BOEing-7eFMBA-Case-Study

UV0281ThiscasewaspreparedbyProfessorsJamesTompkinsandRobertBrunerusingpublicinformation.Itwaswrittenasabasisforclassdiscussionratherthantoillustrateeffectiveorineffectivehandlingofanadministrativesituation.Copyright©2004bytheUniversityofVirginiaDardenSchoolFoundation,Charlottesville,VA.Allrightsreserved.Toordercopies,[e-mail]aybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionoftheDardenSchoolFoundation.THEBOEING7E7Westillhavealottogetdoneaswemovetowardauthoritytoofferthe7E7toourcustomers.Theteamismakinggreatprogress—understandingwhatourcustomerwants,developinganairplanethatmeetstheirneeds,anddefiningacasethatwilldemonstratethevalueoftheprogram.—MichaelBair,BoeingSeniorVicePresident1Inearly2003,Boeingannouncedplanstodesignandsellanew,“super-efficient”jetdubbedthe7E7,subsequentlycalledthe“Dreamliner.”However,newsoverthenextsixmonthsdepressedthemarketforaircrafts,whichwerealreadyinsharpcontraction.TheUnitedStateswenttowaragainstIraq,spasmsofglobalterrorismofferedshockingheadlines,andadeadlyillnesscalledSARSresultedinglobaltravelwarnings.Forthoseandotherreasons,airlineprofitsweretheworstseeninageneration.Thisseemedlikeanincredibleenvironmentinwhichtolaunchamajornewairframeproject.Nevertheless,onJune16,2003,attheprestigiousParisAirShow,MichaelBair,theleaderofthe7E7project,announcedthatBoeingwasmaking“excellentprogressonthedevelopmentofthe7E7andcontinuestobeontracktoseekauthoritytooffertheairplane.”2Inordertoproceedwiththeproject,BairsoughtafirmcommitmentfromBoeing’sboardofdirectorsinearly2004.Iftheboardapprovedtheplan,hecouldstartcollectingordersfromairlinesandexpectpassengerstostartflyingonthenewjetsin2008.Betweennowandhisrecommendationtotheboard,hewouldneedtocompleteavaluationofthe7E7projectandgainthesupportofBoeing’sCEO,PhilipCondit,andtheotherseniormanagers.WouldthefinancialanalysisshowthatthisprojectwouldbeprofitableforBoeing’sshareholders?1“BairProvidesUpdateonBoeing7E7Dreamliner,”LeBourget,16June2003.2“BairProvidesUpdate.”-2-UV0281Originsofthe7E7ProjectBoeinghadnotintroducedanewcommercialaircraftsinceitrolledoutthehighlysuccessful777in1994.Laterinthe1990s,however,Boeingannouncedandthencancelledtwonewcommercial-aircraftprograms.Themostprominentofthosewasthe“SonicCruiser,”whichpromisedtofly15%to20%fasterthananycommercialaircraftandbraggedofasleekandfuturisticdesign.Unfortunately,aftertwoyearsofdevelopingtheSonicCruiser,Boeing’spotentialcustomersweresendingthemessagethatpassengerswerenotwillingtopayapremiumpriceforafasterride.Boeingwasnowlongoverduetodevelopaproductthatwouldpullitoutofitsfinancialslump,aswellashelpitregainthecommercial-aircraftsalesthatthecompanyhadlostovertheyearstoAirbus,itschiefrival.Withthe7E7,anAirbusexecutivearguedthatBoeingseemedtobepromisinga“salesperson’sdreamandengineer’snightmare.”3The7E7,whilecarryingbetween200and250passengers,wouldbecapableofbothshort,domesticflightsaswellaslong,internationalhauls.Itwoulduse20%lessfuelthanexistingplanesofitsprojectedsizeandbe10%cheapertooperatethanAirbus’sA330-200.Atatimewhenmajorairlineswerestrugglingtoturnaprofit,lessfuel,cheaperoperatingcosts,andlongorshortdistanceflexibilitywouldbeaveryattractivepackageattherightprice.Skepticsofthe7E7werenotinshortsupplyandsuggestedthatthename“Dreamliner”wasappropriate.Tomaketheplanemorefuelefficient,the7E7wouldbethefirstcommercialaircraftbuiltprimarilywithcarbon-reinforcedmaterial,whichwasbothstrongerandlighterthanthetraditionalaluminum.Inaddition,Boeingpromisedgreaterfuelefficiencybyusingamoreefficientengine.Boeingclaimedthattheuseofcompositeswouldalsoreduceitsmanufacturingcosts.Thegoalwouldbetodesignaplanewithfewercomponentsthatcouldbeassembledin3daysasopposedtothecurrent20daysthatittooktorivettogethertheBoeing767.Theuseofcompositematerials,however,haditsrisks.Compositematerialsweresuspectedasacontributorycausetoa2001planecrashinNewYorkand,therefore,wouldhavetoovercomeregulatoryscrutiny.Boeingwouldalsohavetochangeitsproductionmethodsradically.ThelasttimeBoeingmadeamajorproductionchangewasin1997inanefforttocutcosts.However,becausetheprocesswasnotsmooth,itresultedintwoproductionlinesbeingshutdownfor30daysandhundredsofmissedairlinedeliveries.Theabilitytoproduceashortandlongdistanceaircraftwouldalsohavetoovercomeengineeringobstructions.AnalystsarguedthatbuildingaplanethatwoulddoshorthopsinAsiaandlongtrans-Atlanticflightswouldrequiretwoversionsoftheplanewithdifferentwingspans.4Boeingengineersconsideredthepossibilityofsnap-onwingextensions.Thequestionwaswhetherthiswouldbetoocostly,aswellasbeingtechnicallyfeasible.3“WillBoeing’sNewIdeaReallyFly?”BusinessWeek,23June2003.4NotedbyRichardAboulafia,asenioranalystatTealGroupconsultant,in“WillBoeing’sNewIdeaReallyFly?”-3-UV0281Finally,therewasthematterofBoeing’sboard.Twoofthemostpowerfulmembersofthe11-personboard,HarryStonecipherandJohnMcDonnell,wererumoredtohaveraisedseriousconcernsregardingthe