Boeing very late August 26 announced yet another delay of its newest airplane, the 787. Some are trying hard to say this is no surprise – but there is no way any further delays are welcomed by Boeing or its customers. The 787 program has become a source of management embarrassment and a program that has billions of dollars in cost overruns and customer penalties, aggregating $20 billion by some estimates.
What are the key questions pertaining to this latest delay announcement?
- Is the Rolls-Royce engine excuse viable?
The fact that both companies were at odds over the wording of the delay press release tells us they had rather different views of the news. Boeing needed an external reason for the delay because anything else would really look bad for a program that has had more hiccups than any other in Boeing’s history.
Rolls-Royce has a lot at risk on the 787 program as one of two engine choices. Rolls-Royce has a 38% of 787 engine orders announced. Rolls-Royce says the engine test failure will not delay it providing engines for the 787’s certification. Boeing says it will delay the certification process.
Were the engine issue the only item, one might believe Boeing. But there are other issues such as Alenia’s workmanship on the horizontal stabilizer which was also mentioned by Boeing as part of the delay.
Clearly there is a disconnect – to date there has been no mention of Rolls-Royce engine supply shortages. One has to wonder why the engine that failed is so crucial to the test program. The paucity of information suggests that the delay announced by Boeing probably has to do with more than just the engine issue.
- What other problems really led to this delay?
The primary problem that has been a perennial cause for delay is the complexity of the 787 supply chain. With vendors across the globe, Boeing has had a tough time ensuring parts shipped to Everett arrive as required. The industry was taught a new term from the 787 program – “traveled work”. This term describes incomplete work that arrives at Everett that Boeing’s engineers have to complete and or fix. Boeing has had to go so far as buy one of its primary 787 vendors in order to take control of the build quality issues.
Boeing has faced problems with trying to get properly assembled parts arriving at the correct time in order to assemble the 787. Too much of the assembly has been outsourced and left to vendors for quality control. Boeing’s project management skills and resources have been stretched. Untimely layoffs of experienced, but expensive, labor have not helped. The 787 program’s timing in terms of resource requirements have been so severe that the 787 program has led to delays in the 747-8 program. In addition, the negative cash flow from these programs has delayed work on 777 and 737 replacement studies.
- Is Rolls-Royce being made into a scapegoat?
It would seem at this stage that Rolls may be treated as a scapegoat. Even if it is argued that the test engine that failed included special features Boeing planned to use for program launch, Rolls Royce can assemble another. If it is argued that the engine failure caused damage to the test facility, Rolls-Royce has already said this will not delay its own engine development.
Clearly from Rolls-Royce’s perspective the engine failure event was bad – but not that bad. Indeed, Rolls-Royce announced it had the matter under control on August 17th nearly ten days prior to Boeing’s delay announcement. Consequently one has to wonder how Boeing and Rolls Royce have such a widely different view of the engine failure. If Rolls-Royce can assemble another engine in short order and continue its testing then we know for sure that Boeing overstated the matter. You can expect Rolls-Royce to do just that.
- Is Rolls-Royce being used to mask fundamental program issues?
This is the nub of the issue – absent any other program stumbles, Rolls-Royce’s engine failure news would look really bad. But the truth is that Boeing has repeatedly blamed its vendors for delays. “Traveled work”, poor workmanship and faulty parts have all been reasons given before delays. Boeing, in a way, needs a new excuse. Rolls-Royce provides a new name to bring into a program delay.
Boeing has had numerous problems that have been described as “unknown unknowns”. The 787 program is incredibly complex because of the way Boeing designed it. In order to offset risk and financial burdens, Boeing spread the project around the world. This has proven to be a primary source of trouble. Vendors have not lived up to their side of the deal and repeatedly let Boeing down. But at the same time, Boeing’s project management has been wanting. It has not managed the supply chain effectively to really bring down program risk. Consequently there are good reasons to doubt the latest delay is all about Rolls-Royce.
- What is the cost?
Penalty payments to 787 customers may reach $5 billion estimates Myles Walton, a Deutsche Bank AG analyst in New York. Air India has stated it is seeking $840 million in compensation. Qantas has said that it is claiming compensation. Last week Kenya Airways said it might even cancel its 787 order. Clearly Boeing is scrambling to keep its customers in line and compensated. This compensation can take many forms – for example, 767s built for 787 launch customer ANA, sold no doubt on very favorable terms. With each new announcement by an airline that it is getting compensated, Boeing’s other customer line up for their own compensation.
Airline scheduling is complex in its own right. Airlines build and plan schedules with a view to certain airplanes being in the right places at a certain time. Delivery delays therefore cause schedule havoc. As we have seen with A380 delays, airlines have to scramble to get seats in place. In the case of the 787, this means keeping older planes in service that were planned for retirement or sale. There is a long tail impact from delivery delays which airlines can quantify in detail. No doubt these costs are being sent to Boeing as part of compensation claims. 787 customers expecting their aircraft in 2016 seem less concerned, but those who were planning on 787 capacity being available sooner will be much less sanguine and demand compensation. And then they may still cancel their orders.
- What are the implications for other future airplane programs?
Boeing is in the midst of a series of studies to replace its venerable 737 and also update its magnificent 777. Indeed, the 737 is the bread and butter program for Boeing. The 777 is the industry benchmark. But both programs are facing ever tougher competition. Airbus is likely to undertake a re-engine program on its A320 family and thereby impact the 737 program. Boeing has to react to this. In addition, new competitors are coming into the segment at the lower end of the 737 market and pose a manifest threat. Therefore Boeing’s bread and butter program requires attention and this means resources.
The 777 program is also under threat by Airbus, which is developing a family of aircraft that fit between the 787 and 777. Even though Boeing’s top end 777 does not face a direct Airbus threat, Boeing has to take the new Airbus very seriously. This means access to resources too.
As mentioned the 787 is not the only program sucking up resources, the 747-8 is also in need of attention. Clearly Boeing’s engineering and cash resources are being stretched. In all likelihood Boeing will try to delay any new programs as long as possible. When the first 787 deliveries start next year, that program will start to generate cash. This will of course ease some of the resource crunch. As soon as the 747-8 deliveries start that too helps. It is likely that Boeing can really start to move forward with new programs only in 2012.
But between now and then, Airbus for one, can possibly move faster and gain some advantage. There are no easy choices for Boeing. Poor project management of the 787 and 747-8 have clearly cause ripple effects in these other studies and programs.
- Will Boeing make delivery in the middle of Q1 or is this wishful thinking?
The need for Boeing to deliver its first 787 at this stage cannot be overstated. The desire to get ANA their first airplane is crucial. As we have seen with the A380, a new plane generates tremendous media attention. Boeing wants that positive attention for its 787 because media attention to date has been mostly negative. Consequently it is clear that within Boeing the push on people and vendors to accomplish this first delivery must be tremendous.
Boeing has over 20 787s in various states of assembly. The company has a very aggressive test program to try and make up time – though the Rolls-Royce issue has apparently slowed this somewhat. Why exactly is not clear.
So even as one would expect Boeing to make its latest delivery date, we have seen repeated slides to the right – time and again. The problem is indicative of something bigger too – Boeing’s word no longer means what it once did. This is a big issue. Credibility is important, because as explained, so much is riding on this airplane. It is rich with promise for airlines and they want – even need – the airplane now. But they have to scramble to fix holes in schedule planning as each delay is announced. The bottom line is that more delays are expected rather than the schedule being firm.
“Experience shows that programs that ‘swim funny’ do so for much longer than most, especially the bulls, ever expect,” wrote Heidi Woods, an analyst at Morgan Stanley wrote in a note to clients. “We do not expect this is the last setback.” And that is how many people feel about the 787 at this stage.