UV0281 This ca was prepared by Professors James Tompkins and Robert Bruner using public information. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2004 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights rerved. To order copies, nd an e-mail to No part of this publication may be reproduced, stored in a retrieval system, ud in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwi—without the permission of the Darden School Foundation.
THE BOEING 7E7
We still have a lot to get done as we move toward authority to offer the 7E7 to our customers. The team is making great progress—understanding what our customer wants, developing an airplane that meets their needs, and defining a ca that will demonstrate the value of the program.
—
Michael Bair, Boeing Senior Vice President 1 In early 2003, Boeing announced plans to design and ll a new, “super-efficient” jet dubbed the 7E7, subquently called the “Dreamliner.” However, news over the next six months depresd the market for aircrafts, which were already in sharp contraction. The United States went to war against Iraq, spasms of global terrorism offered shocking headlines, and a deadly illness called SARS resulted in global travel warnings. For tho and other reasons, airline profits were the worst en in a generation. This emed like an incredible environment in which to launch a major new airframe project. Nevertheless, on June 16, 2003, at the prestigious Paris Air Show, Michael Bair, the leader of the 7E7 project, announced that Boeing was making “excellent progress on the development of the 7E7 and continues to be on track to ek authority to offer the airplane.”2 In order to proceed with the project, Bair sought a firm commitment from Boeing’s board of directors in early 2004. If the board approved the plan, he could start collecting orders from airlines and expect pasngers to start flying on the new jets in 2008. Between now and his recommendation to the board, he would need to complete a valuation of the 7E7 project and gain the support of Boeing’s CEO, Philip Condit, and the other nior managers. Would the financial analysis show that this project would be profitable for Boeing’s shareholders? 1
“Bair Provides Update on Boeing 7E7 Dreamliner,” Le Bourget , 16 June 2003. 2
“Bair Provides Update.”
Origins of the 7E7 Project
Boeing had not introduced a new commercial aircraft since it rolled out the highly successful 777 in 1994. Later in the 1990s, however, Boeing announced and then cancelled two new commercial-aircraft programs. The most prominent of tho was the “Sonic Cruir,” which promid to fly 15% to 20% faster than any commercial aircraft and bragged of a sleek and futuristic design. Unfortunately, after two years of developing the Sonic Cruir, Boeing’s potential customers were nding the message that pasngers were not willing to pay a premium price for a faster ride. Boeing was now long overdue to develop a product that would pull it out of its financial slump, as well as help it regain the commercial-aircraft sales that the company had lost over the years to Airbus, its chief rival.
With the 7E7, an Airbus executive argued that Boeing emed to be promising a “salesperson’s dream and engineer’s nightmare.”3 The 7E7, while carrying between 200 and 250 pasngers, would be capable of both short, domestic flights as well as long, international hauls. It would u 20% less fuel than existing planes of its projected size and be 10% cheaper to operate than Airbus’s
A330-200. At a time when major airlines were struggling to turn a profit, less fuel, cheaper operating costs, and long or short distance flexibility would be a very attractive package at the right price.
Skeptics of the 7E7 were not in short supply and suggested that the name “Dreamliner” was appropriate. To make the plane more fuel efficient, the 7E7 would be the first commercial aircraft built primarily with carbon-reinforced material, which was both stronger and lighter than the traditional aluminum. In addition, Boeing promid greater fuel efficiency by using a more efficient engine. Boeing claimed that the u of composites would also reduce its manufacturing costs. The goal would be to design a plane with fewer components that could be asmbled in 3 days as oppod to the current 20 days that it took to rivet together the Boeing 767. The u of composite materials, however, had its risks. Composite materials were suspected as a contributory cau to a 2001 plane crash in New York and, therefore, would have to overcome regulatory scrutiny. Boeing would also have to change its production methods radically. The last time Boeing made a major production change was in 1997 in an effort to cut costs. However, becau the process was not smooth, it resulted in two production lines being shut down for 30 days and hundreds of misd airline deliveries.
The ability to produce a short and long distance aircraft would also have to overcome engineering ob
structions. Analysts argued that building a plane that would do short hops in Asia and long trans-Atlantic flights would require two versions of the plane with different wingspans.4 Boeing engineers considered the possibility of snap-on wing extensions. The question was whether this would be too costly, as well as being technically feasible.布鼓雷门
3 “Will Boeing’s New Idea Really Fly?” Business Week, 23 June 2003.
4 Noted by Richard Aboulafia, a nior analyst at Teal Group consultant, in “Will Boeing’s New Idea Really Fly?”
Finally, there was the matter of Boeing’s board. Two of the most powerful members of the 11-person board, Harry Stonecipher and John McDonnell, were rumored to have raid rious concerns regarding the cost of the 7E7. While the cost of developing the 7E7 project could be as high as $10 billion, there was an imminent veto threat if that number did not shrink by billions. More specifically the board wanted to keep 7E7 development costs down to only 40% of what it took to develop the 777. An additional pressure from the board was to keep the 7E7 per-copy costs to only 60% of the 777 costs. In respon, Philip Condit, Boeing’s CEO and chair, was quoted as saying that “Boeing has a responsibility to develop jetliners for less.”5 He knew, however, that if Boeing did not take bold
risks in the commercial-aircraft industry that their days as a rious competitor to Airbus were numbered.
Commercial-Aircraft Industry
In 2002, two companies, Boeing and Airbus, dominated the large plane (100+ ats) commercial-aircraft industry. While Boeing historically held the lead in this market, through a number of measures Airbus became number one. In 2002, Airbus received 233 commercial orders compared to Boeing’s 176 orders, reprenting a 57% unit market share and an estimated 53.5% dollar value market share.6棉纺织
Airbus Industry
Airbus was understandably proud of its growth. Established in 1970, by a consortium of European companies, it took Airbus 23 years to deliver its first 1000 aircrafts, another six years to deliver the next 1000, and only another three years (by 2002) to pass the 3000 aircraft milestone.7 In 1999, for the first time in its history, Airbus recorded more plane orders than its rival, Boeing.
Airbus’s large plane commercial-aircraft products included the A300/310, A320, A330/340, and A380
families. Airbus touted the A300/310 family as having the flexibility to rve short-, medium-, and extended-range routes. The widebody, twin-engine aircraft was considered mid-size, with a typical pasnger configuration of about 250 pasngers. This family first flew pasngers in 1983, and it was this aging fleet that provided a replacement opportunity for Boeing’s 7E7. However, while Boeing was betting on the future demand for mid-size aircraft, Airbus announced its A380, superjumbo four-engine jet in 2000. The A380 was due to fly in 2006 with a 550-pasnger configuration and long distance range of up to 8000 miles. It would be the largest pasnger aircraft ever built.
5 “Losing Ground to Airbus, Boeing Faces a Key Choice,” Wall Street Journal, 21 April 2003.
6 “2002 Commercial Results,”
7 In 2001, Airbus formally became a single integrated entity through the transfer of Airbus related asts to the newly incorporated company. European Aeronautic Defen and Space Company (EADS) owned 80% of the new company, and BAE systems owned the remaining 20%.
The Boeing Company
Boeing was split into two primary gments: commercial airplanes and integrated defen systems. In 2002, it was awarded $16.6 billion in defen contracts, cond only to Lockheed Martin with $17.0 billion. Exhibit 1 shows that in 2002, each gment earned Boeing’s revenues almost equally. In addition, while commercial-aircraft revenues had been falling, defen revenues had been rising. Analysts believed that Boeing was able to transfer significant amounts of technology from the defen R&D to the commercial-aircraft gment.
The commercial-aircraft gment produced and sold six main airframes designed to meet the needs of the short- to long-range markets: the 717, 737, and 757 standard-body models and the 747, 767, and 777 wide-body models. As of December 31, 2002, Boeing undelivered units under firm order of 1083 commercial aircraft and had a declining backlog of about $68 billion. For 2003, it projected 280 commercial-aircraft deliveries and expected between 275 and 300 in 2004. Boeing estimated that in 2003, the revenues for its commercial-airplane gment would be approximately $22 billion, down from $28 billion in 2002. Recognizing the negative impact of the September 11th attacks on commercial-aircraft demand, Boeing cut the production rates for 2002 in half in order to maintain profitability in that gment.
Exhibits 2 and 3 show Boeing’s balance sheet and income statement respectively. While Boeing’s ea
rnings were down significantly from 2001 to 2002, most of this was the result of an accounting change (SFAS No. 142). However, a drop in commercial-airplane deliveries from 527 in 2001 to 381 in 2002 also contributed to the decline.
Demand for Commercial Aircraft
The long-term outlook for aircraft demand emed positive.8 Boeing’s Market Outlook said the following:
In the short term, air travel is influenced by business cycles, consumer跑步姿势
confidence, and exogenous events. Over the long-term, cycles smooth out, and
GDP, international trade, lower fares, and network rvice improvements become
paramount. During the next 20 years, economies will grow annually by 3.2%, and
世界最大的地震air travel will continue its historic relationship with GDP by growing at an
average annual rate of 5.1%.
社保代办委托书As shown in Exhibit 4, Boeing’s 20-year forecast from 2003 to 2022, was for 24,276 new commercial aircraft in 2002, valued at $1.9 trillion. The company predicted a composition of 4,303 smaller regional jets (fewer than 90 ats); 13,647 single-aisle airplanes; 5,437 intermediate twin-aisle airplanes; and 889 747-size or larger airplanes. This prediction reflected a
木糠蛋糕8 The primary sources for commercial-aircraft demand estimates include Boeing’s 2003 Current Market Outlook and Airbus’s 2002 Global Market Forecast 2001–2020. While both reports recognized the negative effects of “exogenous events” such as September 11, 2001, they both agreed on a healthy long-term outlook.
world fleet that would more than double, with one-fourth of the market coming from aircraft replacement and three-fourths from projected pasnger and cargo growth.
Exhibit 5 illustrates Airbus’s 20-year predictions for the years 2000–2020. Although the report was dated 2002, becau of the September 11 attacks, numbers included the year 2000, to rve as a benchmark year. For that period, Airbus predicted the delivery of 15,887 new commercial aircraft in 2002, with a value of (U.S. dollars) $1.5 trillion. This included 10,201 single-aisle aircraft; 3,842 twin-aisle aircraft; 1,138 very large aircraft, and 706 freighters. The 15,887-unit forecast did not include planes with less than 90 ats.
Although Boeing and Airbus’s numbers are not directly comparable due to the slightly different time periods and aircraft classifications, it appeared that Airbus was more optimistic about the market for large aircraft than Boeing was. While Airbus predicted it to be a $270 billion market, including 1138 pasnger units, Boeing projected only $214 billion with 653 pasnger units. Boeing, however, estimated that the share of intermediate-size planes would increa from 18% to 22%. In its forecast, Boeing acknowledged that intermediate-size airplanes would economically allow airlines to fly the incread frequencies, city pairs, and nonstop flights requested by pasngers. According to a recent study by Frost & Sullivan, they believed that the Airbus market projection for the A380 was “over-optimistic.”9
Aircraft Development and Lifecycle
The development of a new airframe was characterized by huge initial cash outflows that might require between one and two decades to recoup. For example, the development costs for the Boeing 777 were rumored to be $7 billion. Any pricing would not only have to recoup the upfront development costs but also the production costs. In addition, pricing would be subject to rigorous, competitive pressures. In short, becau of the financial strains a new product line might create, each new aircraft was a “bet the ranch” proposition. Over time, survival in the industry depended on i
ntroducing successful products and having the deep financial pockets with which to survive the initially gushing cash flow.
While aircraft sales were subject to short-term, cyclical deviations, there was some degree of predictability in sales. Sales would typically peak shortly after the introduction of the new aircraft, and then fall. Thereafter, sales would ri and fall as derivatives of the aircraft were offered. Exhibit 6 shows the cycles for the first 20 years of the 757 and 767 sales.
The 7E7
The concept of the Boeing 7E7 was driven by customer requirements. Boeing originally announced in March 2001, its plans to build the Sonic Cruir, a plane that would fly just below the speed of sound. The success of the Cruir depended on whether pasngers would pay a
挽留>招工做9 “An Ongoing Rivalry,” Avionics Today, August 2003.