Boeing (BA, Financial) faced quite a bit of challenges in the last decade. Its revolutionary 787 Dreamliner project not only went into massive cost overruns, but its service entry also got delayed by three years. As such, the American aircraft maker is reconsidering its approach for innovation. Instead of pursuing moonshots, Boeing would now improve existing technologies.
During an interview with The Wall Street Journal, Boeing CEO of commercial plane units Ray Conner said that the company’s approach of improving current models is a lot like what Apple (AAPL, Financial) does with its iPhone. He threw light on what Boeing’s plans are going forward, and how its current efforts are bearing fruits. Here’s a lowdown.
Making small improvements
Boeing has mostly focused on creating new technology and has gone into gigantic projects to develop groundbreaking airplanes for airlines. However, the company has decided not to get involved in such risky programs that increase development cost of the planes, making the jet considerably costly. But this does not at all mean that Boeing would stop innovating. The company is studying to make planes more efficient than before, lower emissions, and increase reliability to serve airlines and passengers' needs best. The Chicago-based company would upgrade current planes, which will restrict costs from overshooting.
This essentially means Boeing would take one step at a time instead of making giant leaps that generally turn out to be an extremely costly affair. Conner said that by doing this, the company would be able to churn out planes faster for deliveries to airline operators, and provide greater reliability at reasonable cost. The executive is responsible for the development of Boeing’s seven commercial models (737, 737 Max, 747, 767, 777, 777X, and 787) along with a new military tanker. Though the 787 Dreamliner project has been a tough one for Boeing, the plane has been built using cutting-edge technology that’s being used for upgrading other models.
Dreamliner weighed on Boeing’s progress
The 787 Dreamliner is the key reason behind why Boeing’s shifting from making clean-slate models to reengineering existing planes. Last year, at an investors’ conference, CEO Jim McNerney said that “the more-for-less world will not let you pursue moonshots.” Creating a host of new technical advancements for one single project becomes very costly and disruptive. The Dreamliner is an all-new modern day jetliner built by Boeing. It’s the first aircraft made using carbon composite material.
However, developing the plane was a mammoth task. Not only did Boeing experience challenges in the production stage, but problems didn’t end after its service entry as well. Airlines flying the plane have seen series of technical glitches over the years after it hit the world’s runways in 2011. Besides, an analyst at Barclays Capital calculates that the program cost is nearing $50 billion. This, however, includes the R&D expense, expansion of facilities and cost of acquiring suppliers for the Dreamliner. Moreover, the Dreamliner is sold below cost – the deferred cost of the program is approaching $30 billion now. Though the company expects Dreamliner cash flows to breakeven later this year, its deferred cost would only start falling from next year. Conner, however said not to “judge our future by what’s happened on the 787.” Boeing’s current plans should reward the company in future.
Boeing’s strategy is similar to Apple’s
Supporting the strategic shift of making incremental improvements, Conner compares Boeing with Apple. The Cupertino tech giant has consistently been selling the iPhone year after year. Every new launch is capable of doing more things, and Apple does this by making improvements on the previous model. Boeing also has a similar formula – the company is reengineering the 737 and 777 aircraft.
This is being done to offer airlines and leasing companies planes with greater efficiencies while regain market share that it’s been losing to Airbus (EADSY, Financial). The European plane maker has been eroding Boeing’s market share, particularly in the narrow body segment.
Boeing is making great efforts and it's showing in the results. The company is renegotiating contracts with suppliers to lower costs. It also approached Walter Odisho, a former Toyota (TM, Financial) executive, to help automate processes. This assisted Boeing with saving around $1 billion in 2014. Presently the company is involved in completing the current projects – 737 Max and 777X.
The company’s announcement of concentrating on upgrading models doesn’t mean it has withdrawn from making all-new planes completely. The company has been talking with several customers to understand their requirements and preferences to build a new plane in the future. Boeing may not follow the business model it applied for 787, but it’s definitely ready to create new planes along with strategic partners when the time is right.
