SQUEEZED BY SUCCESS
You don’t have to be financially troubled to have problems. Just ask the folks at Boeing Co.
They are selling more airliners than ever. They are making more money than ever. And, with an order backlog of more than 1,000 planes, Boeing’s business outlook is superb far into the next decade.
But Boeing, the non-Communist world’s largest manufacturer of commercial airliners with more than 60% of the market, may be enjoying more success than it can handle. In fact, what is occurring at Boeing is a case study of what can happen when a company does too well.
“One of the problems we have today is a perception that we’re doing very well,” Frank A. Shrontz, Boeing’s chairman and president, said in an interview. “And that makes it tough to convince both our employees and our suppliers that we need to get costs down. It’s a lot easier to do when you’re in a crisis than when you’re not in a crisis.”
Most notably, Boeing has had to delay deliveries and has encountered embarrassing quality problems--largely the consequence, managers say, of suppliers being unable to deal with the enormous pickup in demand for Boeing planes and the company’s own hiring of inexperienced workers on the assembly line.
Still, Boeing’s business boom goes on, and nowhere is the evidence more visible than at its huge facility in suburban Renton, a few miles from Seattle.
Outside two enormous hangars, sections of fuselage--just transported by flatbed rail car from another Boeing factory in Wichita, Kan., and each about the size of a Mack truck--waited one day recently to be hauled inside so workers could assemble them. Before long, wings, tails, flaps and noses were attached. What had been a mass of metal began to become an airplane.
As riveters attached the pieces, other workmen installed wires, created the cockpit, installed paneling, screwed in seats and carpeting. Windows were fitted and landing gear attached.
The vast hangars, each big enough to contain a football field and a baseball diamond, operate round the clock. By day, the planes are assembled. At night, workers driving small tractors pull them slowly to their next positions on the assembly line.
On one recent day, there were 21 Boeing 737 airliners in one of the hangars and nine 757s next door in various stages of completion. It takes four to six weeks from the time the first metal is cut until a new 737 is ready to be flown away. A 737 is completed every day and a half.
After the jet engines are installed, the planes are moved to a nearby paint hangar where they are adorned with the names and insignias of their new owners.
Then the aircraft--many destined for far-away places ranging from China to West Germany--are pulled to an outside Tarmac, where the engines are calibrated and tested. Finally, the new planes are flown to nearby Boeing Field, a company-owned facility where they are flight-tested and where their new owners take possession of them.
Since most foreign customers want to keep a watchful eye on their planes as they move through the construction process, they station full-time representatives at Renton, where one building resembles a miniature United Nations.
Boeing was founded in 1916 and says it has made more airliners than any other company in the world. During World War II it turned out the famed B-17 Flying Fortress and B-29 bombers. Its first entry in the jet airliner competition was the four-engine 707, which dominated the field for years.
Today, the company is building four airliner types: the two-engine, narrow-body 737, which was introduced in 1968; the jumbo four-engine 747, introduced in 1970; the two-engine wide-body 767, introduced in 1982, and the 757, which entered service in 1983, has two engines and a narrow body and is bigger than the 737.
Boeing received orders for 366 airliners worth $19.9 billion during 1987. So far this year, the figures are 595 planes and $28 billion. By Dec. 31, analysts predict, the total value of Boeing airliners ordered this year will exceed $30 billion.
Industry observers said the company’s backlog of orders stood at $44.3 billion at the end of September, up from $39.9 billion at the end of June. Analyst Lawrence Harris, who follows Boeing for the Los Angeles investment firm of Bateman Eichler, Hill Richards, forecast that before the year is out Boeing will have a backlog of $51 billion.
But there is a bittersweet taste to all this. The big firm’s production lines are humming, but its executives complain that the glut of orders has caused the company to be squeezed from all sides.
Lackluster Military Business
Beside the fact that it is having trouble getting its own costs in line, the company’s airline customers demand lower prices for the aircraft they are buying and insist on ever more advantageous financing terms. On the other side of the squeeze, Boeing’s suppliers watch the surge in Boeing’s business and seek more money for their own wares. Since a 747 jumbo jet uses parts made by more than 2,000 companies, that is putting pressure on Boeing’s profit, Shrontz complains.
Another problem involves Boeing’s lackluster military aircraft business, which accounts for 25.5% of the company’s total revenue but only 10.9% of its profit. Also, Boeing’s Canada-based de Havilland commuter aircraft division has had continuing losses.
But most of the woes are associated with the company’s success.
Some managers and workers claim, for example, that the flood of orders has forced Boeing to hire inexperienced workers--and that many veteran employees are no longer sufficiently motivated. The result, they say, is a drop in quality and a slowing of the assembly line.
So, some of Boeing’s deliveries are late. At the moment, the company is behind schedule on about 20 747-400s alone, said Dean D. Thornton, president of Boeing Commercial Airplane, the subsidiary that builds the airliners.
“We’re being burned by our own success,” Thornton said. “We’ve got too much on our plate. We’ve got too many inexperienced workers--green peas, we call them--and not enough of the old-timers who know how to do things. We’re working too much overtime. We’re stretched right now.”
This has caused Thornton some anguish. “We recently did something terrible,” he said. “We told a whole bunch of airlines we’re going to be late on deliveries.
“The worst day of my life was the day I called six or eight airlines and told them we’re not going to make it. . . . One of the reasons for our success is being responsive to customers . . . meeting our commitments. . . . When Boeing says it is going to do something, then, by God, we’re going to do it. In this case we didn’t.”
Boeing’s suppliers are also having trouble keeping up the pace, which further slows production and disrupts the assembly line.
Customizing Affects Assembly
“Our production capability is constrained,” Thornton said, adding that if one wing, one tail, one engine or even one bolt is missing, a plane might not move ahead on the assembly line, and all of those behind it are slowed or halted.
Yet another obstacle: On planes, as on automobiles, a lot of options are available.
Such customization, which the airlines are demanding, is also slowing production, Thornton said. “The customer selects a certain configuration,” he said. “He hasn’t changed the wings, but he sure as heck moves the lavatories and the galleys around--and that affects the plumbing and the wiring and the floor beams.” Engines, he added, also vary, coming from a variety of suppliers.
The company is worried about the manufacturing inefficiencies caused by the slowdowns. Indeed, by Thornton’s admission, they are causing the quality of Boeing’s product to slip a bit.
There have been some well-publicized complaints from some customers, notably Japan Airlines and British Airways, about quality. The problems, Thornton said, have included such things as the smoothness of the planes’ fuselage skin, which resulted from rivets not being precisely flush with the body, “and such small things as ash trays that have a dent in them.” Some outside critics, however, have cited more significant problems, including wings that were said to be improperly attached to the bodies of airliners.
But Thornton is vehement in his insistence that, while there are some quality problems, safety standards have not been compromised.
“There’s a potential for quality deterioration,” he said, but “I’m not talking safety. I am talking cosmetic things. But if a guy’s buying an airplane for 50 million bucks, he’s got a right to squawk just as if he bought a new $100,000 Mercedes. He can be more critical of that than if he bought a Chevy.”
Boeing hopes that its various manufacturing problems can be sorted out before it starts a planned speedup of production. It expects to begin the quicker pace soon--but in stages.
Continuing Flood of Orders
Since it introduced the 737 two decades ago, Boeing has received orders for 2,243 of the planes and has delivered 1,624. Production is 14 planes a month, a figure that will be increased to 17 by mid-1990. It has delivered 708 of the 880 747s ordered so far and plans to boost production from four to five a month by mid-1989.
There have been 371 orders for the 757, and 197 of them have been delivered; to catch up, the company plans to increase production from the current four to five a month in February and eventually to seven. Three hundred thirty-seven 767s have been ordered, of which 242 have been delivered, and Boeing plans to increase production on the 767s from 3.5 a month to five at some unspecified future time.
And the orders continue to pour in--a phenomenon for which there are many reasons.
For one thing, airlines have been making huge profits and are better able to afford new planes than they have been for a long time. And their expenditures on aircraft are a relatively small part of their overall outlays, representing only about 9% of total operating costs.
In addition, Boeing, unlike its principal competitors, McDonnell Douglas and Airbus Industrie, the European consortium, offers a full line of aircraft in each of the three main types: short-, medium- and long-range.
Many airlines like one-stop shopping, and they like Boeing’s family of aircraft--mainly because it saves them money. Training costs are lower, since pilots qualified in one type of Boeing plane can easily step into the cockpit of another. Also, the same maintenance workers can service all of the planes.
Airport and air traffic congestion are also helping push sales, especially of larger planes. To relieve problems of overcrowding, the airlines want to fly more people in fewer aircraft. This has caused a surge in sales of the 757, which seats 186 passengers, to replace the 140-seat 727, a three-engine airliner that is no longer in production. Both planes can be accommodated at the same airport gates.
Also to Boeing’s advantage is the fact that it is the only manufacturer of the largest type of airliner now flying, the 747, which usually seats around 450 passengers but which could be configured to carry more than 600.
The fall of the value of the dollar relative to many other currencies has also helped Boeing. It has presented a significant price reduction for foreign airlines, which already own more than half of the world’s airliners. So far this year, more than 90% of the orders received for 747s have been placed by foreign buyers.
Airliners Aging Fast
John A. Modzelewski, the analyst at the Paine Webber Inc. brokerage in New York who follows Boeing, pointed out a number of other reasons for the airlines’ buying binge. Principally, they involve the cost, safety and environmental advantages of new airplanes: savings on fuel and maintenance, quieter engines, assured structural integrity.
Since the introduction of jets in the 1950s, relatively few airliners have been retired. According to Modzelewski, only 49 planes of the Western world’s commercial aviation fleet of 7,500 aircraft are more than 25 years old. Less than five years from now, however, if no more are retired, 1,504 aircraft will be that age or older.
During the five years after that, an additional 1,704 planes will enter the 25-or-older category. “We believe the substantial majority (approximately 2,500 to 3,000) of these aircraft will be removed from the airline fleets over the next 10 years,” Modzelewski said.
Edmund Greenslet, who heads a Connecticut consulting firm, ESG Aviation Services, said the airline industry is catching up from “a very slow period” during which it bought very few planes.
As a result, it does not have enough airliners to handle growth in passenger traffic between now and the end of the century. There will be hundreds of thousands more passengers, Greenslet said, and “you just have to have more and more boxes to put them into.”
He predicted that between now and the year 2000, more than 3,500 of the West’s commercial airliners will be scrapped and, besides their replacements, another 3,500 to 3,700 will be required for growth.
And perhaps there is a whole new area of the world where Boeing might soon be selling its planes. The Polish national airline, Lot, recently ordered three 767s and indicated that it might buy more. Also, Boeing said it has talked to other Eastern European nations, including the Soviet Union, about airliner sales.
Though it might sound as if its wealth of orders has fallen easily into Boeing’s lap, that is not the case. The company has had to compete vigorously for orders, and Boeing complains that one of its competitors, Airbus Industrie, a foreign consortium owned by Germany, France, Britain and Spain, is particularly formidable because it is subsidized by its owners and is operating at a loss.
To meet the competition, Boeing does some wheeling and dealing. “I am sure there has not been a plane sold at list price for the last several years,” Greenslet said. He estimated that airliners are discounted by as much as 25%--and that the manufacturer still makes money at such prices.
Favorable Leases Let
The company refuses to talk about specific discounts, but Thornton conceded that Boeing makes concessions to meet the competition. “With Airbus certainly--(and with) Douglas to a lesser degree--we compete on price, we compete on financing, we compete on spare (parts) support, we compete on performance, meaning fuel-burn guarantees. It might also be the range of the plane. We’re making concessions, and we’re making money both,” he said.
But because demand is so strong, he added, “we’re giving smaller discounts, giving smaller concessions, than we were two years ago.”
Last year, in an effort to successfully launch a new model, Boeing gave American Airlines a highly favorable deal on a lease of 15 new 767-200s. The arrangement gives American a “walk-away” clause that allows it to cancel the lease and return the planes to Boeing on 30 days’ notice.
“It was a great deal for us,” an American spokesman said recently. “It shifts the capitalization off our backs and onto Boeing’s. If the bottom falls out of the economy and nobody travels, we can reduce our fleet quickly.”
Even though Boeing has plenty of cash in the till (more than $4 billion), Shrontz is not satisfied. He wants to make more from current operations.
“I can tell you we’d like to see higher (profit) margins,” he said. “Not just for near-term returns but also to be able to have the kind of return necessary to plow back into future developments which I think the industry will require.
“Some day, there will be a (U.S.) supersonic transport, and we want to be in a position to participate in that kind of a program.”
