Boeing's Dreamliner mess: Simply inevitable?

BY Shelley DuBois | FROM CNN | 2013-01-23 10:33

January 22, 2013: 1:02 PM ET

  FORTUNE -- This ain't Kitty Hawk. Any aircraft creator on the cutting edge of technology needs much more than two brilliant men and a glider. Take Boeing's new 787 Dreamliner plane: Boeing had to work in concert with government regulators and more than 900 subcontractors to get this project off the ground. That is a ton of moving parts.
  Not all of those parts were up to snuff, apparently. The Dreamliner made its commercial debut in 2011, nearly three years behind schedule. On January 16, the FAA grounded the line's six active planes operating in the U.S. until investigators say they're safe to fly. The planes were grounded following a series of issues most likely related to defects in the model's electrical wiring and battery packs, both of which are spanking new to commercial aviation.
  The press has been rough, having fun with dream-to-nightmare headlines. But do the Dreamliner's problems reflect a management misstep at Boeing (BA), or are they simply the cost of building a modern plane?
  Boeing and Airbusare the only companies with the capabilities to build large, high-tech commercial planes. Each company has new models in the works, and each focuses on a different feature. Boeing made a bet that the market would want quick, light planes like the Dreamliner. Airbus made a bet that buyers would want big planes – its new aircraft, the A350 XWB can be configured to have up to 440 seats. The A350 family is set to hit the market in 2014, although it has faced rollout delays.
  "They're just massively complex projects," says Raul Chao, a professor at University of Virginia's Darden School of Business. "That means that, just like when you're remodeling your kitchen, they will go over budget and over time."
  The Dreamliner is powered, in part, by a lithium-ion battery, and its electrical system is unlike any other commercial aircraft. It is also built with composite materials, which are lighter than those used in other planes on the market. All these features enable the Dreamliner to burn about 15-20% less fuel than a commercial craft of comparable size.
  Those bells and whistles created a massive technical challenge beyond what even a company like Boeing, with a $57 billion market cap, can address on its own. Boeing, which builds more of its planes' own parts than other aerospace companies such as Lockheed Martin (LMT), outsourced 70% of the construction of the 787.
  Outsourcing construction is an industry trend. Over the years, building an aircraft has become more about assembling a puzzle than building a product from scratch. And those puzzle pieces have complicated digital components, these days. "My favorite example is that the guys who make brakes now do the 'aircraft stop management system,'" says Richard Aboulafia, vice president of consulting firm Teal Group.
  Building a plane becomes even more complicated when companies introduce novel technology. "The FAA logged 200,000 hours of technical work on the 787 type certification," said Federal Aviation Administration administrator Michael Huerta in a 2012 speech touting the Dreamliner. "And our Transport Airplane Directorate developed 15 special conditions -- essentially new design regulations to address innovations that existing rules don't fully cover." In other words, the Dreamliner has features so fancy that regulators had to write rules as the aircraft was being developed.
  Boeing executives thought they could have wrapped up the Dreamliner much sooner. "They know that the best way to increase a share price is to set the targets and hit them," Chao says. "And they set those conservatively, and they still can't hit them."
  As of now, those misses have ticked people off, but they probably haven't sunk the Dreamliner. Every airline is looking for ways to decrease exposure to unpredictable fuel prices, and Boeing is one of the two companies that can make new fuel-efficient commercial models. No one else can do it.
  What should Boeing do now? "We take the battery failures on the 787 over the past two weeks very seriously," says a January 17 JP Morgan analyst report. "But we believe the most likely outcome is that Boeing identifies and fixes the problem and we move past this issue over the next several weeks or months at most."
  Airlines all over the world have collectively ordered more than 800 Dreamliners. At roughly $200 million per plane, that's a lot of potential cash coming to Boeing and its investors.
  Passengers, reasonably, expect that when they board a cool new plane the battery will not combust. Evidence to the contrary is unnerving. Boeing needs to put its current problems in context and then fix them for good. "They're in an unusual, if not unique, position because there's an inordinate fear of flying," says Gene Grabowski, crisis communications consultant and executive vice president at Levick. "Because there's an inordinate fear, there has to be an inordinate effort to put things into context."
  No amount of gloss will cover a defective plane. But investors will forgive a rollout delay, if it's short, and (most) passengers will forgive smoke in the cockpit if it never happens again.
  Barring another glitch or the discovery that the Dreamliners are fundamentally flawed, Boeing should be fine. "If fuel prices drop and financing costs rise, then you've got trouble," says Aboulafia. But for now, buyers want new fuel-efficient planes and Boeing has them. Releasing the Dreamliner has been a messy, clunky, and sometimes terrifying process. But it looks like it's the best the market can provide.

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