Boeing's big test a success

Dreamliner exceeds expectations, but can company meet demand?

By David Greising, Chief business correspondent. Tribune staff reporter Michael Oneal contributed to this report
Published December 30, 2005
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WICHITA, Kan. — At year’s end, the comeback at Boeing Co. seems as solid as its tally of airplane orders. The storied American planemaker strongly outsold archrival Airbus SAS this year, setting course to recapture the title Boeing owned until Airbus snatched it away two years ago: world’s biggest aircraftmaker.

But the Chicago-based company’s turnaround, largely due to the stunning demand for its superefficient 787 Dreamliner, came at a heavy cost, both to Boeing’s pocketbook and to its employees.

The pressures created by the sales splurge could put Boeing’s corporate transformation at risk. Nowhere are the crosscurrents more evident than at the sprawling former Boeing plant in this Great Plains city.

The Wichita complex turned out the B-29 Superfortress at the height of World War II. Now it is the crucible for Boeing’s push to dump production plants and instead head up a confederation of contractors worldwide that supply major plane sections for Boeing to assemble.

In June, Boeing sold the Wichita facility and two in Oklahoma for $1.2 billion to a Canadian buyout firm, Onex Corp., which renamed the plant Spirit AeroSystems, imposed 10 percent pay cuts and laid off 15 percent of its Wichita workforce.

Boeing paid a price too. To make the deal happen, the company had to commit a previously undisclosed $1 billion over five years to help Spirit buy factory equipment needed to build the 787. Spirit eventually will repay the cash, but only in the form of discounts on the prices it charges Boeing for the nose sections Spirit will build for the Dreamliner.

It turns out that creating world-class airplanes at Costco prices isn’t easy.

Boeing’s idea sounded simple at the outset. Unloading production plants would reduce its investment in factories and equipment. Boeing could focus on designing airplanes and streamlining final assembly. Its former operations could push their production lines harder, lowering costs and competing for new customers, perhaps even Airbus.

The shift seemed to pay off this year. After selling a half-dozen major plants and laying off thousands of workers, Boeing recaptured its lead in airplane sales, notching 198 orders for the new 787 alone. All told, Boeing sold 870 aircraft in 2005, trouncing Airbus’ tally of 687 firm orders.

But the striking results are setting the stage for more challenging times ahead.

To meet its goal of delivering the first 787 in 2008, Boeing must design, build and deliver perhaps the most complex commercial aircraft in history. And it must do so while relying on factories it no longer owns to build major sections of its aircraft.

The supply chain, with its redesign untested, must operate seamlessly or risk what happened last time sales boomed, in 1997: Boeing’s production system ground to a halt as suppliers couldn’t keep up with orders. Boeing had to delay deliveries of new airplanes and take a $1 billion write-off.

The company has vowed to do better during this upsurge.

“It’s all a very carefully orchestrated, very carefully watched process, so we don’t wind up doing to ourselves what we did in the late 1990s. We’re not going to repeat that process,” said Mike Bair, head of the 787 program.

Boeing is under pressure to show that its new system can work, even when it needs to perform at peak rates. Wichita is at the center of this challenge.

The production increase is prompting Boeing to seek even more aggressive price cuts than the ones Onex guaranteed when it bought the Wichita plant.

Onex managing director Nigel Wright, who negotiated the deal to buy the plant in February, is leaving nothing to chance as he and Spirit’s chief executive, former Boeing plant manager Jeff Turner, set out to turn a healthy profit on a plant where Boeing had lost money for years.

From the start, Wright found quick savings. He lopped $10 million in costs by hiring local accountants, lawyers and human-relations experts, replacing services Boeing had provided at a steep levy to Wichita.

But the biggest savings came from the layoffs and pay cuts. Workers who still have jobs are promised a cut of profits and an option for 1,000 shares each should Spirit reach profit goals and sell stock to the public.

A rough split

It has been a messy, wrenching change, spawning two lawsuits. One, filed in mid-December against Boeing and Spirit, charges them with discriminating against older workers while paring the workforce. The other charged Boeing with not living up to severance payments promised in its contract with the mechanics union. The companies have denied the charges.

The employees who did get jobs are dealing with moves that erased hard-won union work rules. Spirit, for instance, reduced the number of job categories at the plant from 159 to 13.

The savings come with risks for Spirit and Boeing. The new job categories free employees to invoke their seniority status to begin working more lucrative jobs in the plant. But there is a learning curve when, say, a worker from the parts shop lays claim to a job operating the overhead crane.

“There’s a lot of potential to have people in a job and having them perform work under tremendous pressure that they’ve never done before,” said Steve Rooney, president of District 70 of the International Association of Machinists and Aerospace Workers. “Spirit made a mistake doing it this way.”

Wright believes the steps are necessary to make the plant competitive for business from Boeing and other customers.

“The organizational genius of American industry was the ability to produce quality products at high volume,” he said. “A decade from now, what we have at Wichita will be competitive, notwithstanding what happens anywhere in the world.”

Airbus has taken notice. After production executives from Airbus’ Toulouse, France, headquarters visited the plant, one called on a cell phone en route to dinner to wake a colleague in France and request information about a pending order. The next morning, a request for a bid arrived by fax at the office of David Walker, a former Vought Aircraft executive who runs Spirit’s sales effort.

Even Rooney acknowledges that the outlook in Wichita is improved over recent years.

“Under the Boeing company, we’ve seen work just leaving, going overseas over the last few years,” he said.

If employment does grow in Wichita, that would be an exception to the trend of declining aerospace employment in the U.S., which fell to 607,000 jobs a year ago, down 56 percent from the 1989 peak, according to industry figures.

The number of companies supplying parts has plummeted too. Boeing deals with 1,200 major suppliers, down from 3,700 before its streamlining started.

Experts in industrial production warn that Boeing may be overestimating the ability of its new system to adjust to demand. Much of Boeing’s restructuring plan is modeled on Japan’s reinvention of automotive production that began in the 1970s. But lessons from the car business do not always carry over to aerospace, experts warn.

“The challenges in aerospace are different than in the automotive industry, because production rates are lower,” cautioned Richard Rahn, president of FlowAlliance, a consulting firm specializing in lean manufacturing. “Ultimately, it will come down to the leadership of the company.”

Boeing executives are doing what the experts recommend: giving suppliers real-time access to its information systems so they can know when and where Boeing needs deliveries.

But they can’t control everything. Tight supplies of aluminum and other key raw materials raised the prospect of Boeing suppliers bidding up prices by competing with each other. That forced Boeing to step in and centralize purchasing, dragging it further down in the supply chain than the corporate restructuring plan called for.

The pressure on suppliers is relentless. Richard C. Ill, president of Triumph Group, recalled a recent dinner meeting in Seattle with Carolyn Corvi, head of Boeing production. Corvi wanted to make certain Triumph was investing enough to make all the flooring, duct systems and other parts Boeing needs, and that it would cut prices as production rates rise.

“We’ll make dollar investments as long as we’re sure we’ve got the business” from Boeing, Ill recalled telling Corvi.

The pressure works both ways. “We’re going to push hard to maintain our rates, because the demand means they really need our products,” Ill said.

Corvi downplayed any suggestion that the surge of orders will be tough for Boeing to handle. It’s hardly a historic increase, she argued. The increase in production this time around won’t match the speed of the last big jump in orders, from 1997 to 1999, when Boeing boosted deliveries 65 percent, to 620 airplanes from 375.

The possible distortion in Boeing’s looking glass, though, is the Dreamliner. Boeing recently raised its 787 production target, now promising to deliver 112 copies by the end of 2009. Bair told reporters this month that Boeing will boost its plans for deliveries after 2009 too.

The demands are straining the limited supply of the tools needed to produce the sections of the airplane made out of carbon fibers, then cook them in huge ovens called autoclaves.

“We’ve pretty much sucked up the world’s capability to do that,” Bair said.

Inventing on a schedule

The Dreamliner has forced suppliers to expedite their innovation to keep up.

“We’ve had to invent on a schedule,” said Vern Broomall, chief technology officer at Vought Aircraft Industries.

Vought is teaming with Italy’s Alenia Aeronautica to build the rear fuselage section of the airplanes and fill them with seats and electronics. The computer-aided design of a South Carolina plant that will build the 40-foot-long airplane sections made one big cost-saving catch: An original design of the plant was too small to allow for movement of the 787 tail sections.

Back in Wichita, the sales success of the 787 is proving to be good for jobs and good for Onex’s business plan. Boeing had used the plant as a manufacturing center for the huge production tools it needed to build airplanes.

Now, Spirit is selling those tools to Boeing’s other major suppliers, including Japan industrial giants Mitsubishi Heavy Industries, Kawasaki Heavy Industries and Fuji Heavy Industries.

“This is one of our big growth areas,” said Ron Brunton, the Wichita plant’s chief operating officer, who was a 23-year Boeing veteran before the buyout.

Brunton has seen Wichita in fat and lean times. He is convinced the plant can handle the next surge.

“Boeing was readying us for the next up cycle before the sale,” he said. “We’ll handle it just fine on our own.”

Spirit must. Boeing’s success depends on it.

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Air war score card

Archrivals Boeing and Airbus are battling for dominance of the market for large passenger jets. Here’s how they compare in the battle for the skies:

New models

BOEING: The 787 has hit bigger than anyone expected, with 254 sales in two years and proposals out for 500 more. Its superefficient design, using carbon-composite material, appeals to cost-conscious airlines.

AIRBUS: The double-decker A380 is behind schedule but has created a new niche for ultralarge planes in the 500- plus-seat market. The new A350, rushed out to compete with the 787, has sold 164 planes, short of Airbus’ target.

ADVANTAGE: BOEING

Trade war

BOEING: Pushed U.S. to launch largest trade dispute ever, arguing that Airbus receives $15 billion in illegal “launch aid” to start new airplanes. Aimed to force Airbus to start the A350 without subsidies from European governments.

AIRBUS: Argues that Boeing receives billions of dollars in aid from state tax breaks, NASA and defense research grants. Has won approval from European governments for A350 launch aid.

ADVANTAGE: AIRBUS <—I would call this one more of a “PUSH”, since I believe both have an argument

Sales

BOEING: On strength of 787, has rebounded from post-9/11 slump. Stalwart models 737 and 777 doing well. Big wins from Qantas, Northwest Airlines and Air Canada. Will top Airbus with 870 total orders this year.

AIRBUS: Gives up top spot this year for first time since 2003. A350 had decent showing after late entry to marketplace. Big year-end order from China helped. Sales chief John Leahy taking over as chief operating officer. Can Airbus keep its mojo?

ADVANTAGE: BOEING

Production line

BOEING: Corporate restructuring a necessary but difficult move. Big boost in sales will strain production system, pressuring big suppliers to deliver. Acting to secure access to raw materials.

AIRBUS: Has long used model similar to one Boeing is adopting, but European employment model not driven purely by profit motive. Direct access to European government money for major capital moves.

ADVANTAGE: BOEING <—Not sure this isn’t a typo, I would think Airbus has the advantage on this one.