Boeing Sees The Light

March 2006

Boeing Sees the Light;

Is it the end of the tunnel or a landing A340?

This last decade of the 20th century was demoralizing for Boeing, the world’s leading manufacturer of mainline commercial aircraft. Beginning in 2000, when its only major aircraft competitor, Airbus S.A.S, received more orders and then followed with delivering more planes in 2003, Boeing additionally has had to deal with the impact of rising fuel costs, multiple CEOs dismissed for unethical behavior, World Trade Organization lawsuits, and the negative effect September 11th had on air travel.

Nevertheless, 1Q06 results for Boeing portray a company with a substantial increase in profits and an increase in order backlog of 42% to a record $213bnn. Boeing further regained its world dominance in 2005 by reversing the trend of the past 5 years and outselling Airbus, when measured by the value of new aircraft orders. Deliveries are up by 40%, operating earnings increased by 81%, and their operating margin improved from 8.2 to 10 percent (Done, 2006).

What changes were undertaken by Boeing to re-establish its market position and profit stability, can they be sustained, and is Boeing’s current global market outlook in-synch with its customers, the international airline community?

Desperate Times Call for Desperate Measures

Analysts consistently attribute part of Boeing’s “turn-around” to the hiring of James McNerney, Jr. in June 2005, as Chairman, CEO and President. A product of Yale University and Harvard Business School, McNerney has established himself as someone who knows how to manufacture more efficiently and profitability, which will impact Boeing’s commercial aircraft division, and increase revenues from the acquisition and execution of government contracts. He has knowledge of Boeing’s markets and a record of improving profits through combined operating efficiency and capital discipline (Lozier, 2006).

Manufacturing efficiency was a dominant factor in improving the company’s profitability. From a previous productivity low of four planes per 1000 employees in 1996, Boeing increased production to seven planes per 1000 employees in 2005, with estimates of 10 planes per 1000 employees by EOY 2008 (Wood, 2006). In general, these increases can be attributed to the new management team now headed by McNerney, fostering improved economies of scale associated with sales increases, rising employee productivity, enhanced information management systems, and a manufacturing strategy that shares risk with providers in exchange for the potential of larger rewards down the line.

Manufacturing for Boeing’s 787 “Dreamliner” program will move even further away from the well-established tradition of sourcing assemblies to sourcing entire subsections of the craft, involving manufacturing alliances at 135 sites around the world. By collaborating with the sub-section manufacturers, Boeing can share R&D responsibilities and establish international long-term relationships with its suppliers and their respective governments who, in many instances, are also their customers (Earls, 2006). In support of this effort, Boeing has developed a converted 747-400 into a 747-400LCF (Large Cargo Freighter) to transport the assembled subsections for the new 787 from their manufacturer to its assembly site (Runte, 2006).

These manufacturing “relationships” often take the form of acquiring a valued supplier by Boeing as part of a strategic plan to build “an integrated services portfolio,” according to one Boeing spokesperson. Their attempt is to leverage the strengths of synergistic suppliers in order to maintain cost controls and product integrity while enhancing their customer’s perception of Boeing as a “total service provider” (Boeing Website. “Supplier Diversity is Key to doing Business in the Global Century”). The technological platform for such enhanced customer support is Boeing’s integrated website for ordering and tracking spare parts, myboeingfleet.com, made assessable free-of-charge from any fleet management office to ensure ease of use (Elser, 2000).

One final cost-management activity Boeing has undertaken is the outsourcing of back-office support activities where viable and cost-effective. A definitive example of their efforts was the creation of an enterprise agreement between Boeing and Intrepid Learning Systems (2003) for the training of Boeing’s 55,000 plus employee base. To date, the relationship has resulted in a 38% reduction in course design and development, a 25% reduction in training delivery costs, and served as a catalyst for enhanced training applications with the influx of new ideas (Institute of Management and Administration [IOMA], 2003).

Maintaining Strength within an Enigmatic Airline Industry

“It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.” вЂ" Charles Darwin

Like all businesses, nothing happens until something is sold, and with Boeing Commercial Air serving an extremely volatile airline industry, strategic planning and operations must be as efficient and effective as possible, while remaining flexible to the evolving needs of their customer base. Overall, analysts agree the fundamental outlook for the global airline industry will see an increasing demand for passenger flights, as the recovery from the declines triggered by events such as 9/11 and SARS continues. At issue, particularly with regard to the duopolistic battles between Airbus and BCA, is which market segments will substantiate their growth requiring what type of aircraft.

Airbus has staked its claim on a hub-and spoke strategy, based upon analysis of Europe-Asian traffic and North American hubbed international traffic (Airbus Website, Global Market Forecast 2004-2023). Such supports their product line strategy focused on high capacity wide-body aircraft, even though their four-engines have a substantial impact on fuel efficiency in times of rising costs, and are often deemed a “gas-guzzler” (Holmes, 2005).

Conversely, Boeing’s strategic focus is on the point-to-point flight market, with differentiations made for legacy carriers versus low-cost carriers (Boeing Website, Current Market Outlook). They anticipate that commercial air travelers would rather fly non-stop to their destinations, avoiding the standard connection through major hubs onto smaller jets.