RichardAboulafia.com 

:: December 2010 Letter ::

link

Dear Fellow Big Idea Fans,

According to some, the decade has just ended. For our industry, it was an exciting one. The world’s two big jetmakers spent the decade taking very different paths, a marked divergence in outlook and strategy. Yet strangely, they’ve come back to the same place.

Airbus took the lowbrow road. They ignored all known technological, economic, and market trends. They did this for their own lowbrow reason: no global trends justified development of a 550-seat metal clunker, but thanks to pride, nationalism, and hubris, they really wanted to build one. This, and other monstrously incompetent programs like the A400M, brought the company close to ruin. Management learned nothing from this. Top Airbus executives still give speeches lauding the A380 and decrying “so-called experts,” with a distaste for rigorous thinking that makes Sarah Palin look like Simone de Beauvoir.

Boeing, by contrast, took the highbrow road. The company carefully surveyed all macro and micro trends driving change in the world, and in the transportation industry. They listened to every expert, guru, futurist, and tea leaf reader with a manifesto. They decided that the most promising new technologies would best be adapted to create a mid-market long-range plane. This happened to fit perfectly with the superior pricing power associated with international long-haul point-to-point routes. As air travel networks continued to fragment, these point-to-point routes would further proliferate. Leveraging new technology to pursue this promising segment would give them maximum pricing power, helping them escape the weak margins of a static duopoly. At first, Boeing espoused the Sonic Cruiser, which was odd, but at least it was forward-looking. Then, they launched the 787, a brilliant riposte to the pointless, low-tech, retrograde A380. The 787 was the thinking person’s plane, and by extension Boeing was the thinking person’s planemaker. But all this brilliance has dug the company into a hole.

The problem is that the assumptions behind the three biggest enablers of the Dreamliner – composites, a more electric configuration, and using a global design network to achieve lower costs – have proven partly or totally wrong. Boeing failed to properly verify them before embracing them. Composites sounded brilliant and still offer benefits for aircraft in this class, but they bring new complications to manufacturing and aircraft certification and will take much longer to mature than assumed. The same goes for the 787’s brilliant-sounding more electric aircraft design approach. A fleet that still hasn’t resumed certification flights two months after the electrical panel fire shows that this concept was embraced without analyzing the possible complications. The global design partnership concept, which sounded brilliant, is a complete fiasco (see my July 2009 letter for more on this). As a result, the nonrecurring cost assumptions have proven completely wrong. All recurring cost assumptions look set to be proven wrong too.

More than anything else, Boeing wanted a category killer, a way out of the desperate price competition that hobbles the jetliner duopoly. The 787 was assumed to command a premium price. Yet earlier this month Jon Ostrower (Flightblogger) produced an article (http://tinyurl.com/295rqse) documenting some truly disturbing 787 prices. According to Ostrower, over 300 787 sales were achieved with an average unit price of $76 million (excluding engines, IFE, and other options). Hundreds more were priced only slightly higher. All assumptions about the high pricing power of this purported killer product were completely wrong. Between the higher than expected development costs, the higher than expected production costs, and much lower than expected aircraft prices (and penalty payments too), the 787’s economics now look awful.

Despite Boeing’s superb ability to communicate smart ideas to the outside world, the 787 program brought internal company communications to a desperate new low. At the 787 rollout, Jim McNerney told everyone the plane would fly within two months. Since he wouldn’t have staked his reputation on a lie, the likeliest explanation is that he had absolutely no contact with the engineers working on the plane, and no idea what was going on in the company. Jim Albaugh has since brought more of an engineering culture to BCA, which is quite welcome. But McNerney remains CEO, with no explanation whatsoever for this catastrophic internal communications failure.

Will the 787 recover from this mess? Probably, but there are no guarantees. Whether it enters service in 2011 or 2012 is anyone’s guess. Fortunately for Boeing, this remains the sweet spot of the market. People and airlines still want to fly point-to-point routes. The A350XWB-800 offers very little competition in this segment. That’s why most 787 orders have stayed intact – there’s really nowhere else to go, although the A330 continues to enjoy record numbers, which will stay high until the 787 arrives. A bigger question is how long it takes to get 787 performance up to promised levels. There’s a chance that it never gets there. At the very least, it will probably take the 787-9 to get there. The -8 might just become an interim product, like the 767-200.

This program is getting very expensive. Boeing is spending record levels on new product development. For some time, analysts (myself included) have been wondering if Airbus and Boeing were building record numbers of jets to bring in the cash needed to pay for new aircraft development. There’s no longer doubt about that. A few weeks ago, Boeing said it will boost 777 output to 8.3 planes per month in the first quarter of 2013. In March, it announced plans to increase production to seven airplanes per month from five starting in the middle of next year. Reality check: the backlog is now 264 777s. That’s less than three years of production at the current rate, making a 2013 rate increase purely speculative. The more concerning possibility is that this rate increase is essential for Boeing’s financial well-being.

Meanwhile, Airbus’s NEO launch means they don’t have to worry about their narrowbody line for the rest of the decade. Boeing, by contrast, needs to do something faster than it would like. The company line that the current 737 is fine and that there’s “no compelling reason” to re-engine is weakening fast, with number one customer Southwest now openly demanding something new. That means either another big expense to create an all-new jet, or a prompt return to the re-engine option.

In short, Boeing’s hopes of a strategic victory are gone, or at least deferred. The decade saw both companies take different paths leading to the same duopoly they were in when the decade began. Airbus spent the decade poorly executing on a disastrous vision. Boeing disastrously executed on a brilliant vision. And as we begin the new decade, both companies have exactly one thing to be thankful about: this is an industry with very high entry barriers. Without that, these guys would be toast.

The last Teal aircraft binder supplement of the decade (again, by some measures) includes the annual World Aircraft Overview, plus updates of the F/A-18, AH-64, BA 609, E-3/E-737/AWACS, Tucano, AW109, E-8 JSTARS, B-2, and Dassault’s Falcon series. All the best in the new year.

Yours, ‘Til They Start Making CFRP-Flavored Kool-Aid,
Richard Aboulafia
 

© Richard Aboulafia 1997-2006, All rights reserved.
RichardAboulafia.com
  ~  Last updated on January 08, 2006