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:: August 2012 Letter ::

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Dear Fellow Boeing-ologists,

“History doesn’t repeat itself, but it does rhyme.” Looking at Boeing, that saying, attributed to Mark Twain, rings true. The company seems to be falling into a pattern that’s all too familiar.

Consider events this year. In the first half of 2012, Boeing Commercial Airplanes (BCA) moved forward aggressively with two new twin aisle products. In March, BCA President Jim Albaugh told Flight International’s Jon Ostrower that BCA would approach its board “toward the end of this year” about 777-X launch authorization. Reams of technical information about the 777-8X and -9X were reported by the trade magazines, with plans for multiple variants and ambitious new technologies, including a much larger carbonfiber wing (see Aviation Week, July 9, for a good overview; Flight has a good piece here: tinyurl.com/7ooulkk). Meanwhile, the 787-10X stretch was also readied for a launch, possibly also later in the year.

Customers responded strongly to these two new initiatives, with Emirates and British Airways indicating enthusiasm for the 777-X and United for the 787-10X. With both these planes launched, Airbus’s A350XWB would face serious threats from above, below and right in the middle too. Airbus’s twin aisle market standing would be at serious risk.

Then, immediately before Farnborough, Albaugh was abruptly replaced. Even though air show invites with Albaugh’s name on it had already been sent out, some observers reacted to Albaugh’s exit as a natural retirement. For these folks, presumably Abraham Lincoln also died naturally watching a play.

Immediately after, everything at BCA seemed to change, in a flurry of backpedaling. On July 9, Bloomberg reported that Boeing “isn’t looking to meet a goal set by…Albaugh to present a 777 update proposal to directors in 2012…Boeing still plans a stretched version of the 787, while declining to give any timing for an announcement.” And in August, Mike Sinnett, chief project engineer on the 787-10 told Bloomberg, “We’re not in a hurry to come up with an answer…We’re not even to the point that we’re telling the board, ‘We’re going to come talk to you by the end of the year.’”

Customer reaction to this backpedaling was negative. Emirates CEO Tim Clark told Flight International, “Faffing around and waiting to see what [Airbus] does to the -1000 or the -900 makes no sense at all. If you've a good product and people are interested in it, you go for it - don't worry about what the competition is doing.” But one carrier didn’t just voice its displeasure with Boeing. It defected. Cathay Pacific, a 777 fan, ordered 26 A350-1000s, the first order for the variant in about four years, and the first endorsement since the variant was re-designed last June. Cathay currently operates a similar number of 777-300ERs.

That was a predictable event, and more defections are likely. Boeing maintains that the 777-300ER is as good, if not better, than the A350-1000, and therefore, it can delay the 777-X. The 777-300ER may be a superb plane, but the market still prefers newer models. The increased role of third party finance means that everyone wants the latest models, largely due to the profound bifurcation between newer and older models in aircraft values and financing terms.

The last time BCA rested on its laurels, we saw the same thing. Fifteen years ago, Boeing maintained that its legacy jets were as good as Airbus’s, and they were right then too. There’s no technical reason the A330 should have beaten the 767. But again, the market preferred newer products, and the A330 won big.

Boeing’s past provides insight to what may be happening today. In 1998-2004, after the 777 and the McDonnell Douglas acquisition (or, as some Boeing folks say, after McDonnell Douglas used Boeing’s money to buy Boeing), the company’s new commercial product development spending collapsed. In 1999 and 2000 it fell to less than 2% of BCA sales, from a peak of over 7% in 1995 (the 787 development debacle caused it to rise above 15% in 2009). A parsimonious, risk-averse (and by some estimations greedy) management culture made launching a new jet a near-impossibility. Then-BCA chief Alan Mulally only pulled it off by promising to get partners to foot the 787 R&D bill, a very risky plan, but one necessitated by a board that simply didn’t want to fund new products. (For an overview of this dismal period in BCA’s history, see two of my letters from ten years ago, accessible here: tinyurl.com/cvalogn and tinyurl.com/dyty4pw.)

After launching the 787, frustrated by the experience and also realizing that he’d hit a career ceiling, Mulally left to be Ford CEO. He was replaced by a sales and finance executive, Scott Carson. Brought in from Boeing’s defense unit in the midst of the 787 development debacle in 2009, Albaugh is an engineer who promised to restore an engineering culture to Boeing (the 787’s turnaround is proof of his success). The most logical explanation for his sudden departure is that he continued to move aggressively on the new jets, while the board and others wanted to throttle back on spending. Albaugh’s replacement, Ray Conner, is a well-regarded sales executive with no engineering background at all. He may do a good job. But he also won’t aggressively advocate that cash be diverted away from investors towards ambitious new programs.

This is not a simple one-sided story of black-hat money guys against white-hat engineers. Engineers need discipline, from both customers and financial markets. Albaugh made the occasional mis-step. BCA pursued an all-new single aisle for too long. It took last summer’s near-heart attack AMR A320 Neo order to persuade Boeing that a lower-tech 737 re-engine solution was all the market wanted (or was willing to wait for). And Airbus, with much less discipline from equities markets to keep them from pursuing misbegotten concepts, launched the A380 and A340-500/600. If they had Boeing’s financial discipline, Airbus wouldn’t have been able to make these self-inflicted wounds.

But backpedaling on promising efforts such as the 777-X and 787-10 would be an equally bad self-inflicted wound, especially since that backpedaling would presage a return to Boeing’s dismal pre-787 days of short-changing the engineering department. Also, while giving cash to shareholders sounds financially smart, a series of new product launches (and orders) would boost Boeing’s share price. The post-787 launch run up took the stock from around $39 in March 2004 to a peak of around $104 in July 2007.

Most of all, the two new planes would cement Boeing’s market dominance in the international long-haul market. Boeing CEO Jim McNerney, curiously, has been advising President Obama on increasing US exports. The loss of Cathay Pacific as an export customer (and rumblings of others) does not align with that objective.

As for Jim Albaugh, perhaps a large US car company could use a really good CEO. If that happens, maybe Mark Twain was wrong, and history does repeat itself.

Once again, watching Boeing resembles Kremlinology. Appropriately, there’s a new Teal Aircraft Binder report this month on the MS-21, plus updates of the Il-96, Tu-204, and An-28/M-28. There’s also a new World Rotorcraft Overview, plus updates of the F-22, C-130, Hondajet, and Cessna’s Citation family. Have a great end of summer.

Yours, ‘Til Airbus Launches The A350-700 and 1100,
Richard Aboulafia
 

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