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Boeing: Sleepy in Seattle

August 7, 1995, 2:51 PM UTC
UF 8/7/1995
Man in hangar w. body of new Boeing 777 under construction.
Robert Lyons

Around Seattle, Boeing is known as the “Lazy B.” With good reason. You’d be lazy, too, if you could do business Boeing’s way. For years it had undemanding, deep-pocketed customers like the Defense department and the pre-deregulation airlines. Its competitors were mostly small, undercapitalized, and way behind the technology curve. Even with Europe’s Airbus coming on strong now, no one can say that the Europeans have blitzed Seattle the way the Japanese did Detroit. But while Boeing (BA) put itself on automatic pilot—cruising on its reputation for superb engineering—its pre-computer-age manufacturing techniques were creating a big problem on the ground: They made new airplanes very expensive. Too expensive for many U.S. airlines, crippled by nonstop fare wars.

A wake-up call was inevitable, and when it came last year, everyone in Seattle heard it. Boeing’s high costs and inefficient operations collided with a declining airplane market. To steal a line from Queen Elizabeth II, 1994 was Boeing’s annus horribilis. Revenues, which had reached $31 billion only two years earlier, dived to $22 billion. Earnings shrank by nearly half, to $856 million, and Boeing slashed 9,300 employees from its payroll of 126,600. But what really roused the sleeping giant was an unheard-of decision by Northwest Airlines. Resisting Boeing’s entreaties to buy 40 new 737s at a cost of about $50 million each, Northwest decided to refurbish 40 of its old DC-9s for about $5 million apiece. It will install all-new interiors on the 26-year-old planes, reinforce the wings and fuselages, put federally mandated sound-dampening equipment on the engines—and operate them for up to another 15 years. “To the customer,” says a Northwest executive, “flying our enhanced DC-9s will be as good or better than flying in a brand-new aircraft.”

It was time for Boeing to put away the silk scarves and leather flying goggles. Time to get its head out of the sky and focus on the gritty details of productivity, quality, and cost. Says CEO Frank Shrontz, the calm Idahoan who has run Boeing since 1986: “We are using the challenge of competing with the used airplane as a rallying call.”

Boeing has rallied, and some indicators are up. It has booked orders for 147 new airplanes, more than the 120 it recorded for all of 1994. Its newest plane, the 777-200, which carries 350 passengers, made its maiden commercial flight in June. The company has begun to correct gross inefficiencies and astronomical defect rates in its manufacturing. But Boeing also is cutting production rates on the 737 and 757, delaying plans to build a superjumbo plane that would carry 600 to 800 passengers, and sending 12,600 more employees out the door. “The worst is behind us,” says Shrontz, “but we’re not as efficient as we are capable of becoming.”

Boeing always believed the jet age would continue its upward trajectory forever. Each new generation of airplane would, by definition, fly more safely and efficiently than the last. But the rate of improvement has been leveling off. The new 777, for instance, which has a maximum cruising speed of 575 miles per hour, flies only marginally faster than the 707 did 40 years ago. “Clearly the curve on efficiency gains has flattened out,” says Michael Roach of the Roberts Roach & Associates airline consulting group.

And yet the escalation in plane prices ranks right up there with the stratospheric rise in college tuitions. The cost of buying and insuring each successive model climbs even faster than the cost of flying it. On the $42 million 737-300, introduced in 1984, the purchase price and insurance (the so-called ownership cost) make up 50% of the total annual operating cost; fuel, flight crews, and maintenance account for the rest (see charts below). On the $94 million 767-300, introduced in 1986, ownership costs make up 56% of the total. The comparable figure for the 777 is 62%.

Screen Shot 2016-07-08 at 11.01.15 AMClick to enlarge.

With a sky-high list price of up to $138 million, the 777 costs twice as much as its functional equivalent, a seven-year-old 747 that carries more passengers. So why does anyone buy it? There are a few good reasons. The 777 is the first two-engine airliner ever certified at launch to fly three hours over water-a significant technological achievement. (The FAA usually requires a plane to fly for several years before it grants certification.) And 1998 versions of the 777 will require 40% less maintenance and burn one-third less fuel than a 747.

The problem is, airlines don’t care much about jet fuel these days because in constant dollars, fuel costs only half as much as it did in 1981. Furthermore, while aircraft prices have been climbing, the rates airlines can charge for their seats have been falling for years. Since 1960 the cost per seat of an airliner has risen 47% in constant dollars, while the airlines’ revenue per seat has declined 50%. If that trend continues, it will squeeze the growth out of air travel. Most plane seats are filled by pleasure travelers, and the frequency with which they fly depends directly on how much they have to pay for a ticket.

For Boeing, which likes to think of itself as an engineering development company, the graying of the jet age has come as a comeuppance. Making planes fly better has always been more compelling than making them fly cheaply. Ron Woodard, who runs Boeing’s commercial airplane business, says he frequently has to remind his employees that “technology does not sell airplane seats.” He adds: “The guy in row 15 won’t pay 55 cents for something in the cockpit if it won’t get him there faster.”

Illustrative of Boeing’s keep-’em-flying, hang-the-cost attitude is its roadside service program, which seems more suited to Rolls-Royce. Anytime, anyplace a Boeing plane is stricken, the company dispatches AOG (airplane-on-ground) teams—free of charge. If repairs are necessary, Boeing promises equally prompt dispatch of spare parts, which it sells at a modest markup. In one famous example, a 110-person Boeing repair team erected a tent over a 747 that had careened off a runway in India. The team worked round the clock (in daytime temperatures of 120 degrees) for three months to repair the damaged landing gear and sheet metal. The bill: $50 million.

With a fixation on keeping its planes in the air, Boeing has overlooked some earthly irritations. For instance, it seldom benchmarked its manufacturing processes against those of other companies. Says president Philip Condit, 54, a 30-year Boeing veteran: “One of the things we have done is to say, ‘Airplanes are different,’ which is one of the neatest ways not to learn. You can go stand on a Toyota production line and say, ‘Wow, this is neat, but airplanes are different.'”

In fact, some benchmarking against Toyota is exactly what Boeing needed. Two years ago it developed a system to track defects across its entire line of airplanes. In 1993 it identified 3.5 million of them, which worked out to a rate of 52 defects per seat of every plane it made that year. “Ohmigod!” you’re saying. “Fifty-two defects per seat? I’ll never fly again.” Before you call Amtrak, know that all the defects—which ranged from dents and carpet runs to misdrilled bolt holes and misfitting parts—were caught and corrected by Boeing before its planes ever carried a paying passenger. You might feel even better knowing that Boeing has fewer defects than its chief competitors, McDonnell Douglas and Airbus. Boeing claims this is so, although neither of the competitors would reveal its rate of defects.

Still, Boeing calculated that fixing the glitches cost $1 billion in 1993—almost as much as its corporate profit of $1.2 billion that year. At least it’s making some progress in reducing the heart-stopping numbers. Last year the defect rate declined slightly, to 49 per seat. The company has set a target of 26 per seat by 1996. But even that seems astronomically high compared with a car made by Toyota (TM). Admittedly a mass-produced car is much less complex than an airplane. But Toyota generates only 0.75 defects per car, or 0.15 per seat. A Boeing 777 with 350 seats and three million parts has one defect for every 175 parts. A Toyota Camry with five seats and 20,000 parts has one defect for every 26,667 parts. In other words, some Camrys have no defects at all. One caveat: Boeing reports defects found during the manufacturing process and subsequently corrected. Toyota doesn’t report any manufacturing defects; its numbers come from customer surveys made after its cars have been on the road for 90 days.

The project stirring the most passion at Boeing is a second-generation SST that could travel 1,600 miles per hour.

Boeing’s quality and productivity problems stem directly from a World War II-era process that coordinates engineering and manufacturing. For years this vestigial way of work has been treated like a crazy uncle in the attic: Everybody knew it was a problem, but nobody wanted to deal with it. Because of inherent inefficiencies, it has driven up costs, lengthened production times, and created a sprawling bureaucracy—for Boeing and its customers. To give just one example of how out of control the process is, 800 different computer systems are required to manage it—and most of the computers don’t communicate directly with each other.

The process, which has never been given a name, was used to coordinate the production of B-17s and other planes for the Army Air Corps. It keeps track of the several million parts that go into each airplane, rather than following the development of the plane itself. That worked fine when Boeing was building 10,000 identical bombers, but became a major problem when each airline wanted its planes to be slightly different. Moreover, the list of parts produced by engineering for a given airplane is configured differently from the list put together by manufacturing, customer service, or other Boeing operations. So the parts list has to be broken down, converted, and recomputed as many as 13 times during construction of a single plane. Bad as this sounds, it doesn’t compare with another process called-in the ultimate propeller-speak—”effectivity.” Effectivity is Boeing’s way of manually—manually!—tracking which parts go into which airplane. It requires that a customer’s identification number be placed individually on a drawing of every part of the plane. Clumsy enough on the first round of drawings, effectivity makes for enormous problems when specifications change, which they do all the time. When, say, a cockpit thrust-reverse lever needs to be made of titanium instead of aluminum, Boeing employees spend 200 hours on the design changes and another 480 hours retabbing those drawings with customer identification codes.

Supporting this cumbersome system creates ripples all through Boeing’s production process. Draftsmen require 21/2 years of training before they fully understand the system—and even then, one-third of their paperwork contains at least one error. Legendary chairman T.A. Wilson, who ran Boeing from 1969 to 1986, recently confessed that one of his regrets was not bringing his company into the computer age. “Ohmigod!” you’re saying. “This is the high-tech company whose plane I take to Chicago? I’ll never fly again.”

Before you redial Amtrak, take comfort that in October 1993, Boeing finally institutionalized its crazy uncle. In a message to employees, Ron Woodard admitted what everyone knew: “Effectivity just doesn’t make sense. The tabbing and retabbing of drawings accounts for a large percentage of engineering hours, adds absolutely no value to our products, and results in tremendous costs.” Amazingly, he noted that McDonnell Douglas had eliminated tabbing, and Airbus had never used it.

CEO Shrontz, like Wilson, takes responsibility for not modernizing Boeing faster and reining in costs sooner. But as Shrontz rightly points out, the old system worked for decades and Boeing prospered. Says he: “Trying to change this company without a crisis wasn’t easy. We had 75 years of history, and we were very successful. There was a strong feeling of ‘why change?’ ”

“Trying to change without a crisis wasn’t easy,” says Shrontz. “We had 75 years of history, and we were very successful.”

No more. Today 1,100 Boeing technicians are replacing half the 800 computer systems with four new ones and reprocessing most of the manufacturing and engineering data. Instead of treating most airplane parts as unique, Boeing will henceforth group them into three categories, depending on how frequently they are used. Meanwhile it is assembling a single parts list that every division can use without modification and without tabbing. In place of defining a plane by the parts that go into it, Boeing will define the parts by the plane they are in.

It sounds simple, but, of course, it isn’t. Sighs an executive: “It would be so much easier to shut down the whole company and make the change.” Expectations for the new process are prodigious: Boeing hopes to cut costs 25%, reduce defects 50%, and shrink the order-to-delivery time from ten months to no more than six (three years ago it was as high as 18). The first plane to be built under the new system should roll out in 1997.

If all goes as planned, about 6,000 jobs could disappear. That has made the change a tough sell inside the company, but executives are convinced they have no choice. Says senior vice president Tom Schick: “If we do not make these changes, potentially more jobs will go away than if we do. We are in a death struggle with competitors.” That may be an exaggeration, since Boeing’s high production volumes almost surely make it the industry’s low-cost producer. But Airbus, whose market share has climbed from zero to 28% in 21 years, says it is aiming for 50% of the plane market. If it succeeds and if McDonnell Douglas stays in the airline business, that would leave Boeing with just two-thirds of the sales it has today.

Shrontz is due to retire at the end of 1996. His heir apparent, “assuming I don’t do something really stupid,” is Condit. Rumpled and easygoing, Condit operates out of a big office with a messy desk that looks out on a Boeing runway. Despite his training as an aeronautical engineer and a flier, Condit takes a down-to-earth view of the economics of flying. Productivity improvements, he says, will enable Boeing to control its own destiny, rather than be trapped in the ups and downs of the air travel business. With a smile, he adds: “One of my jobs is to be wildly enthusiastic about the progress we’ve made and eternally disappointed at the rate we’re making it.”

Once Boeing modernizes, it hopes to catch an updraft in plane sales. The company forecasts that 15,400 airplanes worth just over $1 trillion will be needed to replace old aircraft and satisfy new passenger-traffic growth over the next 20 years. But the forecast is based on straight-line projections of economic and travel trends, without accounting for oil shocks, much less a revolution in China, where Boeing has sold one in seven of its new planes over the past two years. (More than 70% of Boeing’s sales come from outside the U.S.)

Investors betting on a quick turnaround in deliveries have driven the price of Boeing stock up 37% this year, more than any company in the Dow Jones industrial average except IBM (IBM). But Boeing is cautious. Says Condit: “In the U.S., some very serious balance-sheet repair work needs to be done at the airlines. Overseas, British Airways and Singapore Airlines are healthy, but if you look at Air France, you’d conclude that there isn’t any way it’s going to buy airplanes in the near future. None of us see this thing snapping back instantly.” Indeed, it could take Boeing until the end of the decade to return to yearly sales of $30 billion.

As the 777 settles in for a 30-year run, Boeing is mulling three proposals for all-new airplanes. The most likely is a 100-seat plane that wouldn’t require buckets of capital and whose development could be shared with Asian partners. At the other extreme is the superjumbo. Condit says it is essential to breaking the traffic bottleneck created by Tokyo’s perpetually congested Narita airport, where land-hungry rice farmers prevent expansion. For now, however, the superjumbo has been put on hold because the potential market for it may be too small to support its multibillion-dollar development costs.

The project stirring the most passion at Boeing is a second-generation supersonic transport (SST) that could travel 1,600 miles per hour. Boeing built a prototype for the first SST but never produced it because the federal government refused to subsidize it. The challenge of solving noise and emission problems associated with the SST appeals to Boeing’s engineering jocks. Under one scenario, the company would launch its superjumbo in 2002 and the SST in 2015. But if the SST looked feasible sooner, the superjumbo might never be built.

Glamorous though the SST is, talk of it may be impeding Boeing’s transition from a pilot-oriented airplane company to a sophisticated manufacturer of high-technology transportation products. Frankly, the former sounds like more fun. But the annals of industry are littered with the makers of bespoke automobiles, mahogany-planked speedboats, and, yes, propeller and jet aircraft that never adopted modern business practices. Given the economic realities of Boeing’s eighth decade, it can hardly afford to do the same.

Reporter Associate: Joe McGowan

A version of this article was originally published in the August 7, 1995 issue of Fortune.

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