The Selling of the 707 (Fortune, 1957)

October 30, 2011, 8:04 PM UTC

Editor’s note: Every week, publishes a favorite story from our magazine archives. This week, we turn to an article from the October, 1957 issue that examines Boeing’s bid to rule civilian aviation with something entirely new: a jet.

FORTUNE — Undismayed that his company has not made money on a nonmilitary plane in over twenty years, William, M. Allen, president of Seattle’s Boeing Airplane Co., is investing about $185 million ($36 million more than Boeing’s total net worth in 1956) in America’s first all-jet transport–the Boeing 707. “Our great ambition,” says Allen, “is to produce the finest commercial transports in the world. We have sufficient facilities. This time we’re in the commercial business to stay.” Late this year the first Boeing 707 will roll out of the company’s final assembly plant at Renton, Washington, thus starting another lap in Boeing’s, long-frustrated pursuit of fame and fortune in the commercial field.

The $4,500,000 four-engine plane, capable of carrying 124 first-class passengers over 3,000 miles nonstop at a cruising speed of close to 600 miles per hour, will be put in regular service by Pan American World Airways early in 1959. A bigger intercontinental version with a maximum range of over 4,000 miles will probably go into scheduled operation in the fall of 1959.

Big planes are nothing new for Boeing, of course. The company, since it was founded in 1916, has designed and built more heavy military aircraft than any other U.S. manufacturer, and more multi-engine jet planes than all other airframe makers together. Today Boeing operates three major plants in the Seattle area plus two at Wichita, Kansas, employs more than 80,000 people, over 80 per cent of them on military projects. Boeing’s sales last year of $1 billion (second in the airframe industry only to Douglas Aircraft’s $1.1 billion) came almost wholly from military production the B-47 and B-52 jet bombers, and a prop-driven transport tanker. Net profits were $32 million, only 3.2 per cent of sales, but a pleasing 21.6 per cent of invested capital. (Like most aircraft companies, Boeing’s ratio of sales to invested capital is high, largely because it leases a big proportion of its facilities from the government; the company owns only 30 per cent of its floor space.)

In the first half of 1957 stepped-up deliveries of B-52’s and the start of deliveries of a new jet tanker raised Boeing sales to $652 million, profits to $16,500,000. Moreover, Boeing is in an excellent position to weather the present cutbacks in defense spending, which are falling hardest on the fighter-plane contractors. As FORTUNE pointed out last month (see “The Anxious Aircraft ‘Primes'”), the company’s military backlog ($2.3 billion) consists almost entirely of bombers and tankers plus a production contract for the Bomarc ground-to-air missile. As things stand now, the Air Force’s need for all these aircraft is far more likely to increase than to diminish.

Boeing’s present position in military-plane making is largely due to the foresight of Bill Allen, who reluctantly abandoned a successful Seattle corporation-law practice in 1945 to take over a company that had just lost the bulk of its military business. By converting his firm’s design efforts, from piston planes to the then-new jets, Allen put Boeing out in front of the rest of the industry when jet-bomber production began in 1948. And the invaluable experience gained in building jet bombers and tankers in the past ten years is what he is primarily counting on now to keep his company out front in the commercial jet-transport business.

As in the past, however, Boeing faces severe competition from Douglas Aircraft Co. For Douglas is now starting production of its own jet transport–the DC-8–at Long Beach, California. Unlike Boeing, Douglas has had relatively little experience in building multi-engine jet aircraft: it has built about 275 B-47’s from Boeing designs (compared to about 1,400 by Boeing); it also built nearly 750 two-engine jet bombers and fighters for the Navy and Air Force. Douglas executives acknowledge that not much of the company’s previous jet experience is directly applicable to the DC-8. And Douglas is at least six months behind Boeing on delivery schedules. But Douglas has one big advantage over Boeing: it has been building planes for the airlines continuously (except during World War II) since 1934, and it has earned an unmatched reputation in the commercial-transport field.

The jinx
Boeing’s commercial ventures, by contrast, repeatedly have been plagued with bad luck, pad timing, or plain bad judgment. Just before World War II, for example, Boeing started producing its Clipper flying boats and the 307 Stratoliners. After it had built only twelve Clippers and nine Stratoliners, war broke out in Europe, and Boeing had to switch to B-17 production. Loss on the two commercial planes: $4,200,000. The Stratocruiser, Boeing’s most recent commercial offering, brought out in 1947, also came a cropper financially. Although the Stratocruiser still has more passenger appeal than any other plane flying, even Boeing agrees it was less economical to operate than either Douglas’ DC-6 or Lockheed’s Constellation. Only fifty-six Stratocruisers were sold, and Boeing lost $13,500,000 on the venture (which was more than offset, however, by sales of a military version, the C-97, to the Air Force).

The one financial success Boeing has had in the commercial field was its model 247, which it produced back in 1933. Sixty-five of these planes were built, and the company might have sold many more if it had not made the serious mistake of agreeing to deliver the first sixty to United Air Lines. (At the time, United and Boeing were subsidiaries of United Aircraft & Transport, which was broken up by federal legislation in 1934.) Because the other airlines could not get deliveries of enough 247’s to compete with United, most of them in 1934 turned to Douglas, which then built the DC-2, which outmoded the 247, and subsequently the DC-3.

Despite this dreary history, Allen around 1947 began thinking seriously about a commercial jet. Because of high operating costs per mile, a jet transport would have to be big to be economic. But airline executives feared they would not be able to fill planes larger than the DC-6 (about sixty passengers). A Boeing design group concluded operation of jet transports was economically feasible even at that load capacity. In August 1949, attempts were made to sell such a plane to Pan American. “We went with a brochure that showed three different sizes of plane, one six-engine, two four-engine,” recalls Maynard Pennell, later chief project engineer for the 707. “We discussed 61 passengers up to 103; it was as daring as we dared to be.” Pan Am was interested and Boeing considered taking a contract to build a jet primarily for Pan Am. It decided not to for fear there would be a repetition of its experience with the 247. Instead, Boeing started showing its brochure to other major U.S. airlines. Response was completely unenthusiastic.

Comets and tankers
While Boeing and other U.S. airframe makers were talking about commercial jets, the de Havilland Aircraft Co. in England had gone ahead and built the first all-jet transport, the ill-fated four-engine Comet I, of which BOAC had ordered fourteen. In July 1949, de Havilland flew the Comet for the first time, and several U.S. airlines, including American and Pan Am, sent representatives to England to window-shop. It began to look as though the U.S. manufacturers might well lose out in the jet field. But none of them felt it could risk the $15 million or so it would take to build a prototype plane.

Wellwood Beall, senior vice president of Boeing, and others in the industry wanted the federal government to finance construction of a prototype jet transport. Indeed, a bill to get this done was proposed in Congress; it died quickly. By the fall of 1950, Boeing management was convinced that if it was to get into the jet-transport business it would have to build a prototype itself. But the company’s annual earnings in the 1946-49 period had averaged less than $1,400,000, and Allen just didn’t have the money to finance a prototype.

Moreover, with the outbreak of war in Korea, Boeing was busy building bombers again and working on the first experimental B-52 for the Air Force. Though the B-52, which was to be the backbone of the Strategic Air Command, was designed to fly over 6,000 miles nonstop, in-flight refueling would be necessary to give it the range SAC required. Existing prop-driven tankers flew too slowly and too low to fuel the B-52 efficiently. Allen, with SAC requirements foremost in his mind, but thinking also of his transport prototype, tried to get the Air Force to authorize construction of a jet tanker for the B