Only About a Year Late

Boeing has finally gotten FAA approval to restart deliveries of the 787.

Following the dual debacles of the 737 MAX and 787, the FAA did not allow Boeing to self certify its solution to the problems.

They still don't know how to make planes.

In fact torturous path to getting the plane out the door in the first place, where Boeing attempted to foist off most of the serious engineering and manufacturing onto, "Risk Sharing Partners," strongly implies that they aren't interested in making planes.

They have done their best to reduce everything to marketing and financial engineering, and not actual engineering:

Boeing Co. received preliminary US regulatory clearance to restart deliveries of its 787 Dreamliner aircraft, paving the way for the end to a drought that drained cash and dented the planemaker’s reputation for quality.

The Federal Aviation Administration approved Boeing’s plans to inspect and repair tiny manufacturing flaws in the Dreamliner’s carbon-composite frame, two people familiar with the plan said late Friday. The jet manufacturer had largely halted deliveries since late 2020 as its engineers found improperly filled gaps in about 20 locations.

The FAA agreement is a milestone for the company, but it won’t immediately resume deliveries. Boeing must still make required fixes and get FAA inspectors to approve each aircraft, the people said, asking not to be identified as the information hasn’t been publicly announced. While timing of delivery resumptions remains unclear, the company is aiming to begin in the week of Aug. 8, one of the people said.

………

The resumption of shipments will mark a financial turnaround for Boeing after years of operational lapses that have frustrated customers, suppliers and investors. It’s also a potential catalyst for Boeing shares, since the Arlington, Virginia-based company will start to unlock nearly $10 billion in cash tied up in Dreamliners stashed around its factories and in desert storage, according to Rob Spingarn, an analyst with Melius Research.

………

The chief problem for the 787 had been how the plane’s carbon-fiber fuselage sections were joined, which didn’t meet Boeing’s design specifications but wasn’t deemed to be a safety hazard.

The company’s plan to resume sales also includes addressing how the planemaker constructed the so-called forward pressure bulkhead, the structure near the nose that maintains pressurized atmosphere, and other issues that had arisen during the past year, said one of the people.

This is what happens when the marketing and finance guys take over.

Another Indication that Boeing Cannot Make Aircraft Anymore

If you follow airline production at all, it quickly becomes clear that airliners are sold to airlines at something very close to zero profit margins. The profit comes from supporting these aircraft throughout their lifetimes.

It appears that in its never ending MBA short-sited quest to maximize return on capital, Boeing is looking to abandon the physical part of support, and try to make its money from IP related rents.

I understand where these guys are coming from, they look at the return on capital for software companies and it makes them salivate like Pavlov's dogs would if the Russian physiologists was playing flight of the bumblebee on a Glockenspiel.

The problem is, as I noted almost exactly a decade ago, this simply does not work, instead it sets in motion a process of decline. (Quoting with slight edits here)

• Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. 
• Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. 
• Without the ability to develop such new processes, they find they can no longer develop new products.
• In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.

Whether they know it or not, Boeing is making a conscious decision to leave the only part of airline manufacture that makes money.

It is also worth nothing that this was exactly the same strategy with its, "Risk Sharing Partners," on the 787, where Boeing had to reverse itself, and the quality issues remain to this day:

Boeing’s reshaping of its business amid internal struggles and the global passenger traffic downturn is touching nearly every aspect of the company’s air transport-focused operations, including parts of its services unit. One result appears to be added emphasis on leveraging proprietary elements and less focus on growth by aggregating aftermarket services.

“I expect services to continue to be a mid-single-to-double-digit growth portfolio,” President and CEO Dave Calhoun tells Aviation Week. “Our digital platform will be a double-digit grower and will take a lion’s share of our investment appetite with respect to services.”

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BGS has not been spared in the company’s revamp. Once tapped by Boeing executives as a business that could hit $50 billion in annual revenue by the end of the decade, BGS is being retooled. While growth remains a goal, BGS will focus more on investing in products and services with high-capital-return potential, Calhoun says.

By this, they mean software and other IP controlled items, as opposed to physical product.

………

Boeing also will continue to generate aftermarket revenue from its own intellectual property (IP), including parts for its aircraft programs. However, the company is less focused on capturing as much work as possible and will take the most prudent approach on a case-by-case basis.

Boeing hopes to extract rents from whoever makes the parts, as opposed to making the parts.

………

While parts distribution will remain part of BGS’ activities, the days of it being a core focus may be coming to an end. Boeing has built a massive distribution business, primarily through its Aviall and KLX acquisitions. But Calhoun’s strategy may see further growth as not worth the investment.

“There are pieces of our portfolio that I am not likely to continue,” he said at the Bernstein Strategic Decisions conference in early June. “That really relates to delivering somebody else’s parts with no value added to a customer and suggesting that we add value, especially when it means I’ve got to invest a lot of capital underneath it. That’s not my idea of a big win,” he added.

Note that his idea of a "Big Win" is extracting rents through government subsidies in the form of IP regulation. 

It's another corporate giant sucking up public money.

………

“With respect to new airplanes and control of the [intellectual property], control of the technology, there’s an opportunity for us as we move forward to ensure Boeing gets its rightful share of the services opportunities attached to our IP contribution,” Calhoun says. “I think it will be significant.”

And here is the problem:  If you stop being involved in the process, your IP will over time become obsolete and irrelevant, and you will have lost the capability to generate new innovations upon which you could extract profits.

Eventually, Boeing's only product will be stock buybacks, but their return on capital will be stellar.

Same as it Ever Was ……… Same as it Ever Was ……… Same as it Ever Was ……… Same as it Ever Was ……… Same as it Ever Was ………

When Boeing rolled out is 777, it decided that the best way to maximize profits was to recruit potential competitors to be risk sharing partners to minimize its upfront costs.

The net result was significant delays and a loss of technical know-how, and now, both Boeing and Airbus are looking to bring these capabilities, because it turns out that they outsourced their profits as well:

The world’s largest plane makers are testing a seemingly simple formula to smooth production, cut costs and fatten profits: Make more of the parts that go into their jets themselves.

In the wake of United Technologies Corp.’s proposed $23 billion deal to buy Rockwell Collins Inc., that push is taking on more urgency. The deal is the latest in a round of consolidation among the world’s biggest suppliers of aviation parts—something Boeing Co. and European rival Airbus SE have eyed warily.

Earlier this week, Boeing said it might cancel some of its parts contracts if the deal undermines competition further in the aerospace supply chain. Airbus had previously expressed its skepticism over it.

Worried about getting squeezed by the consolidation, Boeing and Airbus have moved to protect themselves by building more of their parts in-house. This month, Boeing will start construction of a new production facility in Sheffield, England, that will make some of its own actuation equipment—motors that help move a wing’s flaps. Airbus, meanwhile, is planning to build some of its own nacelles, the metal casings that house a plane’s engines. United Technologies is one of the world’s largest nacelle suppliers.

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Boeing decided two years ago to make some of its own nacelles after years of buying them. In July, the company also said it is planning to develop and build some aircraft electronics, a market dominated by companies such as Rockwell Collins and Honeywell International Inc.

The wings for a revamped version of Boeing’s new 777 jetliner also will be built at a new plant near Seattle rather bought from a supplier. Boeing bought the wings from a supplier for its last big project, the 787 Dreamliner.


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Bringing production in-house helps level the playing field.

Those parts makers have also traditionally been able to suck out more profit for their components than plane makers like Boeing and Airbus can extract for selling whole aircraft. Profit margins for plane and engine makers have averaged 9% over the past two years, compared with 14% for so-called “tier one” suppliers such as United Technologies and Rockwell Collins, which make finished parts directly for plane makers. Margins come in at 17% for tier 2 suppliers, which provide smaller components for those parts, according to Boston Consulting Group.

This is not a surprise.

The idea that drove the outsourcing of critical technologies for the 787 was that Boeing could be more profitable and efficient by doing and knowing as little as is possible about the underlying business.

This is classic MBA/High Finance type thinking, and MBA/High Finance type thinking unmoored from the underlying business has ALWAYS been a recipe for dismal failure.

Boeing Cannot Design Planes Anymore

As a result of years of layoffs and retirements of staff, Boeing lacked the technical resources to make a credible bid for the new Air Force Trainer:

It seemed so all-American: a U.S. aviation giant unveiling its newest military jet to flashing lights and thumping heavy-metal music. But the sleek twin-tailed T-X — Boeing’s candidate to become the U.S. Air Force’s next pilot trainer — couldn’t have made it to the dolled-up St. Louis hangar without a good deal of international help.

For all its deep aviation heritage, the Chicago company needed a partner on the T-X bid. A decade of engineering layoffs had left the venerable American firm without the workers needed to add the trainer competition to its existing workload, particularly with the Air Force requiring demonstration aircraft with a relatively quick turnaround. It also needed a way to do it more cheaply than past endeavors.

So the maker of the F-15 Eagle and F/A-18 Super Hornet teamed up with Saab — builder of the Gripen 4.5-generation fighter jet — to develop a T-X candidate. And less than three years after the two firms announced their partnership, they have now unveiled their first two aircraft, which are expected to fly by year’s end. That’s pretty fast for an American defense firm.

While officials from neither company would say just what parts of the plane were developed in Europe, Saab is believed to be manufacturing large portions of it. In June, a large Russian cargo plane believed to be carrying sections of the new aircraft flew from Sweden to the U.S.

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“I’m not saying this thing is doomed. It’s just that I’m uncomfortable with a big disconnect between engineering and design and manufacturing,” said Richard Aboulafia, vice president for analysis at the Virginia-based Teal Group consulting firm. “It adds risk, it gets rid of a core company advantage, and frankly, there are just huge advantages of having designers and manufacturers co-located.”

Aboulafia cited Boeing’s need to lean on its partner for engineering.

“Outsourcing design — that appears to have a lot more complications than benefits,” he said. “It adds risk and it gets rid of a core capability, a core differentiator.”

I would note here that Boeing has outsourced technical expertise on the civil side as well, with many of the stumbles in 787 development coming from the fact that critical engineering expertise was outsourced to, "risk sharing partners."

It is a clear indictment of the McDonnell Douglas MBA style management that Boeing has had for the past few decades.

Boeing can no longer design and build new aircraft.

Bummer of a Birthmark, Boeing

A Boeing 787 caught fire at Heathrow, though there are no indications that batteries are involved:

Investigators classified the fire that broke out on a Boeing 787 Dreamliner parked at London's Heathrow airport as a "serious incident" but have found no evidence it was caused by the plane's batteries, Britain's Air Accidents Investigation Branch (AAIB) said on Saturday.

The question of whether the fire was connected to the batteries is crucial because the entire global fleet of Dreamliners, Boeing's groundbreaking new flagship jet, was grounded for three months this year due to battery-related problems.

The AAIB designation fell just short of a full-blown "accident" on the scale it uses to describe investigations. The agency's preliminary probe is expected to take several days, opening up Boeing to more questions about its top-selling plane.

When Boeing decided that it would be a good idea to outsource most of its expertise to "risk sharing partners", it was pretty much inevitable.

As I noted 2 years ago in the case of Dell Computer, this is penny wise and pound foolish:

So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.

Boeing's problems are further complicated by the fact that its partners did not have the time to develop the expertise to do the job right, so now we have a troubled airliner where the sum of the parts is less than the whole.

I Blame the MBA Mentality

The Boeing 787 Dreamliners fleet has been grounded worldwide:

Qatar Airways, Ethiopian Airlines and LOT Polish Airlines have joined the list of 787 operators that have stopped flying the aircraft following a U.S. FAA directive on Jan. 16. All 787 fleets worldwide have now been grounded.

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The groundings were prompted by an incident on Jan. 16 in Japan, when an ANA 787 on a domestic flight declared an emergency and diverted to another airport. Pilots reported messages on cockpit indicators concerning the battery and other systems, and they also noticed an unusual odor in the cockpit and cabin. Inspections revealed that the main battery in the forward electronic equipment bay was discolored and its electrolysis solution had leaked.

The 787 has a lot of innovations, but one of its feature is a change in management strategy.

Boeing has outsourced much of the design and engineering to "risk sharing partners" (some of whom it was forced to buy to get things made right) .

To an MBA, it's about cutting overhead.  In reality, it's about losing control of the systems, some of which have never flown on a civil aircraft before, and losing the big picture on how that complex jigsaw puzzle all goes together.

787 Finally Delivered

Only 3 years late:

Boeing's long-awaited dream machine became a commercial reality on Sunday when the lightweight plastic-composites 787 Dreamliner was formally delivered to its first Japanese customer.

Boeing says the revolutionary carbon fiber design will hand 20 percent fuel savings to airlines struggling to avoid a new recession, and give passengers a more comfortable ride with better cabin air and large electronically dimmable windows.

The first $200 million aircraft was handed over to Japanese carrier All Nippon Airways three years behind schedule after persistent delays that cost Boeing billions of dollars.

"It took a lot of hard work to get to this day," said Scott Fancher, vice president and general manager of the 787 program, at the outset of two days of celebrations at the plane's Seattle production plant.

The blue and white-painted long-range aircraft, which boasts a graceful new design with raked wingtips, will leave for Japan on Tuesday and enter service domestically on Oct. 26.

Boeing has taken orders for 821 Dreamliners, which will compete with the future Airbus A350, due in 2013.

FWIW, Airbus is likely to be late with the A350, that's the way of such endeavors, but it is unlikely to be as late, because EADS is not determined to shift all of its expertise to poorly supervised outside firms in order to hit quarterly numbers.

Additionally, EADS has had nearly a decade to watch the missteps Boeing made in implementing the advanced technology of the aircraft, and so should be able to avoid some of them. (You know, little things like not having enough of the proper fasteners available).

Boeing, after having taken over McDonnell Douglas, after the path taken by that company, single source "risk bearing partners", made them irrelevant in commercial aviation, decided to traipse down the same insane path.

EADS, by virtue of being what amounts a national champion in aerospace for the EU, cannot take this path, and so its ability to completely f%$# things up is somewhat more limited.

Big Surprise: Boeing's 787 Outsourcing Cost Money Instead of Saving It

To the tune of billions of dollars:

The airliner is billions of dollars over budget and about three years late. Much of the blame belongs to the company's farming out work to suppliers around the nation and in foreign countries.

It should be noted that aircraft manufacturers do not make money off of the sales of aircraft, but rather on spares and support down the road, and in outsourcing, Boeing has thrown that revenue stream to its suppliers, an act that Atrios calls, "obviously insane," additionally, it makes the entire process of creating an aircraft more riskier, because you have less control over whether tab A fits in slot B, or, as Felix Salmon notes, it's like, "picking up pennies in front of a steamroller".

Boeing was told that this was an issue by a senior fellow, L.J. Hart-Smith in 2001, (also here, where the PDF cuts and pastes better) and but chose to ignore it:

The inescapable problem with outsourcing work that could be done in-house is that it necessarily increases the tasks and man-hours to carry out the work way above those needed to perform all assembly, including most subassemblies, at one site. Experience in the electronics industry has shown that out-sourcing work to regions of low labor rate is only a transitory phenomenon. The reason why the rates were low was that there had previously been no work there. Once the work became available, hourly rates increased, so that the primary electronic companies kept moving the work to yet another as-yet-under-developed area, and the cycle was repeated. This may be cost-effective for small items, with production lives of only a few years at most, but it is inappropriate for large aircraft that may need spare parts throughout a service live in excess of 50 years (80 or more for some military aircraft) and for which the manufacturing program itself may last 40 or 50 years. There are so many aircraft components that must be out-sourced, such as engines, avionics, and systems, because today’s prime aircraft manufacturers are no longer equipped to undertake such work themselves, that the retention of a determinable minimum fraction of the structures work is a pre-requisite to developing sufficient cash to develop new products. Without new products, as distinct from derivatives, all companies will go out of business, no matter what their line of business.

The correctness of the author’s position on these matters is easily confirmed by two facts. It was the suppliers who made all the profits on the extensively out-sourced DC-10s, not the so-called systems-integrating prime manufacturer. (The same thing has happened on aircraft assembled by Boeing, in Seattle, too.) Also, when plans were being formulated for the proposed MD-12 very large transport aircraft, almost all potential suppliers indicated a preference for being subcontractors rather than risk-sharing “partners”. Could they have known more about maximizing profits, minimizing risk, etc., than the prime manufacturer who sought their help even though it could borrow money at lower rates of interest than potential suppliers could? The DC-8 was manufactured and assembled almost entirely within the Long Beach plant, with only the nose coming from Santa Monica. That policy was changed after the acquisition of the former Douglas Aircraft Company by the former McDonnell Aircraft Company, but the change did not improve the company’s profitability. It is time for Boeing to reverse this policy.

(emphasis original)

So, McDonnell, a company which was a complete failure in the commercial arena (only 1 project, a failed bizjet), took over what was the number two (and had been the number 1) commercial aircraft manufacturer in the world, and implemented its defense contracting monopsony^* driven business model, where it failed, and then Boeing bought McDonnell Douglas, and implemented their failed business model.

Boeing bought MACDAC, but MACDAC took over Boeing, and set the tone for its corporate culture, despite the fact that it was largely a failed company, having lost the JSF competition, and having only 2 major programs that it had initiated, the F-15 and the C-17 over the past 30+ years (the F/A-18 was initiated by Northrop).

One good thing that has come of this is that it will make a fascinating case study for the size of operations for economists, as Paul Krugman rather smugly notes:

In Boeing’s case, they outsourced far too much, only to find that they were getting parts that didn’t do what they were supposed to — and also to find that the subcontractors were seizing a lot of the rents. They discovered, in effect, that there are times when it’s better to rely on central planning than to leave things up to the market.

Obviously this isn’t always true. There’s a tradeoff. But that’s the point — and it’s this tradeoff that determines how big firms should be. Boeing has now provided a clear motivating example. Their loss, the economics profession’s gain.

Heh.  Here's hoping that I'm never a good case study for some academic.

^*A monopsony is the flip side of a monopoly. Instead of having only one seller and many buyers, a monopoly, you have only one buyer and many vendors, in McDonnell's case, the US military.

787 Wings Worse Than Thought

So, we have some more details on just how screwed up the Boeing 787 wing is.

Not only is there delamination in the wing, but it appears that they have the same sort of problem on the wingbox, opposite the attachment bulkhead body fixture.

As you can see from the pictures, the geometry there appears to be a read-made pull test machine. I'm not a composites guy, but this is really really ugly work, and the idea that they did not experimentally verify this joint before assembling aircraft just buggers the mind.

I would also note that the problem is with two different vendors and the interface across the fastening fixture, and their geometry, and their fix, appears to be identical, so the finger of blame points back squarely to Boeing, and not their "partners".

Boeing Uses Labor Agreement as Cover to Trim Outsourcing

So, we now see that Boeing will move more engineering and manufacturing in house after the debacle with its long-delayed 787:

Boeing has expected too much from major outsourcing partners and will take much detailed design work and some major production back in-house to avoid in future the troubles that have plagued its long-delayed 787 programme.

I think that some of the upper management will now say that they had to, because of the labor deal they cut with the IAM, as opposed to admitting that farming that much out to future competitors so as to reduce the initial investment, did not work, and transferred core competencies to the "partners".

I think that the employment guarantees in the contract were a relief to management, because they had to bring this stuff back in, but admitting failure in an honest way would have meant some high level firings.

Also, toward the bottom, it appears that the SPEEA is feeling its oats with Boeing too, though I don't expect a strike from them, they are engineers, who tend to be Randroid by nature.

Then again, I did not predict the last time, when they did go on strike, so YMMV.

EADS, Euro Governments at Odds on A350 Outsourcing

In an attempt to cut costs, and deal with the falling US dollar, EADS is looking at aggressively outsourcing to the US and cheap overseas countries, and the governments that generally back Airbus are saying that their backing is contingent on local manufacture (Paid Subscription Required).

This is not surprising. Boeing and its partners aggressively pursued all sorts of tax abatements and set asides with the 787, and you would never expect (for example) Georgia to pay for a plant in North Carolina.

I would also add, as Peter Hintze, the German aerospace secretary, that Boeing's distributed base has thus far proved a major disappointment.

An Additional 6 Month Delay on 787

This is now well into A380 territory.

I think that this is more of a failure of management than engineering. While the extensive use of composites is new for a civil aircraft, as is the "all electric" nature of the accessories, the degree to which Boeing has outsourced basic engineering and designs to so-called "partners" seems to be a much bigger part of the delay.

First flight is not in Q4 of this year, and if it's before December 15, I will be very surprised.

787 Partners Reorganizaton

One of the central "innovations" of Boeing's 787 plan was the idea of bringing in suppliers in as fully involved partners, where they would bear much of the risk, and be responsible for much of the design and engineering.

Recent developments appear to indicate that Boeing is walking away from this policy.

Boeing has just bought out Vought Aircraft's ownership stake in Global Aeronautica, which means that Boeing and Alenia now each own half of the enterprise.

Vought will still be a supplier for the 787, particularly the aft fuselage, but their more senior role in design and engineering has been taken over by Boeing.

I expect to see more in the way of recentralization by Boeing on the 787 to come, with yet more on their next project, a replacement for the venerable 737.

Full disclosure, the CEO of Vought Aircraft, Elmer Doty, was head of my division^* when I worked at United Defense/BAE Systems.

^*Yes, I have worked everywhere. Maybe I can't hold down a job, but more likely this has been my role as "technical hit man", where you are parachuted in to take care of a specific need.

Boeing Gives Future Away on 787

Look at the line about "with Boeing 787-based carbon-fiber construction". The MBA suits at Boeing thought that it was a great idea to outsource critical technologies to "risk sharing partners".

It has funded competitors in its own market.

This is stupider than when Coke decided not to buy Pepsi in 1933.

State Subsidy Plan Lifts Mitsubishi's RJ Hopes(Subscription Required)
Aviation Week & Space Technology
06/11/2007, page 43

Bradley Perrett
Beijing

Plan for state aid buoys Mitsubishi's aspirations for a regional jet

Printed headline: RJ Funding

A key Japanese government department plans to allocate ¥40 billion ($330 million) in subsidies for a Mitsubishi Heavy Industries project for a large regional jet, greatly increasing the likelihood of the country finally establishing itself as a supplier of commercial aircraft.

With Boeing 787-based carbon-fiber construction and new engines, the proposed Mitsubishi aircraft could present a serious challenge to Embraer, Bombardier and two other companies developing such jets, Sukhoi and China's Avic I."

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