A Special Guest Lecturer For This Week's Class !

I am most pleased to have obtained Mr. Richard Aboulafia's permission to post his July 2009 newsletter, the topic of which is Boeing's ah, "progress" with the 787 program.

Mr. Aboulafia is Vice President of Analysis for the Teal Group, and his was one the earliest (and most accurate and credible) assessments of the challenges faced by our friends in Albuquerque during their arduous march to certification and production- and, well, bankruptcy. That drama is still being played out, as the bankruptcy proceedings...um, proceed- and will continue to be a central theme of the blog. But it is interesting to note that even the "big guys" can have their share of challenges too.

Without further ado, and with utmost appreciation; here's Richard's July 2009 Newsletter (inclusive article starts/stops with red text, and is shown without quotation marks for the reader's convenience):

Dear Fellow DayDreamliner Believers,

The battle of Jutland didn’t start well for the Royal Navy. As the British and German fleets fired their opening rounds, three RN capital ships took direct hits. Two were battlecruisers that blew up and sank, taking thousands of sailors with them. In the midst of the carnage, Admiral Sir David Beatty turned to his flag captain and said “There seems to be something wrong with our bloody ships today.”

I’m reminded of this droll understatement because, for Boeing, there seems to be something wrong with their bloody plane today. The week after Le Bourget, the industry was hit with the latest 787 news – first flight was delayed again, this time due to problems with the wing-to-body join structure. This development cast an unpleasant retroactive shadow over Le Bourget. Boeing said it was looking at possible fixes and tried to sound upbeat, or as upbeat as possible given the circumstances. They haven’t provided a new schedule, but that’s just as well because nobody would take a sixth schedule particularly seriously. Days after that announcement, Boeing moved to buy Vought’s share of the 787 program, which unintentionally signaled that the company had not yet fully straightened out the situation with at least one of its major partners.

This is all seriously bad. As we digested the news, I paused to reflect on just what a tremendous drug-like rush the 787 program once was, and just what a ghastly let down it has become. A few years ago I said it was the aviation equivalent of the i-Pod – a revolutionary product that would be a category killer and would change the way we perceive of aircraft production. The sales figures were extraordinary. It was clearly the key to Boeing’s reinvention, and to helping the company maintain its status as an export powerhouse. We knew a market downturn was coming, but the 787 looked set to keep its supply chain companies –much of the aerospace industry – healthy due to overwhelming demand. The 787 also looked set to prove that advanced market economies could compete in manufacturing, and that global industrial supply chains were a brilliant concept. No wonder the 787’s structure has stress problems – that’s a lot of weight for a mere airplane to bear.

The 787 had additional meaning because of what it wasn’t. It came with a coherent business case, without delusions and wishful thinking. The 787 was created as a truly global product, rather than as a foolish display of national pride. The 787 introduced new technology. Most of all, the 787 is what the market wants – an efficient, long-ranged mid-market plane, perfect for new point-to-point routes that would bring the world closer together. In short, the 787 was in all ways the exact opposite of the A380. Unfortunately for Boeing, the A380, while still commercially irrelevant, is flying in revenue service. We have no idea when the 787 will achieve that status.

This final delay has also obliterated much of Boeing’s credibility. BCA executives have reasonable explanation for their optimistic posturing at Le Bourget. They were apparently not informed about the extent of the problems at that point. But those of us at the rollout two years ago (on 7-8-07) are stuck with some baffling memories, and few explanations with much plausibility. Executives there were every bit as optimistic as they were at Le Bourget, firmly convinced that the plane would fly two months later. Either you had very high ranking executives willing to lie, or you had an organization that was completely unable to tell those high ranking executives that the plane that had just been rolled in had more in common with a Revell model kit than with anything that actually might get airborne.

To understand how this happened, you need to look back in time. A grossly oversimplified recent history of Boeing: Twelve years ago McDonnell Douglas effectively used Boeing’s money to buy Boeing. This resulted in a struggle between a faction that wanted to invest in Boeing’s future (basically the legacy Boeing crowd) and a faction that wanted to invest in Boeing’s shareholders (basically the McDonnell Douglas leadership).You can find a slightly less simplified chronicle of these events in my May 2003 and December 2003 letters, archived at http://www.richardaboulafia.com/.

The future investment faction won, but at a price: the McDonnell Douglas zombie bit them before it died. To sell the new plane to the board and to investors, they needed to get as much cost and risk as possible off Boeing’s books. This resulted in a short-sighted decision to trust enormous parts of the 787’s development and integration work to partners, without due diligence to ensure that these partners were up to the job. (Disclosure: I was a big fan of this approach at the time, and I still think production work outsourcing is a good idea.) Like a lot of the US economy in the last decade, the program relied way too much on leverage to make something big happen with an inadequate financial base. The desire to create the plane at minimal cost also resulted in an impossibly aggressive schedule that just made things worse. Work was performed out-of-sequence or with temporary components just to meet arbitrary cost-driven milestones, without any production processes put in place. Billions in cost overruns, late fees, and other expenses are the result. The Vought 787work acquisition adds another $1 billion to the bill ($580million in cash, $422 million in payments forgiveness). The savings from putting design and development work in the hands of partners has been dwarfed by the cost of remedying the damage wrought by that strategy.

Finally, the new Boeing also disempowered the company’s engineers, turning its back on a decades-old management culture that didn’t always produce profits but did always produce great planes. Instead, it embraced McDonnell Douglas’s culture of leadership by money people. This disconnect between engineers and finance executives would explain why bad news wasn’t communicated upstairs, either at Le Bourget 2009 or at the 7-8-07 rollout. Countries that survive civil wars and internal strife, such as South Africa, create a Truth and Reconciliation Commission. Boeing badly needs something like that, to establish what lines of communication broke down and what went horribly wrong.

What happens next? Nobody can say. There’s a strong chance that Boeing is being factual, and that the plane will arrive in 2010, and that it will perform as advertised. It’s also possible that there will be seventh, eighth, and ninth delays, with an EIS in 2011. There’s also an unlikely but not impossible worst case scenario: a 787 that’s simply a mediocre aircraft. The proven Boeing track record (“We’re ten for ten!”) has been replaced by the unpleasant memory of McDonnell Douglas’s checkered past. The nickel and dimed MD-11 mediocrity, the useless MD JSF competitor, the out-of-control cost overruns of the C-17, and worst of all, the scandalous MD/GD A-12 carrier stealth attack plane. The likely (or at least hopeful) scenario is that the 787 winds up like the C-17, a nightmare development program followed by an impressive technical achievement and a profitable production phase. But we can’t rule anything out. The A-12 is the most haunting extreme outlier: a mere Potemkin Village plane. Those of us at the 7-8-07 rollout wouldn’t have dreamt of that comparison at the time. But who knows what to believe anymore?

In short, the 787 has become less of an adrenaline rush of optimism, and more of a wait-and-see story. Returning to the Jutland analogy, as Churchill said of Admiral Jellicoe, commander of the British fleet in World War One, he is the only man who can lose the war in an afternoon. The men in charge of the 787 today must know exactly how that feels.

This month, we’ve updated the Commercial Jetliner market overview, as well as the 747, 767, CSeries, Dash 8, ERJ 170/190, C-27J/G.222, Hawker 800/4000, UH-1, UH-60, SH/MH-60, EC 145/UH-72,MD500, and the Nimrod. Have a good month.

Yours, “Til The RealityLiner Arrives,

Richard Aboulafia

As was posted on the previous thread- Woo- Hoo !! Long time Eclipse watchers no doubt enjoyed the irony in Mr. Aboulafia's description of events at "the lazy B ranch", and the similarity to those in "the land of enchanment". I would have to say, given Richard's familiarity with aviation history, and current events- he's both an aviation critic, and enthusiast!! Please accept our sincere thanks for your excellent analysis, and your graciousness in sharing it with us.

(Now, least I be accused of being un-critic-al, or overly enthusiast-ic; I am pleased to present "Another View", which provides solid confirmation of Mr. Aboulafia's insightful analysis ! :)