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Boeing Case Study November 15, 2011

Abstract

2 Boeing is one of the worlds largest aerospace firms. It manufactures airliners for commercial and military segments. The company is based in Washington State. It just opened a new manufacturing facility in South Carolina. Boeing is best known for the 747 jetliner. They have large contracts with different airlines as well as the U.S. government. Over the years, Boeing has been plagued with many labor, manufacturing, and supply problems. Their latest problems are with the 787 Dreamliner. Boeing is outsourcing a lot more its processes. It has worked with Japanese automakers to improve its production process. Airbus is Boeings main competition. Both compete in the same market segments. The SWOT analysis looks at Boeings processes and strategies.

Boeing

3 The Boeing Company, together with its subsidiaries is one of the worlds major aerospace firms. The company is organized based on the products and services it offers. Boeing has five principle segments: Commercial Airplanes, Boeing Defense, Space, & Security (BDS) consists of three segments: Boeing Military Aircraft (BMA) Network & Space Systems (N&SS) Global Services & Support (GS&S) Boeing Capital Corporation Engineering, Operations & Technology (EO&T): provides Boeing with technical and functional capabilities, including information technology, research and development, test and evaluation, technology strategy development, environmental remediation management and intellectual property management Shared Services Group (SSG)

The Boeing Company was established in 1916 by William Boeing. It is the largest manufacturer of commercial jetliners and military aircraft combined. It designs, develops, manufacturers, sales and supports commercial jetliners, military aircraft, satellites, missile defense, space flight, and launch systems and services. It is a major service provider to NASA and operates the Space Shuttle and International Space Station. Boeing provides products and support services to customers in 150 countries. It is one of the largest US exporters in terms of sales. Boeings large scale of operation and market penetration gives it substantial bargaining power. Boeing is headquartered in Chicago and employs more than 165,000 people worldwide. Boeings vision is: People working together as a global enterprise for aerospace leadership. Boeing plans to achieve their vision by

4 running healthy core businesses, leveraging their strengths into new products and services, and opening new frontiers (About us, 2011). To realize their vision, Boeing considers where they are today and where they would like to be tomorrow. They emphasize detailed customer knowledge and focus that understands, anticipates and responds to customer needs, large-scale systems integration that continually develops and advances technical excellence, [and] a lean enterprise characterized by efficiency, supplier management, short cycle times, high quality, and low transaction costs (About us, 2011). Boeing is organized into two business units: Boeing Commercial Airplanes and Boeing Defense, Space & Security. Supporting these units are Boeing Capital Corporation, a global provider of financing solutions; the Shared Services Group, which provides a broad range of services to Boeing worldwide; and Boeing Engineering, Operations & Technology, which helps develop, acquire, apply and protect innovative technologies and processes (About us, 2011). The company merged with McDonnell Douglas (competitor) in 1997. Today, the main commercial products are the 737, 747, 767, 777, and the Boeing Business Jet. Boeings new product development efforts are focused on the Boeing 787 Dreamliner, and the 747-8. Boeing has nearly 12,000 commercial jetliners in service worldwide, which is about 75 percent of the world fleet. Boeings Commercial Aviation Services provides 24/7 technical support and a full range of engineering, modification, logistics and information services to its global customer base, which includes passenger and cargo airlines, as well as maintenance, repair and overhaul facilities. Boeing also trains maintenance and flight crews in the 100seat-and-above airliner market through Boeing Training & Flight Services, the

5 world's largest and most comprehensive provider of airline training (About us, 2011). 2010 Financial Results Boeing recorded revenues of $64.3 billion during the financial year ended December 2010 (FY 2010). Revenues for the year were down 6 percent from 2009 due to anticipated lower airplane deliveries and reduced defense volumes. Net income (earnings) increased to $3.3 billion or $4.46 earnings per share (EPS) compared with $1.3 billion or $1.87 EPS in 2009 reflecting solid performance across core production and services programs. Boeing captured $69 billion of new orders during the year and grew its backlog to $321 billionfive times current annual revenues. It continued to provide strong liquidity with operating cash flow of $3.0 billion, and cash and marketable securities of $10.5 billion (The Boeing Company, 2011). Boeing delivered 462 commercial airplanes, including record 737 deliveries for the second year in a row, and won 530 net orders, increasing its backlog to 3,443 airplanes valued at $256 billion. It delivered 115 production military aircraft, two launch vehicles and four satellites, and increased backlog at Defense, Space & Security to $65 billion, and more than twice the business units 2010 revenue. The company delivered the 900th 777 and started assembly of the 1,000th 767. In addition, it extended core Defense, Space & Security programs, including contract awards for 124 F/A-18E/F Super Hornet and EA-18G Growler aircraft for the U.S. Navy; low-rate initial production of up to 51 AH-64D Apache Block III helicopters for the U.S. Army; and six new commercial satellite orders. It Achieved key Defense, Space & Security milestones, including delivery of the first P-8A Poseidon for flight testing; unveiling of two unmanned aircraftthe fighter-sized Phantom Ray and the

6 hydrogen-powered Phantom Eyein preparation for flight testing in 2011; first flight of the UK Mk4 Chinook rotorcraft; and winning the coveted Collier Award for the International Space Station. The company advanced their environmental leadership by testing biofuels on commercial and military aircraft; creating sustainable aviation biofuels research projects around the globe; demonstrating next-generation energy smart grid technologies; improving the global air traffic control system; and continuing to reduce the environmental footprint of Boeing operations (The Boeing company, 2011).

SWOT Favorable Internal Strengths: Large scale operation and strong global network Strong association with Federal Government Robust inorganic growth Focus on R&D Strong order backlog Strong financial performance Realignment for growth and Unfavorable Weaknesses: Production/supply problems Labor/legal proceedings Dependence on US government

7 expansion to new markets Diversified business offerings

External

Opportunities: Increased aircraft demand Rising global defense spending 787 Dreamliner to gain market share

Threats: Intense competition and pricing pressure Risks concerning labor issues Uncertain airline industry Rising fuel costs Change in US budgetary priorities and contracts

Strengths Large scale operation and strong global network Boeing is one of two major manufacturers, equipped to produce aircraft capable of carrying more than 100 passengers for the worldwide commercial airline industry, and the second-largest defense contractor in the US. Boeing is one of the leading producers of commercial aircraft and offers a broad spectrum of commercial jetliners designed to meet passenger and cargo requirements of both the US and

8 non-US airlines. The company has customers in more than 150 countries around the world and is one of the largest US exporters in terms of sales. It is the global market leader in design, development, manufacture, sale and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services. Boeings large scale of operation and market penetration gives it substantial bargaining power (About us, 2011; Boeing SWOT, 2009). Strong association with Federal Government Boeing has worked with the Federal Government for over 30 years. Its Defense, Space & Security is a $32 billion business with 64,000 employees worldwide that combines manned and unmanned airborne capabilities, intelligence and security systems, communications architectures and extensive large-scale integration expertise across several diverse business areas. Boeings Defense, Space & Security strategy is to understand the enduring needs of customers and provide capability-based solutions to meet their rapidly evolving requirements. The strategy includes understanding the art of using current and emerging technologies to improve the capabilities of existing products and deliver new solutions (About us, 2011; Boeing SWOT, 2009; Hill & Jones, 2009, C1-C15). Boeings military aircraft business includes tactical and airlift aircraft, missiles, unmanned airborne systems, and surveillance and engagement programs. FY2008, Boeings contracts with the US government accounted for 46% of its total revenues. The company deals with numerous US government agencies and entities, NASA, and the Department of Homeland Security. Boeings IDS (integrated defense systems) segment provides various research, development, production, modification and support services to the US Department of Defense (80% of IDS

9 2008 revenues), NASA and other defense customers. Boeing also engineered and deployed various products for the Army, Navy and Air Force and tests complex and mission critical hardware and software systems used by these agencies. The company played key roles in improving the performance, reliability, maintainability, supportability, and weapons effectiveness. The company has received significant contracts from these customers. Most recently, Boeing received a $48.9 million contract from the US Navy in May 2009, for development and testing of a Distributed Targeting system for the F/A-18E/F Super Hornet strike fighter. In June 2009, Boeing received A-10 sustainment and integration contract from the US Air Force. In the same month, the company also received a $5.2 million US Marine Corps contract to provide a solution for recovering disabled Mine Resistant Ambush Protected vehicles. In June 2009, Boeing received a contract from the US Army for future combat systems. Strong relationships with major customers enable the company to receive many new contracts and hence serve as a competitive advantage (About us, 2011; Boeing SWOT 2009; Hill & Jones, 2009, C1-C15). Robust inorganic growth Boeing focuses on acquisitions as a business-level strategy to expand its business and to earn more revenues. In FY 2009, the company acquired Vought Aircraft Industries 787 business conducted at North Charleston, South Carolina. Voughts 787 business produces fuselage sections, including the fabrication, assembly and systems installation, for the 787 program. The acquisition strengthens Boeings 787 program and bolsters its capability to develop and produce large composite structures (Boeing SWOT, 2010). In FY 2009, Boeing also acquired eXMeritus, a Fairfax Virginia based company that provides hardware and software to the federal government and law

10 enforcement organizations, for sharing information securely, across classified and unclassified networks and systems. The acquisition of eXMeritus complements FY 2008 acquisitions of Digital Receiver Technology Ravenwing and Kestrel Enterprises. These acquisitions are part of Boeings global-level strategy to expand its presence in the cyber and intelligence markets. The addition of exMeritus enhances Boeing capabilities developed through years of experience on secure networks for some of the most complex systems in national security (Boeing SWOT, 2010). In addition, during FY 2009 Boeing acquired Alenia North Americas half of Global Aeronautica, a South Caroling fuselage subassembly facility for Boeings 787 Dreamliner. Alenia North America is a subsidiary of Italys Alenia Aeronautica, a Finmeccanica company. This acquisition increases productivity for the 787 program and allows Boeing to maintain its long-term competitiveness. Therefore, acquisitions bring complementary technologies, support geographic expansion, and leverage existing infrastructure for Boeing (Boeing SWOT, 2010). Strong focus on research and development Boeings strategy also has a strong focus on R&D activities. Its 'other' business segment principally includes the engineering, operations and technology (EO&T) activities. EO&T is an advanced research and development organization focused on innovative technologies, improved processes and the creation of new products. R&D expenditures involve experimentation, design, development and related test activities for defense systems, new and derivative jet aircrafts, including both commercial and military, advanced space and other company-sponsored product developments. The companys R&D investment amounted to $6,506 million, $3,768 million and $3,850 million in FY 2009, FY 2008, and FY 2007 respectively.

11 The Boeing military aircraft division continues to focus on R&D resources to leverage customer knowledge, technical expertise and system integration of manned and unmanned systems that provide innovative solutions to meet the warfighters enduring needs. The network and space systems division of Boeing is investing in capabilities to enhance connectivity between existing and new air/ground and maritime platforms; to increase communications availability, utility and bandwidth through more robust space systems; and to leverage innovative networking and ISR (intelligence, surveillance, and reconnaissance) concepts. Investments were also made to develop concepts and capabilities related to cyber and security products, as well as the development of next-generation space and intelligence systems. Boeings global services and support (GS&S) continues to focus investment strategies on its core businesses. Successful development of adaptable systems has allowed GS&S to transition from Boeing platforms into the broader aviation market. Strong focus on R&D allows Boeing to develop proprietary products, strengthen its product portfolio, and have an advantage over its competitors (Boeing SWOT, 2010). Strong order backlog As of June 30, 2011, the order backlog for Boeing Commercial Airplanes totaled 3,392. Unfilled orders broken down by aircraft type were as follows: 2,109 for the 737, 111 for the 747, 54 for the 767, 291 for the 777, and 827 for the 787. The backlog at the end of June 2011 represents a decrease from the backlog at the end of the previous month (May), which totaled 3,396. Both figures are decreases compared to the company's year-end-2010 order backlog of 3,443 ("Boeing reports second-quarter," 2011).

12 Strong financial performance The Boeing Company (NYSE: BA) reported second-quarter net income of $0.9 billion, or $1.25 per share, on revenue of $16.5 billion. Operating margin of 9.3 percent reflects higher Commercial Airplanes volume and strong core performance across the company's businesses, partially offset by higher pension expense. The company increased its 2011 earnings per share guidance to between $3.90 and $4.10 per share reflecting the strong core performance. Total company 2011 revenue and cash flow guidance is unchanged. Boeing's quarterly operating cash flow was $1.6 billion, reflecting strong operating performance and continued investment in development programs. Cash and investments in marketable securities totaled $8.8 billion at quarter-end, up from $7.8 billion at the beginning of the quarter. Debt was essentially unchanged in the quarter. Capital expenditures for 2011 have been reduced to approximately $2.0 billion, down from approximately $2.3 billion ("Boeing reports second-quarter," 2011). Boeing Commercial Airplanes second-quarter revenue increased by 19 percent to $8.8 billion on higher deliveries, improved model mix and higher services volume. Operating margin was 10.4 percent, reflecting the higher revenue and strong operating performance, partially offset by higher R&D ("Boeing reports second-quarter," 2011). Boeing Defense, Space & Security's second-quarter revenue was $7.7 billion, while operating margin was 10.4 percent. Boeing Military Aircraft (BMA) secondquarter revenue was $3.6 billion. Operating margin was 10.6 percent, reflecting strong operating performance. Last year's results were impacted by a charge on the Airborne Early Warning & Control program. During the quarter, India signed an agreement for ten C-17s, which are expected to be on contract later this year, and

13 BMA was awarded the U.S. Navy's study contract for the Unmanned CarrierLaunched Airborne Surveillance and Strike Program ("Boeing reports secondquarter," 2011). Network & Space Systems (N&SS) second-quarter revenue decreased to $2.1 billion, due to funding reductions in Brigade Combat Team Modernization and lower SBInet volume. Operating margin was 9.5 percent, reflecting United Launch Alliance performance and a gain on the sale of property. Global Services & Support (GS&S) second-quarter revenue was $2.0 billion. Operating margin was 10.9 percent, reflecting strong performance in integrated logistics. During the quarter, GS&S was awarded modernization and upgrade contracts from the U.S. Air Force ("Boeing reports second-quarter," 2011).

Realignment for growth and expansion to new markets The company focuses on realignment, which is part of a continuing effort to successfully compete in a rapidly evolving global defense and security marketplace. From January 2010, Boeings integrated defense systems business unit began operating under the name Boeing defense, space and security (BDS). While BDS will retain its current operating divisions (Boeing military aircraft, network and space systems, and global services and support), the realignment consolidates some businesses. Boeing consolidated two businesses in network and space systems division, the combat systems business and the command, control and communications networks business. These businesses will be unified as the new network and tactical systems business (Boeing SWOT, 2010).

14 BDS operations principally involve research, development, production, modification and support of global strike systems, global mobility systems, rotorcraft systems, airborne surveillance and reconnaissance aircraft, network and tactical systems intelligence and security systems, missile defense systems, and space and intelligence systems. Boeing anticipated flattening defense budgets and shifting customer priorities for the past few years and has been taking aggressive steps to position the company for profitable growth in a challenging economy. With the latest strategic move, the company extends its core programs even as it enhances its capabilities designed to capture business in promising markets in the US and around the world (Boeing SWOT, 2010). BDS provides affordable solutions and brings value to customers through its ability to solve complex problems utilizing expertise in large-scale systems integration, knowledge of legacy platforms, and development of common networkenabled solutions across all customers domains. Therefore, realignment positions Boeing for further growth in new and adjacent markets while continuing to serve existing defense and space customers (Boeing SWOT, 2010).

Diversified business offerings Boeing is the largest aircraft manufacturer globally and delivers aircraft to a large number of developed and developing countries. Its rank as defense contractor with different countries is second. The designs of Boeings aircrafts are efficient. There is no fault in its designs. Its production system is also very efficient. It also has the strength of product diversification. It not only

15 manufactures commercial aircraft but also manufacture aerospace and defense aircrafts (About us, 2011; Boeing SWOT, 2009; Hill & Jones, 2009, C1-C15). Boeing has been a manufacturer of commercial jetliners for more than 40 years. Boeing merged with McDonnell Douglas in 1997 adding to its existing commercial aviation product line. Today, the main commercial products are the 737, 747, 767 and 777 families of airplanes and the Boeing Business Jet. New product development efforts are focused on the Boeing 787 Dreamliner, and the 747-8. The company has nearly 12,000 commercial jetliners in service worldwide, which is roughly 75 percent of the world fleet. Through Boeing Commercial Aviation Services, the company provides around-the-clock technical support to help operators maintain their airplanes in peak operating condition. Commercial Aviation Services offers a full range of world-class engineering, modification, logistics and information services to its global customer base, which includes the world's passenger and cargo airlines, as well as maintenance, repair and overhaul facilities. Boeing also trains maintenance and flight crews in the 100-seat-and-above airliner market through Boeing Training & Flight Services, the world's largest and most comprehensive provider of airline training ("Boeing: Boeing in," 2011). Boeing Defense, Space & Security (BDS) provides end-to-end services for largescale systems that enhance air-, land-, sea- and space-based platforms for global military, government and commercial customers. BDS designs, produces, modifies, and supports fighters, bombers, transports, rotorcraft, aerial refuelers, missiles, munitions and spacecraft for military, civil and commercial use. Boeing Capital Corporation is a global provider of financing solutions. Working closely with Commercial Airplanes and Defense, Space & Security, Boeing Capital Corporation

16 arranges, structures and provides financing to facilitate the sale and delivery of Boeing commercial and military products ("Boeing: Boeing in," 2011). Realignment for growth and expansion to new markets The company focuses on realignment, which is part of a continuing to successfully compete in a rapidly evolving global defense and security marketplace. From January 2010, Boeings integrated defense systems business unit began operating under the name Boeing defense, space and security (BDS). While BDS will retain its current operating divisions (Boeing military aircraft, network and space systems, and global services and support), the realignment consolidates some businesses. Boeing consolidated two businesses in network and space systems division, the combat systems business and the command, control and communications networks business. These businesses will be unified as the new network and tactical systems business. Boeing anticipated flattening defense budgets and shifting customer priorities for the past few years and has been taking aggressive steps to position the company for profitable growth in a challenging economy. With the latest strategic move, the company extends its core programs and enhances its capabilities designed to capture business in promising markets in the US and around the world. BDS provides affordable solutions and brings value to customers through its ability to solve complex problems utilizing expertise in largescale systems integration, knowledge of legacy platforms, and development of common network-enabled solutions across all customers domains. Therefore, realignment positions Boeing for further growth in new and adjacent markets while continuing to serve existing defense and space customers (Boeing SWOT, 2010). Weaknesses

17 Production and supply problems Boeing delivered its first 787 Dreamliner airplane to All Nippon Airways (ANA) in September 2011, three years later than expected. The 787 is seen as the future of air travel as well as the future of Boeing. It is a sophisticated carbon-composite aircraft. However, the 787 has been plagued by problems of delay and quality control in the companys complex global supply chain and costs more than $32 billion, over double the usual development of a new airliner. Boeing experienced problems with the availability of the new Rolls Royce Trent 100 engine. In August 2011, during a test near the Boeing facility in Seattle, a Rolls Royce engine blew apart and caused severe damage to the testing facility. Consequently, the facility had to be shut down for repairs. Officials at Boeing and Rolls Royce deny that the delays with the Rolls Royce engine are due to the explosion (Logan, 2011; Reed, 2010). Engineers have also had difficulties trying to remedy issues with a horizontal stabilizer on the airplane's tail made by a subcontractor in Italy. In addition, there were problems with the GEnx engine powering some of the 787s. There were other problems with the design, supply chain and manufacturing such as a shortage of fasteners. Boeing controls production of composites through a closely monitored supply chain. Carbon fiber composites come from Toray Industries, which has been rapidly ramping up capacity. Assembly of the composite components requires a large number of high-quality, lightweight fasteners from suppliers such as Carpenter Technology, Alcoa Fastening Systems and Allegheny Technologies (ATI). The 787 uses eight times more titanium fasteners by weight than the 737. Demand is stronger right now for the premium fasteners used to build aircraft engines. Aircraft fastener supplies have been negatively affected in the last three years by

18 speculation in the supply chain. Some distributors bet on strong demand for the Dreamliner in 2008 through 2010 and were burned when production was postponed multiple times. As a result there was a supply overhang that made it difficult for OEM suppliers to operate consistently. Instead of drawing primarily from its traditional pool of aircraft engineers, mechanics and laborers in the Seattle area, Boeing uses an international team of suppliers and engineers from the United States, Japan, Italy, Australia, France and elsewhere that manufacturer Boeing components. The repeated Dreamliner delays result from a splintered engineering strategy and a complex supply chain of about 50 partners (Smock, 2011). According to Bernstein Research, Boeing will not reach target goals for its 787 production of 10 planes per year until 2015. Boeing lowered its outlook due to concerns over additional delays from eight 787s down to six this year and 51 (from 61) for 2012. Boeing had planned to reach 10 planes per month by the end of 2013 (Thomas, 2011). Labor/legal problems Boeing has been plagued with legal problems in the past. Its recent problems involve a new Boeing plant in South Carolina. Boeing opened a new $750 million assembly plant in South Carolina. The National Labor Relations Board (NLRB) is accusing Boeing of breaking the law when it violated workers rights. The controversy is over Boeing's decision to assemble its fuel-efficient 787 Dreamliner. The NLRB is charging Boeing with retaliating against workers in Washington State to punish them for past strikes by building the plant in a right-to-work state where unions are not as prominent. They filed a complaint against Boeing in April 2011. Boeing plans on keeping the original Washington state plant open and continue to send the majority of its 787 Dreamliner business there. Boeing has added more

19 than 2,000 jobs there since the 2009 decision to open a second production plant. Regardless, Boeing remains in the news about government attempts to force Boeing to place the second final assembly line in Puget Sound, Washington and close the South Carolina final assembly and delivery facility (Devaney, 2011; Kesmodel & Trottman, 2011). In September 2011, the NLRB stated that they obtained documents under subpoena that demonstrates that Boeing opened its second assembly line in South Carolina to avoid labor problems, even though Boeing officials considered the location its highest-risk option. The South Carolina plan is known as Project Gemini. According to the NLRB, documents from 2009 reveal that Boeing knowingly located the plant in South Carolina to help rebalance an unbalanced and uncompetitive labor relationship. However, leaders at Boeing made a decision to place the plant there based on numerous factors including the firms need to ensure a competitive future and insist that the decision is consistent with the law. Boeings objectives in the move were to improve its cost-competitiveness and regain a reputation among customers for reliable products, deliveries, and support. Boeing plans to assemble three of the wide-body Dreamliners a month at the South Carolina plant and seven per month in the Washington plant by 2013 (Devaney, 2011; Kesmodel & Trottman, 2011). Dependence on US government According to Boeings 2010 Annual Report, the United States Department of Defense (DoD) is BDSs primary customer, accounting for 82% of its revenues. Other significant revenues were derived from the National Aeronautics and Space Administration (NASA) and international defense markets, civil markets and commercial satellite markets. BDS consists of three capabilities-driven businesses:

20 BMA (Boeing Military Aircraft), N&SS (Network & Space Systems) and GS&S (Global Services & Support). Reliance on these governmental poses a threat to Boeing (The Boeing Company, 2011). Any budgetary and spending cuts affect future revenues. While Boeing is concerned about future cuts, current defense budgets exceed $700 billion for 2010. Budgets are expected to increase in 2011. After 2011, fiscal policy changes could drastically alter future earnings in the defense industry. To reduce its dependence on the U.S. government, BDS has developed several diversification strategies. Expanding its business overseas is one such strategy. Recently, the Obama administration has sought Congressional approval for Boeing to sell $60 billion worth of F-15 jets to Saudi Arabia. Additionally, the company recently delivered three F-15s to the Republic of Korea. (Boeing: Boeing delivers, 2010). Boeing depends heavily on U.S. government contracts that are subject to unique risks. In 2010, 43% of its revenues were derived from U.S. government contracts. In addition to normal business risks, these contracts are subject to risks beyond the firms control. The funding of U.S. government programs is subject to congressional appropriations. Many of the government programs may last several years and are funded annually. Changes in military strategy and priorities can affect future procurement opportunities and existing programs. Long-term government contracts and related orders are subject to cancellation, delay, or restructure, if appropriations for subsequent performance periods are not made. The termination or reduction of funding can result in an adverse effect on Boeings earnings, cash flow, and financial position. The U.S. government can modify, curtail, or terminate contracts with Boeing without prior notice and at its convenience upon payment for work done (The Boeing Company, 2011).

21 In addition, Boeings contracts are subject to audits by the U.S. government agencies for incurred and indirect costs. The company is subject to cost adjustments if any costs are found to be improperly allocated including refunds. They are also subject to government inquiries and investigations that could have adverse effects on their financial condition. Their government business is also subject to specific procurement regulations and other requirements that increase Boeings performance and compliance costs (The Boeing Company, 2011). Opportunities Increased demand for aircraft Air transport throughout the world is constantly changing in response to market opportunities and challenges. The rise of new airline business models and rapid growth of air travel in the worlds emerging economies are stabilizing worldwide demand for airplanes. The emerging markets are driving economic expansion, with China leading the way at 7.2% GDP growth, followed by Southwest Asia (6.1%), Africa (4.9%), Southeast Asia (4.6%) and Asia-Pacific (4.4%). The global GDP is at 3.1% and North America is set at 2.1%. This translates into world average air travel growth of 4.9%, of which Asia-Pacific, including China, will experience growth in air travel of 6.9%. At a global level, the number of airplanes in the world fleet grows at an average 3.2% each year. At the same time, passenger traffic, measured in revenue passenger-kilometer, grows 4.9% per year and cargo traffic, measured in revenue tonne-kilometers, grows 5.4% a year (Boeing SWOT, 2010). According to Boeings Current Market Outlook for the period 2009-2028, the demand for new airplanes worldwide is expected to be 29,000 over the next two decades, of which 2,100 will be regional jets (less than 100 seats), 19,460 will be single-isles, 6,700 will be twin-aisle, and 740 will be large. All this translates into

22 revenues of $3.2 trillion over a score of years, for an average of $160 billion/annum. Boeing is well positioned both geographically and technically to service the huge aircraft market in the future. The growing demand for aircraft represents an opportunity for Boeing to capitalize on this market and would be able to expand its revenues and profits from this market (Boeing SWOT, 2010). The FAA expects U.S. airlines will carry 1 billion passengers a year by 2021, two years faster than previously forecast. In its annual report published in February 2011, the FAA expects international traffic to grow more rapidly than domestic travel - with U.S. airlines handling 7.8 percent more international passengers but only 3 percent more domestic passengers. This trend is expected to continue through 2031 due to faster economic growth in other parts of the world. The International Air Transport Association also predicted 3.3 billion air travelers worldwide by 2014, up by nearly one-third from 2009, with China being the major driver of growth (FAA sees 3.5%, 2011). In a 2006 report, Boeing believes that the 747 range including the Airbus A380, will account for some 3% of deliveries and 10% of value between 2006 and 2025. Airbus believes that the demand for very large aircraft will be robust, amounting to 1,648 large passenger aircraft and freighters in the 747 range and above or 22% of the total value of aircraft delivered. Airbus believes that hubs will continue to play an important role in airline travel especially international travel, and that very large jets will be required to transport people between hubs. However, Boeing believes that travelers prefer nonstop service between cities and want to avoid congested hubs. Boeing believes that the flights between city pairs will continue to grow (Hill & Jones, 2009, pp. C1-C15). Surge in the US defense spending

23 Defense spending is a long-term recession-proof industry which would not be affected by cyclical downturns and upturns. The 2011 US budget allocates $708.2 billion to the Department of Defense (DoD). The US Federal Budget for FY 2011 is a spending request by President Barack Obama, to fund defense operations from October 2010 to September 2011. The 2011 Budget for DoD provides $548.9 billion for the DoD base budget in 2011, a 3.4% increase over the 2010 enacted level. This funding increase allows DoD to address its highest priorities, such as the Presidents commitment to reform defense acquisition, develop a ballistic missile defense system that addresses modern threats, and continue to provide high quality health care to wounded service members. In addition, the 2011 Budget provides $159.3 billion for DoDs ongoing overseas contingency operations in Iraq, Afghanistan, and Pakistan. A supplemental funding request of $330.0 billion for 2010 addresses immediate funding requirements for these missions. Boeings primary customer is the US DoD with approximately 80% of Boeing defense, space and securitys 2009 revenues being derived from this customer. Therefore, a surge in the US defense spending could provide growth for the company in the short to medium term (Boeing SWOT, 2010). 787 Dreamliner to gain market share Boeings 787 Dreamliner offers more comfort and convenience and is 20 percent more fuel efficient compared to other airplanes the same size. It also releases 20 percent less carbon dioxide and flies 15 percent faster due to its ultra-light carbon fiber components. The 787-8 Dreamliner will carry 210 - 250 passengers on routes of 7,650 to 8,200 nautical miles, while the 787-9 will carry 250 - 290 passengers on routes of 8,000 to 8,500 nautical miles. In addition to bringing big-jet ranges to mid-size airplanes, the 787 provides airlines with excellent fuel efficiency, resulting

24 in exceptional environmental performance. It will also travel at a similar speed as today's fastest wide bodies, Mach 0.85. Airlines also have more cargo revenue capacity. The modern systems architecture also offers increased functionality and efficiency. Since being launched in April 2004 with a record order from All Nippon Airways (ANA), 56 customers from six continents have placed orders for 821 airplanes valued at about $145 billion, making it the most successful twin-aisle launch of a new commercial airplane in Boeings history. The first 787 was just delivered to ANA in September 2011 as the world watched. As of 2011, Boeing has 426 orders for the Dreamliner. It predicts the market at 3,310 units over 20 years (2009-2028). Boeing estimates the plane to have a 30 percent maintenance savings and a 10 percent better cash seat mile cost compared to peer airlines. Boeing also estimates the 787 will connect 450 new city pairs ("Boeing: commercial airplanes-787," 2011). Boeing opportunities consist of a growing demand for small to mid-size airline to serve the increase in travel through pair cities and nonstop destinations. As cities become more populated, hub cities become more congested. Many travelers prefer to avoid hubs and travel through city pairs. Smaller cities that offer nonstop flights are more convenient and easier to get in and out of especially for business travelers. In addition, the Dreamliner offers airlines a more cost efficient way to fly. Airlines can reduce their operating costs. As older fleets near retirement, demand for newer, quieter, faster, jets are heating up. Demand has been strong for the 787 (Hill & Jones, 2009, pp. C1-C15). Threats Intense competition and pricing pressure

25 The commercial jet aircraft market and the airline industry remain extremely competitive. Boeing faces aggressive international competitors, including Airbus, who are intent on increasing their market share. Boeing Defense, Space and Security (BDS) business also faces strong competition in all market segments, primarily from Lockheed Martin, Northrop Grumman, Raytheon Company and General Dynamics. Non-US companies such as BAE Systems and European Aeronautic Defense and Space Company (EADS), the parent of Airbus, continue to pursue a strategic presence in the US market by strengthening their North American operations and partnering with US defense companies (Boeing SWOT, 2010; Hill & Jones, 2009, C1-C15). International competitors who are intent on increasing their market share, offer competitive products and have access to most of the same customers and suppliers. Airbus has historically invested heavily to create a range of products to compete with Boeing. Regional jet makers Embraer and Bombardier continue to develop larger and more capable airplanes. Additionally, other competitors from Russia, China, and Japan are likely to enter the 70 to 190 seat aircraft market over the next few years. In addition, certain of Boeings competitors have occasionally formed teams with other competitors to address specific customer requirements. BDS expects the trend of strong competition to continue into 2012 with many international firms pursuing announced intentions of increasing their US presence. Furthermore, market liberalization in Europe and Asia has enabled low-cost airlines to continue gaining market share. These airlines have increased the downturn pressure on airfares. This results in continued cost pressures for all airlines and price pressure on Boeings products. This market environment has resulted in intense pressures on pricing and other competitive factors and Boeing expects

26 these pressures to continue or intensify in the coming years. Therefore, intense competition across all business divisions of Boeing could erode the market share of the company and could also affect its profit margins (Boeing SWOT, 2010; Hill & Jones, 2009, pp. C1-C15). Risks concerning labor issues Boeing faces risk concerning labor issues at its plants. Approximately 57,000 employees, which constitute approximately 36% of the companys total workforce, are union represented as of December 31, 2009. Boeing experiences work stoppages from time to time due to worker strikes. The company experienced a work stoppage in 2008 when a labor strike delayed commercial aircraft and certain BMA program production. Also in May 2010, 1,700 Boeing workers who assemble giant C-17 cargo jets in Long Beach, California were on strike for a month over pension and medical benefits. As a result, theC-17 production line was shut down although 3,000 non-union workers were on the job. The work stoppage was tough at a plant where workers were accustomed to rolling a new C-17 onto the tarmac every three weeks. The strike was halted in June 2010, as Boeing offered to pay a $4,000 payout and a 3.4% over the life of the agreement. It also offered an increase in the basic pension benefit to $79 per month for each for each year of service, from $70. Boeing may experience additional work stoppages in the future, which could adversely affect its business. The company cannot predict how stable its relationships will be with 14 different US labor organizations and 7 different nonUS labor organizations. Union actions at suppliers can also affect the company. Work stoppages and instability in the companys union relationships could delay the production and development of its products, which could strain relationships with customers and cause a loss of revenues (Boeing SWOT, 2010).

27 Uncertain airline industry environment Boeings main competitor is Airbus. The competition between Boeing and Airbus is fierce. Airbus can offer large discounts because it is subsidized by European markets. Both have spent millions lobbying politicians for various reasons from industry regulations and funding to contracts. With time and use, airplanes age and must be refurbished or replaced. Airlines are focusing on refurbishing old aircraft rather than new ones which can decrease the demand as well as sales of new aircraft. Boeing has an opportunity with its Dreamliner to capture the aging airplane market. It may be more cost effective over the long haul for airlines to replace planes due to the fuel efficiency and cost savings of the Dreamliner (Boeing SWOT, 2010; Hill & Jones, 2009, pp. C1-C15). In addition, there has been a decrease in air travel due to the economic state of the global economy. Travelers do not have the money to travel. Businesses are spending less on travel. Since business travel is directly related to corporate profits, airlines are dependent on the overall health of the business environment. Losing those premium travelers could prove to be a huge hit to carriers corporate profits. Indicators for business travel point to a continued slowdown for the remaining months in 2012. Stock prices and profits are down for American, Delta, and United airlines as they struggle to keep up with rising fuel costs and thinning demand. The airline industry will likely face a decline in profitability heading into 2012, with total industry profits falling to $4.9 billion from $6.9 billion this year. The decrease in passenger economy travel has been a problem for airlines over the last decade, but the slowdown in corporate premium travel poses new risks and has the potential to cause even more damage. Passenger tickets now account for just 71% of U.S. airlines' total passenger revenue, down about 17 percentage points from

28 1990, according to the Department of Transportation, and profits from business travelers typically make up a majority of that. Although there was a significant rebound in travel after the recession officially ended last year, there is also a shift away from travel on business and first class seats towards economy. Before the drastic decline in the economy two years ago, premium travel made up 9-10% of total international air travel. In the latest periods, that has fallen to about 7.5-8% placing more pressure on airlines to cut costs. Air travel in the European and North Atlantic markets have dropped significantly which reflects the economic conditions of this part of the world. These regions used to be one of the strongest for air travel. On a positive note, travel to Asia continues to be robust as those emerging markets become more attractive to foreign businesses. With the increased economic interest in Asian markets, premium travel growth within the Far East was up for July and August 2011. First-class travel to the Far East from the U.S. also grew modestly and showed little sign of any slowdown. However, travel on the spacious leather seats within the U.S. dropped 13.2%, which is on top of a 9.7% decline in July (Booton, 2012). Rising fuel costs Rising fuel costs are threatening airline margins. So far in 2011, the U.S. airlines have increased airfares six times compared with four times in 2010. A strong demand could offset some of the price of fuel. Demand began to build in 2010 as airlines kept the number of seats available for purchase relatively low and the recession started to ease. Revenue offset the steady climb of jet-fuel prices last year. In the early months of 2011, however, conflict in the Middle East led to jetfuel prices increasing at an accelerated pace compared with 2010. The volatility of fuel threatens profitability and dampens plans airlines have to increase capacity in

29 the next year. In fact, many airlines have had to cut system wide capacity for 2011 by as much as 2 percent. United, American, and Delta Airlines reduced their capacity-growth plans due to fuel prices. The industry is predicted to remain flat for the remainder of this year. Delta expects its fuel bill to be about $3 billion for 2011, a 35 percent increase over 2010. Besides adjusting capacity, airlines may be forced to furlough and lay off employees and add ancillary fees to tickets as fuel price increases and demand decreases. Ancillary fees include charges for checked bags, blankets, and snacks. To combat rising fuel prices and improve cash flow, some airlines are deferring delivery of planes and may cancel future orders (Neighbor, 2011). Airlines are threatened by the volatility in jet fuel prices. Today, jet fuel ranges from 35 to 40 percent of airlines operating costs. Jet fuel was at an all time high in 2008 when prices were over $4 per gallon. Airlines are in a better position today than in 2008, however, there are fewer travelers. After 2008, the airline industry downsized and removed a lot of capacity. Utilization rates are higher and there are not many empty seats on planes. Reducing and maintaining capacity has meant the difference between hardship and survival for many airlines. For Boeing and Airbus, the reduced capacity affects their bottom line in airplane sales. However, with the continued threat of rising fuel prices, Boeing has a great opportunity with its Dreamliner aircraft (Neighbor, 2011). Change in US budgetary priorities and contracts One of Boeings strength is its contracts with the government. However, heavily reliance on these contracts also represents a threat. As war conditions change, the military requirements also change. Boeing was awarded one of the biggest contracts in military history consisting of $35 billion to build the next generation of

30 air refueling tankers. These new tankers will replace 179 of the Air Forces aging tankers which are equivalent to a flying gas station ("Boeing receives $35," 2011). Boeing provides commercial aircraft to many foreign airlines and is one of the largest exporters in the U.S. It is also one of the biggest defense contractors or the military and other government departments. Boeing gets a lot of support from the U.S. Export-Import Bank due to its overseas sales volume. It is receiving about $15 billion in loan guarantees from the bank which help finance foreign commercial customer purchases. In 2010, Boeing received about 63% of all guarantees from the government entity. However, despite this business, Boeing as well as other defense contractors, is facing the potential for major cuts and reductions in overall defense spending by the United States. This means that there may be fewer tankers, transports or other products purchased from them. The contract Boeing received for the new KC-46A refueling tanker helps offsets the end of the C-17 production for the Air Force and the end to other programs. However, the Air Force is looking at moving a great deal of their logistic support back to their own depots and away from commercial providers which affects Boeings bottom line (Potter, 2011). Personal Observations Boeing has been building commercial airliners since 1927 with the first Boeing commercial jet airliner, the 707, introduced in 1957. Boeing is best known for its 747 jumbo jet it introduced in 1966. Boeing merged with McDonnell Douglas in 1997 primarily for its strong military business and has been a dominant player in the commercial aerospace industry. However, the firm has been losing market share to Airbus since the mid-1990s. Boeing and Airbus directly compete with each other.

31 In 2006, Boeing enjoyed strong sales of its 737, 777, and its newest wide-bodied super-efficient jet, the 787 Dreamliner. Boeing started taking orders for the 787 in 2006, however, due to production delays the first aircraft was three years late. All Nippon Airlines did not take delivery of the first plane until September 2011. Boeings competitor, Airbus, had its own production problems with the A380 super jumbo jet (Hill & Jones, 2009, pp. C1-C16). Historically, airline manufacturers tried to manage the supply process through vertical integration making many of the component parts that went into the aircraft. Their functional level strategy of keeping production in house had many flaws. Airplanes were housed in garages where they were assembled. When one process was complete, the plane was moved to another area for the next process. This process was labor intensive, inefficient, and costly. However, over the past two decades, there has been a shift to contract out production components and entire subassemblies to independent suppliers. Contracting out has caused production problems and delays. It has been difficult to coordinate the manufacturing process with suppliers. Boeings 767, introduced along with the 757 in 1982, was the first aircraft in which the firm contracted out a significant portion of work to Japanese manufacturers. Over the years, Boeing had numerous problems with suppliers and manufacturers causing significant delays with its aircraft. Airbus also had outsourcing problems. Its largest A350 wide-body aircraft that competes with Boeings 777 has been delayed for 18 months (Rothman, 2011). By the late 1990s, Boeing was plagued by a number of production problems. In an attempt to gain share from Airbus, Boeing cut prices. Delivering aircraft meant that Boeing had to more than double its production schedule between 1996 and 1997. However, the company ran into some severe production bottlenecks. The

32 company scrambled to hire and train about 41,000 workers, recruiting many from suppliers, a move it came to regret when many of the suppliers could not meet Boeings demands and shipments of parts were delayed. In 1997, things got so bad that Boeing shut down its 747 and 737 production lines so that workers could catch up with out-of-sequence work and wait for back-ordered parts to arrive. Ultimately, the company had to take a $1.6 billion charge against earnings to account for higher costs and penalties paid to airlines for the late delivery of jets. As a result, Boeing made very little money out of its mid-1990s order boom. The head of Boeings commercial aerospace business was fired, and the company committed itself to a major acceleration of its attempt to overhaul its production system, elements of which dated back half a century (Hill & Jones, 2009, pp. C1-C15). Boeing changed its business strategy to an outsourcing manufacturing process. They looked at the Japanese automobile manufacturing processes. Toyota, after analyzing their production and manufacturing process and discovering numerous flaws, switched to a process known as lean production. In contrast to conventional or mass production, lean production shortened production runs by using a system of levers and pulleys which reduced setup times for production equipment which is a major source of fixed costs. In addition to shorter runs and quicker turnover times, the change to lean production enabled Toyota to provide better customer responsiveness and operate more efficiently. In the 1990s, Boeing looked at what Toyota had done. Until then, Boeings production was about producing parts in high volumes and storing them in warehouses until they were needed. Boeing was drowning in inventory and had the huge financial expense of housing the inventory. In addition, expensive equipment took up a lot of space and remained idle for long periods of time. Boeing created cross-functional teams to develop lean production

33 processes. These moonshine teams started developing their own equipment and machines that were essentially like moving garages and assembly lines. Instead of moving the aircraft, they wheeled machines around the plant to work on the planes. This cut down assembly time and manpower. This small scale and quick turnaround made it possible to produce these parts just in time, eliminating the need to produce and store inventory. Portable machines such as routers were built for a fraction of the cost of large fixed machines. Set-up times were minutes instead of hours. Boeing reduced labor hours by 74% and reduced manufacturing space by 50 percent. Boeing was now able to produce smaller lots of parts economically and switch to just-in-time inventory systems reducing waste. The moonshine teams also adopted other process improvement methodologies including Six Sigma quality improvement processes and total quality management systems (TQM). Boeing also moved from a static assembly line to a moving line in which the aircraft is moved at a rate of 2 inches per minute moving past a series of stations where tools and parts arrive the moment needed. This reduces time and work and eliminates workers from wandering around for parts and tools. These arrive on workstations delivered to the assembly area. In addition, the moving line is stopped when a problem occurs. These changes have had a significant effect. By 2005, assembly of the 737 went from 22 days to 11 days. Work-in-progress inventory was reduced by 55% and stored inventory was reduced by 59 percent. By 2006, all Boeings production lines except the 747 had shifted from static bays to moving lines. It shifted the 747 to a moving line with the production of the new 747-8 jet. Changing its functionallevel and business-level strategies from large inefficient production processes to lean production processes has enabled Boeing to reduce cost, manufacture and produce more efficiently, and improve customer responsiveness. Although Boeing

34 had made great improvements in their production and manufacturing processes, they were mired with supplier problems. Boeing outsourced more work for the 787 than any other aircraft to date. In addition, Boeing asked it major suppliers to bear some of the development costs. Supplier problems caused major delays. Coordinating suppliers proved to be complex, costly due to delay penalties, and time consuming. Boeing lost orders for the 787 due to the delays and potential customers switched to Airbus (Hill & Jones, 2009, C1-C15). Both Boeing and Airbus have had similar problems with production and suppliers. However, they had have had very different views for demand projections. Annual projections of future demand is based on assumptions about future global economic growth, the resulting growth in demand for air travel, and the financial health of the worlds airlines. In 2006, Boeings report showed that passenger traffic would grow at 4.8% per annum over the next twenty years versus Airbuss forecast of 5.3 percent. Boeing forecast demand for 27,210 aircraft valued at $2.6 trillion over the next twenty years. Boeing believes that the majority of aircraft will be for regional jets (which have fewer than 100 seats) and the large 747 aircraft. According to Boeing, aircraft in the 747 and the Airbus A380 range will account for about 3% of deliveries and 10% of the value. On the other hand, Airbus believes that demand for very large aircraft will be robust, amounting to 22% of the total value of aircraft delivered. These differences reflect different views of future demand. Boeing believes that airline travelers will demand more frequent nonstop flights between city pairs, not larger aircraft. After Boeing introduced the 767, airlines introduced more flights between city pairs in North America and Europe and more frequent departures. In 1984, 63% of all flights across the North Atlantic were in the 747. By

35 2004, this declined to 13% with smaller wide-bodied aircraft such as the 767 and 777 (Hill & Jones, 2009, pp. C1-C15). Boeing developed the wide-bodied 777 in response to Airbuss A330 and A340. The 777 was the first jet to be designed entirely on a computer. In addition, for the first time Boeing used cross-functional teams composed of engineering and production employees. It also brought major suppliers and customers into the development process. As with the 767, a significant amount of work was outsourced to foreign manufacturers, including the Japanese companies Mitsubishi, Kawasaki, and Fuji, which supplied 20% of the 777 airframe. In total, some 60% of parts of the 777 were outsourced. Boeings break-even point with the 777 is 200 planes. By mid-2006, they had 850 orders (Hill & Jones, 2009, pp. C1-C15). Although Boeing encountered a lot of problems, there is a lot that they are doing right in the area of their lean efforts. They have continued these efforts for over a decade now and seemed to have learned a few things along the way. Some of the problems were due to poor planning, poor execution of their plans, and in some cases a combination of both. Good plans should consider risks and allow for contingencies. Questions that arise are Why did things go so wrong for Boeing; did they have a good plan or just good intentions? In addition, what was Boeings philosophy behind their approach? Exactly what was Boeings mission? According to Miller (2008), The mission statement of the purchasing group of any company aiming to become a world class lean manufacturer should be a variation on the theme of: Buy the best products at the lowest price, on-time in a way that ensures long-term stability by building strong supply base. The work of sourcing or purchasing within an organization should create value. This means not running out of parts, being on-time with good quality, and purchasing at a low price. In addition,

36 purchasing activities should create profit in a real and concrete way by streamlining the entire process and building a strong supply base. Boeing should learn from its supply chain mishaps with the 787. Firms can take actions toward a better lean supply chain strategy. Firms should develop a mindset of mutual trust and responsibility by building good and strong cooperative relationships as equal partners with suppliers. Fair and reasonable commitments that both sides can live up to and fulfill are simply good business. Cut-throat supply chains that erode trust or relationships based on one-way responsibility work for a short while, and then can fail. A firm should organize its SPTT (Supplier Parts Tracking Team) to make sure there is a smooth start up of production and delivery from suppliers. For example, Boeing was not paying attention to the detail and intensity when it managed to run out of fasteners. Boeing should spend less time putting out fires and more time on a SPTT to prevent these fires (Miller, 2008). The next ten years will be interesting for Boeing and Airbus. The economic environment that the world faces today is much different than in the past. War, economy, and terrorism all affect the future of these airlines. They have some of the same problems but deal with them differently. Both companies see growth in the industry but differ in the amounts of growth and the market segments that will experience growth. Personally, I see airline travel growing more in the city pairs segment with smaller aircraft and more frequent nonstop flights going from city to city. The major hubs will grow but at a lower rate. The industry will always require bigger aircraft like the 747 and A380 for international flights. People that travel on longer transcontinental flights prefer larger, more comfortable aircraft. Boeing has made a lot of changes to its manufacturing strategy and supply chain strategy. The company needs to be careful not to make the same mistakes. It

37 needs to work on strategies that will ensure better predictions on delivery dates. All projects have delays. However, a 3 year delay with the 787 seems unreasonable and unacceptable. In all research for this paper, I did not find information on the project management team responsible for developing the project time schedule. Managing projects as big as the 787, should be monitored with precision. The level to which Boeing managed the project management team is unclear. It would be interesting to see a copy of the project management plan.

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