4. How has Boeing positioned itself to compete effectively in the commercial aerospace industry?

11-4c The 787 While Airbus pushed forward with the A380, Boeing announced, in March 2001, the development of a radically new aircraft. Dubbed the sonic cruiser, the plane would carry 250 passengers 9,000 miles and fly just below the speed of sound, cutting 1 hour of transatlantic fights and 3 hours of transpacific flights. To keep down operating costs, the sonic cruiser would be built out of low-weight carbon fiber composites. Although the announcement Created considerable interest in the aviation community, in the wake of the recession that hit the airline industry after September 11, 2001, both Boeing and the airlines became considerably less enthusiastic. In March 2002, the program was cancelled. Instead, Boeing said that it would develop a more conventional aircraft using composite technology. The plane was initially known as the 7E7, with the standing for efficient" (the plane was renamed the 787 in early 2005) In April 2004, the 7E7 program was formally launched with an order for 50 aircraft worth $6 bilion from All Nippon Airlines of Japan. It was the largest launch order in Boeing's history The 7E7 was a twin-wise, wide-bodied, two-engine plane designed to carry 200 to 300 passengers up to 8.500 miles, making the 7E7 well suited for long-haut, point-to-point flights. The range exceeded all but the longest range plane in the 777 family, and the 7E7 could fly 750 miles more than Airbus' closest competitor, the mid-sized A330-200. With a fuselage built entirely out of composites, the aircraft was lighter and would use 20% less fuel than existing aircraft of comparable size The plane was also designed with passenger comfort in mind. The seats would be wider, as would the aisles, and the windows were larger than in existing aircraft. The plane would be pressurized at 6,000 feet altitude, as opposed to 8.000 feet, which is standard industry practice Airline cabin humidity was typically kept at 10% to avoid moisture buildup and corrosion, but because composites don't corrode, humidity would be closer to 20 to 30% Initial estimates suggested that the jet would cost some $7.8 billion to develop and enter service in 2008. Boeing decided to outsource more work for the 787 than on any other aircraft to date. Some 35% of the plane's fuselage and wing structure would be built by Boeing. The trio of Japanese companies that worked on the 767 and 777, Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and Fuji Heavy Industries, would build another 38% and some 26% would be built by Italian companies, particularly Alenia * For the first time, Boeing asked its major suppliers to bear some of the development costs for the aircraft. The plane was to be assembled at Boeing's wide-bodied plant in Everett, Washington Large sub-assemblies were to be built by major suppliers, and then shipped to Everett for final assembly. The idea was to snap together the parts in Everett in three days, cutting down on total assembly time. To speed up transportation, Boning would adoptar freight as its major transportation method for many components. Airbus' Initial response was to dismiss Boeing's claims of cost savings as inconsequential They pointed out that even if the 787 used less fuel than the A330, that was equivalent to just 4% of total operating costs * However, even by Airbus calculations, as fuel prices starting to accelerate, the magnitude of the savings rose. Moreover, Boeing quickly started to snag some significant orders for the 787. In 2004. Boeing booked 58 orders for the 787 and, in 2005, some 232 orders. Another 85 orders were booked in the first 9 months of 2006 for a running total of 373 well beyond the breakeven point In December 2004, Airbus announced that it would develop a new model, the A350, to compete directly with the 787. The planes were to be long-haul, twin-aisle jets, seating 200 to 300 passengers, and constructed of composites. The order flow, however, was slow with airlines complaining that the A350 did not match the Boeing 787 on operating efficiency range, or passenger comfort Airbus went back to the drawing board, and in mid-2006 announced a new version of the A350, the A350 XWB (for extra wide body) Airbus estimated that the A350 XWB would cost $10 billion to develop and enter service in 2012, several years behind the 787. The two-engine A350 XWB will carry between 250 and 375 passengers and fly up to 8,500 mies. The largest versions of the A350 XWB will be competing directly with the Boeing 777, not the 787. Like the 787, the A350 XWB it will be bult primarily of composite materials. The 'extra wide body is designed to enhance nchi 11-5 Trade Tensions It is impossible to discuss the global orospace industry without touching on trade issues Over the last 3 decades, both Boeing and Airbus have charged that their competitor benefited unfainly from government subsidies. Until 2001, Airbus functioned as a consortium of four European aircraft manufacturers one British (20.0% ownership stake), one French (37.9% ownership), one German (37.9% ownership, and one Spanish (4.2% ownership). In the 1980s and early 1990s, Boeing maintained that subsidies from those nations allow Airbus to set unrealistically low prices, to offer concessions and attractive financing terms to airlines, write off development costs, and use state-owned airlines to obtain orders According to a study by the United States Department of Commerce Airbus received more than $13.5 billion in government subsidies between 1970 and 1990 (525.9 billion it commercial interest rates are applied). Most of these subsidies were in the form of loans at below market interest rates and tax breaks. The subsidies financed research and development and provided attractive financing terms for Airbus's customers. Airbus responded by pointing out that both Boeing had benefited for years from hidden U.S. government subsidies, particularly Pentagon R&D grants. In 1992, the two sides appeared to reach an agreement that put to rest their longstanding trade dispute. The 1992 pact, which was negotiated by the European Union on behalf of the four member states, limited direct government subsidies to 33% of the total costs of developing a new aircraft and specified that and such subsidies had to be repaid with Interest within 17 years. The agreement also limited indirect subsidies such as government- supported military research that has applications to commercial aircraft to 3% of a country's annual total commercial erospace revenues, or 4% of commercial aircraft revenues of any single company on that country. Although Airbus officials stated that the controversy had now been resolved. Boeing officials argued that they would still be competing for years against subsidized products. The trade dispute heated up again in 2004, when Airbus announced the first version of the A350 to compete against Boeing's 787. Signs from Airbus that it would apply for $1.7 bilion In launch aid to help fund the development of the A350 raised a red flag for the U.S. government. As far as the United States was concerned, this was too much. In late 2004, U.S. Trade Representative Robert Zoollick issued a statement formally renouncing the 1992 agreement and calling for an end to launch subsidies. According to Zoelick "Since its Creation 35 years ago. some Europeans have justified subsidies to Airbus as necessary to support an infant industry. If that rationalization were ever valid, its time has long passed Airbus now sells more large civil aircraft than Boeing. * Zoellick went on to claim that Airbus has received some 53.7 billion in taunch aid for the A380, plus another $28 billion in Indirect sules incruang $1.7 billion in taxpayer-funded infrastructure improvements for a total of $6.5 billion Airbus shot back that Boeing too continued to enjoy lavish subsidies, and that the company had received some $12 bilion from NASA to develop technology, much of which has found its way into commercial jet aircraft. The Europeans also contended that Boeing would receive as much as $3.2 billion in tax breaks from Washington State, where the 787 is to be assembled, and more than $1 bilion in loans from the Japanese government to three Japanese suppliers, who will build over one-third of the 787. Moreover, Airbus was quick to point out that a trade war would not benefit either side, and that Airbus purchased some 56 bition a year in supplies from companies in the United States In January 2005, both the United States and the European Union (EU) agreed to freeze direct subsidies to the two aircraft makers while talks continued. However, in May 2005 news reports suggested, and Airbus confirmed that the jet maker had applied to four EU governments for launch aid for the A350, and that the British government would announce some $700 million in aid at the Paris Air Show in mid-2005. Simultaneously, the EU offered to cut launch aid for the A350 by 30%. Dissatisfied, the US, side decided that the talks were going nowhere, and on May 31 the United States formally fled a request with the World Trade Organization (WTO) for the establishment of a dispute resolution panel to resolve the issues. The EU quickly responded by filing a countersuit with the WTO claiming that US aid to Boeing exceeded the forms set out in the 1992 agreement 11-4a Lean Production at Boeing Boeing's attempt to revolutionize the way planes are built dates back to the early 1990s. Beginning in 1990, the company started to send teams of executives to Japan to study the production systems of Japan's leading manufacturers, particularly Toyota Toyota had pioneered a new way of assembling automobiles, known as lean production (in contrast to conventional mass production) Toyota's loan production system was developed by one of the company's engineers, Olno Taichi * Alter working at Toyota for 5 years and visiting Ford's U.S. plants, Ohno became convinced that the mass-production philosophy for making cars was flawed. He saw numerous problems, including three major drawbacks. First, long production runs created massive inventories, which had to be stored in targe warehouses. This was expensive because of the cost of warehousing and because inventories tied up capital in unproductive uses. Second, if the initial machine settings were wrong, long production runs resulted in the production of a large number of defects (that is, waste). And third, the mass production system was unable to accommodate consumer preferences for product diversity In looking for ways to make shorter production runs economical, Ohno developed a number of techniques designed to reduce setup times for production equipment, a major source of foed costs. By using a system of levers and pulleys, he was able to reduce the time required to change dies on stamping equipment from a full day in 1950 to 3 minutes by 1971. This advance made small production runs economical, which allowed Toyota to respond better to consumer demands for product diversity. Small production runs also eliminated the need to hold large inventories, thereby reducing warehousing costs Furthermore, small production runs and the lack of inventory meant that defective parts were produced only in small numbers and entered the assembly process immediately. This reduced waste and made it easier to trace defects to their source and fix the problem. In sum, Ohno's innovations enabled Toyota to produce a more diverse product range ata lower unit cost than was possible with conventional mass production Impressed with what Toyota had done, in the mid-1990s, Boeing started to experiment with applying Toyota I lean production methods to the manufacture of aircraft. Production at Boeing used to be all about producing parts in high volumes, and then storing them in warehouses until they were ready to be used in the assembly process. After visiting Toyota engineers realize that Boeing was drowning in inventory. A huge amount of space and capital was tied up in items that didn't add value. Moreover, expensive, specialized machines often took up a lot of space and were frequently idle for long stretches of time Like Ohno at Toyota, the company engineers started to think about how they could modify equipment and processes at Boeing to reduce waste. Boeing set aside space and time for teams of creative plant employees-design engineers, maintenance technicians, electricians, machinists and operators to experiment with machinery. They called these teams moonshiners. The term 'moonshine was coined by Japanese executives who visited the United States after World War II. They were impressed by two things in the United States supermarkets and the stils built by people in the Appalachian Hills. They noticed that people built these stils with no money. They would use salvaged parts to make small stills that produced alcohol that they sold for money. The Japanese took this philosophy home with them and applied it to industrial machinery-which is where Boeing executives saw the concept in operation in the 1990s. With the help of Japanese consultants, they decided to apply the moonshine creative philosophy at Boeing to produce now,"right-sized machines with very little money which then could be used to make money The moonshine teams were trained in lean production techniques, given a small budget. and then set loose. Initially many moonshine teams focused on redesigning equipment to produce parts Underlying this choice was a Boeing study which showed that more than 80% of the parts manufactured for aircraft are less than 12 inches long, and yet the metalworking machinery is huge, inflexible and could only economically produce parts in 11-2c Demand Projections Both Booing and Airbus issue annual projects of likely future demand for commerciale aircraft. These projections are based upon assumptions about future global economic growth, the resulting growth in demand for air travel, and the financial howth of the world's airlines In its 2014 report, Boving assumed that the world economy would grow by 3.2% per annum over the next 20 years, which should generate growth in passenger traffic of 5.0% and growth in cargo traffic of 4.7% per annum. On this basis, Boeing forecast demand for some 36.770 new aircraft valued at more $5 2 trillion over the next 20 years. In 2033, Boeing estimates that the total global fleet of aircraft will be 42,180, up from 17.330 in 2005. Boeing believes that North America will account for 21% of all new orders by unit share, Asia Pacific for 37% and Europe for 20%. Passenger traffic is projected to grow at 6.3% per annum in Asia versus 2.9% in North America and 3.9% in Europe. * Regarding the mix of orders, Boeing believes that 70% of all orders by units will be for narrow-bodied aircraft such as the 737 and A320, 22% will be for wide-bodied, win-aisle jets such as the 787 and 747, and loss than 2% for large aircraft such as the 747 and A380, with regional jets accounting for the balance The latest Airbus forecast covers 2014-2033. Over that period. Airbus forecasts world passenger traffic to grow by 4.7% per annum and predicts demand for 31,358 new aircraft worth $4.8 trillion. (Note that Airbus excludes regional jets from its forecast there are some 2.400 regional jet deliveries included in Boeing's forecasts). Airbus believes that demand for very large aircraft will be more robust, amounting to 1,501 large passenger aircraft and freighters in the 747 and A380 range and above, or 4% of the total units of aircraft delivered The difference in the mix of orders projected by Boeing and Airbus reflect different views of how future demand wil evolve. Airbus believes that hubs will continue to play an important role in airline travel, particularly International travel and that very large jets will be required to transport people between hubs. Airbus bases this assumption partly on an analysis of data over the last 20 years, which shows that traffic between major airline hubs has grown faster than traffic between other city pairs. Airbus also assumes that urban concentrations will continue to grow. Airbus states that demand is simply a function of where people want to 90, and most people want to travel between major urban centers. The company notes for example, that 90% of travelers from the United States to China go to three major cities. Fifty other cities make up the remaining 10%, and Airbus believes that very few of these cities will have demand large enough to justify nonstop service from North America or Europe Based on this assumption, Airbus ses continued demand for very large aircraft, particularly s A380 offering Boeing has a different view of the future. The company has theorized that hubs will become increasingly congested, and that many travelers will seek to avoid them. Boeing thinks that passengers prefer frequent, nonstop service between the cities they wish to visit. Boeing also sees growth in travel between city pairs as being large enough to support an increasing number of direct, long-haul flights. The company notes that continued beralization of regulations governing airline routes around the world will low for the establishment of more direct lights between city pairs. As in the United States, the company believes that long- haul, low-cost airlines will emerge that focus on serving city pairs and avoid hubs In sum, Boeing believes that airline travelers will demand more frequent nonstop fights, not targer scraft ciles data showing that all growth in airline travel since 1995 has been met by the introduction of new, nonstop flights between city pairs, and by an increased frequency of flights between city pairs, and not by an increase in airplane size. For example, Boeing notes that following the introduction of the 767 airlines introduced more tights between city pairs in North America and Europe, and more frequent departures. In 1984, 63% of all rights across the North Atlantic were made by the 747. By 2004, the figure had declined to 13% with smaller, wide-bodied aircraft such as the 767 and 777 dominating traffic. Following the introduction of the 777, which can fly nonstop across the Pacific and is smaller than the 747, the same process occurred in the North Pacific. In 2000, there were 72 daily lights serving 26 city pairs in North America and Asia