The impact of further delays at Boeing on operations, finances, and product update strategies will be significant, as further delays to the 787 and 747-8 programs will result in additional charges, increased operating costs, and likely impact product development strategies and timing for the 737/777 replacement/enhancement programs.

The 787 has been delayed until late first quarter 2011 through quality issues with Alenia and problems with the Rolls-Royce engines, and emerging reports that the 747-8 will be delayed as well, evidenced by a change in program management at the end of this month, and continued mid-weight, near cruise speed structural flutter in the flight test program.  While the program is still scheduled for 2010, a delay and further announcement appears inevitable.

Technical problems will eventually be solved, although Boeing has been subject to more surprises than for programs in the past, and the 787 and 747-8 should have first deliveries in 2011.

How did Boeing get into so much trouble?  The problem at Boeing is threefold — and not easily solved.   The first is the result of poor management decisions, the second is retaining talent, and the third is corporate culture.

This First Problem is Management:

Boeing is suffering from poor decision-making at the senior level, as evidenced by the failures in the 787 supply chain and shared responsibility for producing the aircraft.  Company leadership under Jim McNerney has been too slow to react.  Quality issues that became evident during the initial delays eventually resulted in Boeing purchasing Vought, but not soon enough to stem the tide.  The same may need to occur with Alenia, given the recently emerging quality control issues requiring significant repairs to the test aircraft.

After the merger with McDonnell Douglas, Boeing focused on becoming a systems integrator, outsourcing key elements of the aircraft rather than build it themselves, and manage the commercial sector more like the military focus of its acquisition.  Unfortunately, this did not play well either with labor relations nor corporate culture, neither of which were ready for such a transition.

While current management inherited a mess from Harry Stonecipher and a McDonnell Douglas dominated board, it did not act decisively to change strategies and restore a culture that transitioned from engineering dominated to one dominated by MBAs and focused on outsourcing, cost reduction, and eliminating core competencies in civil aviation.

Boeing management bit off more than they could handle by taking on a program that encompassed both new technology and establishing a complex, integrated global supply chain at the same time.  Either of these major changes, by themselves, would have represented a major challenge.  Together, they proved impossible. Early critics of Boeing taking on both risks simultaneously proved prophetic.

Boeing would have been better off to produce the 787 internally, and will likely need to move further in that direction to maintain quality control in the program, as it cannot afford to continually rework substandard quality deliverables from its supply chain.  While Boeing continues to indicate that its supply chain is improving, being three years late on initial deliveries is costing the company dearly in both customer compensation and market credibility.

Of course, Boeing has been shuffling resources and management between the two programs under development. The latest 747-8 management re-shuffling is the result of a shortage of resources from stealing talent to solve 787 problems.  Will the revolving door of executives solve the 747-8 problems?  It will, in due time, with appropriate resources.

While Boeing is pushing the envelope in advanced materials, difficulties have resulted that would not typically be expected from a world-class organization.  Structural failures in the wing box can only have resulted from incorrect engineering assumptions, or lack of knowledge of the behavior of new technology materials.   Neither of the above excuses provides comfort to potential passengers of this aircraft.

The problems with the airplane are being solved, albeit at a snails pace, and the supply chain issues are being resolved by either purchasing suppliers or placing additional Boeing personnel on site to bring quality up to standards.  This has been a costly program for Boeing, with the total budget for the 787 now above $20 billion and continuing to climb.  And with each delay, on both the 787 and 747-8 programs, losses continue to mount.

Having squandered a five year plus lead over Airbus into a mere two year lead, the real impact is on new programs.  If Boeing were earning revenues from an on-time 787 today, it would have the cash flow to enhance the 777 to better compete with the A350 XWB, as well as fund a replacement aircraft for the 737.  Airbus, with heavy A380 and A400M losses, and heavy development costs for the A350XWB, would not have been able to respond.  Now Boeing must make a choice of which aircraft development program it can undertake, after a 100% cost overrun on the 787.

Strategically, Boeing has given Airbus new life.  The A350 is now outselling the aging 777, and a re-engining of the A320 family will put pressure on the 737NG.   Compounding the competitive issues, Boeing also now faces new competition from the C919 in China and MS-21 in Russia, each with new technology engines making them more efficient than the current 737NG.

Boeing could have built two new airplanes if the 787 and 747-8 were on time and on budget.  But mismanagement has crippled financial reserves, and one of the two needed programs will need to wait.   Boeing’s talk of a 737 replacement near 2020 may be based more on its own financial difficulties than the availability of new technology engines, as the Pratt & Whitney Geared Turbo Fan and CFM International LEAP-X will both be available by 2016 for the MS-21 and C919, respectively.

The second problem is talent:

The tumultuous ups and downs in the aviation industry resulted in several rounds of cutbacks and layoffs over the last decade.  Unfortunately, management decided to cull many of the more experienced, and thereby more expensive, personnel from the workforce.  That experience on the line, and the stability that it brings, went out the door, and hasn’t been replaced.   Adding a second production line for the 787 won’t be an easy training task with inexperienced employees.

Engineering talent presents a different problem for Boeing.  Labor relations with the Society of Professional Engineering Employees in Aerospace (SPEEA), the major union representing engineers and technical workers at Boeing, has been testy for some time.  Back in 2004, the union head indicated that Boeing “makes no bones about its willingness to be second best.”

Jennifer MacKay, President of SPEEA, in 2004 indicated that Boeing senior management decided that it would focus on one thing, large-scale systems integration, and let other companies focus on being world class at all those other things Boeing used to do.   Judging by the results, they haven’t achieved either goal on the commercial side of the business.

Boeing has a talent gap, as today is finding it difficult to attract top-flight new engineering talent from universities.  Times have changed.

The third problem is culture:

Boeing’s culture has changed over the last decade, and a mistrust of former executives from McDonnell Douglas since the merger continues to haunt the company. Merging two cultures is always difficult, but in Seattle, many of the rank and file believe that current management is following the a new strategy – focusing on the defense business while relegating commercial aircraft to second class status.   They believe Douglas suffered the same fate under McDonnell management, and the result was a departure from the commercial aircraft business.

Recently, Boeing management has hired a consultant to examine the corporate culture in a planned two-year process to make improvements.  What took management so long to realize that there was something amiss?  The changes, significantly negative, have not only been quite visible, but widely publicized by industry observers, and even the local press in Seattle.

“Insourcing” has become a common term at Boeing, referring to employees transferred to a different unit or supplier to perform the same job at a lower price.  Of course, that hasn’t been culturally well received.

The “old-timers’ in Seattle remember a more congenial time, when everyone was focused on being the best, building the most reliable aircraft, and fending of competition by building a better airplane.   Management was local, and actually walked the floor and had a feel for concerns, rather than being off site in Chicago communicating through a chain of command.

Perhaps the worst element of Boeing has been a tendency to “shoot the messenger” that brings bad news, which of course, results in no communication up the chain and a management that has inadvertently created a culture that has left it in the dark.  There are rumors of a cadre of old line Boeing employees that are so frustrated that they are simply doing the assigned tasks, rather than richly collaborating as in the past.  The “we’ll do it your way – by the book only and not one iota beyond” attitude has contributed to problems that could have been detected earlier not being solved.

It takes a long time to change a corporate culture, and a long time to rebuild it once it is broken.  The corporate culture is broken at Boeing.  While they’ve recognized it and hired a consultant to help change things, can they be solved before the 737 and 777 replacement programs begin?

The Bottom Line

Will Boeing recover and once again assume the mantle of leadership in commercial aviation it ceded to Airbus?  We certainly won’t see 80% market share for Boeing ever again, and with competition from Canada, Brazil, China and Russia ready to attack the heart of the narrow-body market by mid-decade, Boeing’s market share in commercial aircraft will be closer to 25% than 50% two decades from now.  The realization that squandering a strategic opportunity to gain an insurmountable lead against Airbus has been lost, and the Boeing now lacks the resources to develop the new aircraft it needs, on a timely basis, will haunt the company for decades to come.

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