Boeing: Dreaming Big to Fight Climate Change
With its 787 Dreamliner, Boeing made a costly bet, failed, but persevered to fight climate change while delivering value to customers.
Summary
The aircraft manufacturing industry has seen massive success. The industry’s two largest players, Boeing and Airbus, saw orders and deliveries set new records in 2015.[1]
But it’s no secret – this success comes at an environmental cost. The transportation industry accounts for ~14% of total greenhouse gas emissions, the third largest contributor behind energy production and industry.[2] These emissions make the industry particularly vulnerable to government regulations, such as one issued by the State Department in March 2015, when President Obama’s administration submitted a commitment to the United Nations to “cut U.S. climate pollution by 26-28 percent from 2005 levels”.[3]
Upon first glance, you might think an announcement like this would be quite scary for aircraft manufacturers like Boeing. The truth is quite to the contrary – Boeing chose to make a similarly bold commitment to efficiency ten years before the State Department. The project for the aircraft, now known as the 787-Dreamliner, was the most ambitious one in Boeing’s history and was riddled with failures. However, the company now finds itself well-positioned to compete and lead in a climate conscious world.
A Bumpy Journey to a New Operating Model
The project for the 787 Dreamliner started with an ambitious announcement in 2003. Boeing set out to change the way they did business by building an aircraft that would set the new standard for fuel efficiency (~20% improvement as compared to current levels). The aircraft would seat ~200-250 passengers and be made of advanced composite materials instead of aluminum, something that had never been attempted before. In addition to improving fuel efficiency, the new materials would enhance customer experience by increasing range / decreasing layovers and improving humidity levels within the aircraft.[4][5]
In theory the concept was applauded, but the operational challenges proved to be immense for Boeing. Barclays conservatively estimated the program finished over budget by nine billion dollars.[6] Most problems stemmed from a decision to “spread out” financial risks and investment by outsourcing critical components of design and manufacturing. Boeing thought that by moving to a more outsourced operating model, they could decrease risk while also benefiting from agility (e.g., by receiving largely finished goods from suppliers, the company estimated assembly would take only three days, as compared to the typical 13-17 days). However, Boeing drastically underestimated the added complexity associated with managing a network of advanced manufacturers.
For example, part of the aircraft’s innovative new design included power from lithium-ion batteries. The technology proved to be incredibly difficult for Boeing suppliers to manufacture, and Boeing would often have to send hundreds of engineers on site to assist with redesign. Even with these types of interventions, post-launch the technology experienced notorious failures, such as the grounding of all Japan Airlines 787’s in 2013.[7]
Outlook – Positioned for Long-Term Success
Despite the obstacles Boeing encountered in developing the 787, the plane has seen commercial success. As of May 2016, Boeing sold over 1000 planes, making the 787 the fastest-selling wide body aircraft.[8] Additionally, competitor Airbus has been forced to respond with more fuel-efficient vehicles of their own.
Recently, analysts have expressed skepticism as sales of the 787 have slowed – airlines are holding on to older, less-fuel-efficient vehicles as a result of cheap oil prices. Still, Boeing has reasons to be optimistic over the long-term. By using lightweight materials, they have pushed the boundaries of fuel efficiency in the airline travel industry. Furthermore, the company is well-positioned to continue to improve fuel efficiency and meet regulatory hurdles with a newly acquired expertise in composite materials. Finally, the challenges Boeing had to overcome to achieve this new design will continue to produce returns. By overcoming the complexity of designing, sourcing, and manufacturing the 787, the company has learned how to balance cost and agility across its supply chain. Over ten years after announcing the 787 project, I challenge Boeing to find an equally ambitious project that will leverage its new operating model.
What do you think? Can Boeing leverage its newly agile operating model to develop and manufacture the next 20% improvement in fuel efficiency?
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[1] S&P Capital IQ. “Boeing Co. Sub-Industry Outlook,” Oct. 26, 2016, accessed November 2016.
[2] Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar, and Amram Migdal. “Climate Change in 2016: Implications for Business,” HBS No. 2-317032 (Boston: Harvard Business School Publishing, 2016), http://hbsp.harvard.edu, accessed November 2016.
[3] Office of the Press Secretary, “Fact Sheet: U.S. Reports its 2025 Emissions Target to the UNFCCC,” March 31, 2015, https://www.whitehouse.gov/the-press-office/2015/03/31/fact-sheet-us-reports-its-2025-emissions-target-unfccc, accessed November 2016.
[4] Allison, M. (2003, Aug 27). Boeing keeps details for new jet close to the chest.Knight Ridder Tribune Business News Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/460607260?accountid=11311
[5] Boeing redefines ‘the box’ with its new 7E7 dreamliner airplane. (2003, Jul 03). PR Newswire Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/446930380?accountid=11311
[6] Jon Ostrower and Joann S. Lublin, “The Two Men Behind the 787,” Wall Street Journal, January 24, 2013, http://www.wsj.com/articles/SB10001424127887324039504578260164279497602, accessed November 2016.
[7] Steve Denning, “What Went Wrong at Boeing,” Forbes, January 21, 2013, http://www.forbes.com/sites/stevedenning/2013/01/21/what-went-wrong-at-boeing/#79e7e6705aad, accessed November 2016.
[8] Alwyn Scott, “Boeing’s 787 Faces New Challenge: Slow Sales,” Reuters, May 16, 2016, http://www.reuters.com/article/us-boeing-787-sales-analysis-idUSKCN0Y70E8, accessed November 2016.
Carlfuda,
Very interesting and well written article! I can remember when the failures of the 787-Dreamliner were plastered throughout the news in 2013. I was completely unaware of the reasoning for these big risks Boeing was undertaking to innovate and fulfill a promise to increase efficiency. I enjoyed your thought provoking question to conclude your blog. My answer is yes; I believe they can succeed. My biggest worry is not competition from their rival Airbus, but from a totally new competitor, the electric plane. It seems like every day we see new advancements for electric cars. I believe the same will be true for planes. In fact, a recent Wired article by Nick Stockton found at the link below discusses the advancements seen by NASA on their new X-57 Electric Plane project. The project team believes they will be capable to reduce power consumption to 20% of current planes using their findings. Maybe this will be the future.
https://www.wired.com/2016/06/nasas-new-electric-plane-looks-goofy-packs-sweet-tech/
Aerospace industry is an industry that is not very dynamic due to regulatory constraints. It takes a considerable amount of time and money to develop and certify any kind of product that will be used in this industry. Furthermore, not only the objects that fly have to be certified, but also all the machines and labor used in the end-to-end process. This fact has maybe hindered disruptive innovation in the aerospace industry and as you state in the post, main manufacturers have followed incremental improvement strategies in the last decades.
Moving forward, I think that a disruptive technology has to be developed to overcome the climate change related hurdles associated with conventional air travel. I do not know it it will be the electric plane, a totally different design to merge fuselage and wings in one piece, environmentally neutral fuels, innovative ways of propulsion or even long-haul sub orbital flights. Lots of investment is put in this field and I hope to see real results soon that will benefit all societies worldwide.
Interesting article, Carl! The over budget concerns are reminiscent (on a smaller scale) of what the US Government has had to deal with concerning the new F-35 Joint Strike Fighter, which is over $200 billion of initial budget. Even more so than private companies, I would guess that the planning fallacy is even more rampant in government agendas and plans. I was also very curious about Boeing’s decision to outsource so much of its manufacturing and design; it seems like that decision unnecessarily increased variability into the process and limited effectual, centralized decision making and problem solving. We’ll see in their next iteration of aircraft if their complex process will be replicated or if it truly is a model that is doomed to fail.
Research and innovations into the airline manufacturing sector can have a strong influence in reducing and reversing climate change due to the significant burden that air transportation places on the environment. Boeing has shown that it can influence its competitor Airbus to similarly invest in sustainability. This is ideal as it drives the forces of competition towards preventing further climate change. It would be interesting to see government bodies and funding sources forge public-private partnerships to deploy heavy capital on long term research into this sector.
Interesting write up Carl. Boeing has had to respond extensively to numerous emergencies related to the 787’s ranging from engine failures to landing gear failures only adding to the additional budget of $9bn. And while they have championed the cause to increase fuel efficiency with the use of better materials, Airbus has been quick to catch up with launch of the A350s. Having said so, I do believe they will continue to innovate on fuel efficiency, but given that the airline industry accounts for 3% carbon emissions globally, I do not believe they are incentivized to do so since they also hold a near monopoly in the commercial aircraft manufacturing and assembly industry.
Thanks for the history lesson, Carl! It would be interesting to see how the financials of this investment ultimately shake out after another decade. While the investment brought them into a new age for sustainability, forced the hand of their competitors, and taught regulators a new set of expectations on fuel efficiency, I do wonder if it’s possible to make the math work on the investment having actually paid off in direct monetary terms. If so, that would be a great argument for the power of advanced R&D, even in the face of significant challenges and seeming failure.