IN Boeing’s cavernous plant here, temporary scaffolding rises alongside

several of the first 787 Dreamliners ever to be built. Workers climb steel
steps to slip everything from wiring to hydraulic systems into some of the
planes.
In other bays, crews operate giant tools that help shape parts of wings being
built for older-model 747s, 767s and 777s. Staccato blasts ring out from air-
powered rivet guns. Cranes hoist finished wings and fuselage sections onto
the assembly floor.
The scene is one of disciplined industry on a gigantic scale. But the fact
remains that the scaffolding for the Dreamliners should never have been
needed. The wings and major sections of the fuselage were supposed to
arrive fully fitted from outside suppliers and simply be snapped together.
But the suppliers were at first too overwhelmed to install all the systems.
Boeing says that they have since come up to speed, and that it should be
able to wheel away the scaffolding soon.
The reverberating effects of Boeing’s outsourcing missteps have taken a
huge toll. The Dreamliner — the first passenger plane to be made mainly
with light plastic composites — is now more than two years late and still
awaits its first flight tests.
Boeing acknowledges that the problems have sorely tested the patience of
suppliers and customers, and damaged its credibility. Already, 60 orders
have been canceled, partly because of the delay.
The company’s chief, W. James McNerney Jr., concedes that Boeing lost
control of the process by farming out more design and production work
than ever and not keeping close tabs on suppliers. He says the company is
retaking control.
“You ultimately get to the question: Is it worth it?” Mr. McNerney says.
“And my answer is yes. And that is why you take the risks. But could we
have done it smarter? Yes.”
Even after the cancellations, the Dreamliner has more advance orders from
airlines — about 850 — than any other commercial plane in history. Part of
what gives Boeing an edge is that its main rival, Airbus, does not expect to
complete its first composite plane until 2013.
At an average sales price that aviation analysts believe to be about $125
million each, those 850 Dreamliners could turn into $110 billion.
The appeal to the airlines is clear: With half of its structure made of plastics
reinforced with carbon fiber, a composite that is both lighter and stronger
than aluminum, and more efficient engines, the 787 could cut fuel costs by
up to 20 percent, Boeing says. That could enable it to fly greater distances,
opening more routes for point-to-point service and lessening the need for
passengers to change planes at hubs.
Boeing, which is based in Chicago, said recently that it was fixing the latest
Dreamliner snag: a series of unexpected stresses where the wings join the
fuselage. It says it expects to begin test flights this year and to start
delivering the plane in the last quarter of 2010.
In many ways, Boeing’s troubles could not have come at a worse time, with
the recession curtailing orders for planes (making the 787 delays a relief to
some airlines that do not have the cash now).
And Boeing’s large military business, which helped buffer the company
from a similar collapse in aviation after the terrorist attacks in 2001, has
been hit hard by cuts in Pentagon spending on big weapons systems.
Given the problems, the company is taking steps to conserve cash. It had
about $5 billion on hand at the end of June, down from $7 billion at the end
of 2007. It is also going through a management shuffle, with the
announcement last week that James F. Albaugh, the longtime head of its
military business, was taking over the commercial side.
And aviation analysts have begun to sound more skeptical about Mr.
McNerney, 60, a former chief of 3M who won praise for cleaning up ethical
scandals after he came to Boeing in 2005.
“There’s a real feeling now that things are happening on his watch that
aren’t so great,” said Richard Aboulafia, an aviation analyst at the Teal
Group in Fairfax, Va. “I think this is his test.”
Others are asking a broader question: whether Boeing will be able to regain
its old magic at driving projects home.
“It’s very clear that this company excels in dreaming big, so big at times
they’ve even taken their competitors’ breath away,” said Heidi Wood, an
analyst at Morgan Stanley. “But there has been something of a pattern
lately where those big dreams have been harder to realize.”
AT the time the Dreamliner was being planned, in 2003 and 2004, Boeing’s
commercial aviation business was still suffering from the fallout of the Sept.
11 attacks. Boeing was also losing market share to Airbus, the European
consortium that was winning the battle to sell midsize wide-body planes
with its A-330 series.
Boeing knew that it needed to make the next technological leap if it was
going to get back ahead of Airbus. And most aviation experts still think that
the Dreamliner, set to replace the aging 767, could be a game-changer.
But after Boeing merged with McDonnell-Douglas in 1997, its top
executives became more cautious about investing in new airplane projects.
Boeing’s goal in the merger was to broaden its military business and give it
a more reliable revenue stream to help offset the boom-and-bust cycles in
commercial aviation.
With the Dreamliner, Boeing aimed to expand its longtime outsourcing
efforts, which had mainly focused on manufacturing parts, to a risk-sharing
program in which the suppliers would also be Boeing’s partners.
“The idea was to get the risk off their books and get other people to do the
heavy lifting for them,” Mr. Aboulafia said. “But the flaw was that led to a
kind of ‘engineering light’ approach, and the problems on the 787 can be
traced to that.”
For instance, Boeing contracted out the design and construction of the
wings — one of the most exacting parts of the aircraft — for the first time
ever. It also let other companies wrestle with the complicated task of baking
and shaping the plastic composites.
And instead of being paid when they shipped parts, the partners agreed to
wait and recover their capital — and receive a share of the profits — once
Boeing delivered the planes to the airlines.
But Boeing officials now say that this left the whole process vulnerable,
should any part of the chain face delays. Start-up problems and shortages
of simple parts like nuts and bolts, along with a labor strike at Boeing last
year, all caused delays and created a domino effect that intensified the
pressure on the most poorly capitalized suppliers.
“I think there were places where we went too far,” said Scott Carson, who
led the commercial division. He plans to retire at year-end and was
replaced in the division post on Tuesday by Mr. Albaugh. “Clearly, we made
some poor judgment calls in terms of what people’s capabilities were.”
Mr. McNerney has good relationships with several airline executives from
his stint as head of the aircraft engine business at General Electric. As the
Dreamliner problems mounted, he said, he called to ask them to be patient
and to make new deals where needed.
He visited the largest suppliers — including Vought Aircraft Industries in
North Charleston, S.C.; Mitsubishi Heavy Industries, Fuji Heavy Industries
and Kawasaki Heavy Industries in Japan; and Alenia Aeronautica in Italy —
to get a better handle on the problems.
He also visited Spirit AeroSystems of Wichita, Kan., which makes the front
section of the fuselage at an old Boeing plant. Spirit cut costs by negotiating
lower labor contracts than Boeing had, and Boeing cites it as one of the best
examples of how it intended outsourcing to work.
Stock analysts estimate that the company initially planned to invest $8
billion to $10 billion in developing the project, but could end up spending
$20 billion, including the penalties it will owe for delivery delays.
STILL, by last spring, things seemed to be coming together, as the first
plane was passing some of its ground tests. But in late May, the latest crisis
began when there were signs of stress during a wing-bending test.
Patrick M. Shanahan, the vice president in charge of airplane programs at
the commercial aviation unit, said the readings were totally unexpected but
not initially worrisome. He said his technical team had been making bets
about what type of last-minute problems might pop up to prevent one of
the planes from making the first test flight by June 30. No one thought that
the plane’s structure, which had always exceeded testing expectations, “was
going to bite us,” he says.
But additional tests in mid-June showed that the plane’s structure needed
reinforcements, and the test flight had to be canceled. The problem placed
more strain on the suppliers, particularly Vought Aircraft Industries, which
ran a plant in South Carolina that builds the rear fuselage section.
In 2008, Boeing had already bought out Vought’s interest in a nearby
facility that had become a production bottleneck. Boeing also advanced
$422 million to the company to help it meet production demands. But
Vought’s chief executive, Elmer L. Doty, said he could not keep raising
money to see the program through. So in early July, Boeing bought the
rear-fuselage plant from Vought.
Scott Hamilton, managing director of the Leeham Company, an aviation
consulting firm, says some of Boeing’s other suppliers are angry about the
delivery delays and are insisting that Boeing pay them an advance against
some of their expected profits. Mr. McNerney said that Boeing would
provide cash to some of them.
Boeing’s purchase of Vought’s operations was crucial in redrawing the lines
of its partnership model and taking some of the most essential work back,
Mr. McNerney said. He says its other top partners are all making solid
progress in ramping up production. And while Boeing still believes in its
model of teaming up with partners that share in the risks, it intends to
retain a greater share of the engineering on future projects and monitor its
partners’ work much more closely, he said.
MR. McNERNEY says Boeing has the size and resources to handle the
difficulties on the project.
Even though Pentagon spending is turning down, the company still expects
its military revenue to stay flat over the next couple of years, at around $32
billion a year. And though the recession is hurting, Boeing still expects to
deliver about 480 planes this year and has a total backlog of 3,400
additional orders.
Boeing has forecast total revenue of $68 billion for 2009, up from $60.9
billion in 2008. (Machinists went on strike that year, and Boeing’s profit
fell 34 percent from the year before, to $2.7 billion.)
On Aug. 27, when it announced the new flight test and delivery schedule for
the Dreamliner, Boeing also said it would take a $2.5 billion charge, or
$2.21 a share, in the third quarter to write off the cost of the research and
development work on the first three Dreamliners. It is also cutting 10,000
jobs this year, or 6 percent of its work force. Its stock, which peaked at
$104.99 a share in 2007 when the Dreamliner orders were pouring in,
closed Friday at $49.15.
Aviation experts caution that the 787 project could still falter if new
problems arise in the flight tests and other certification checks.
But Mr. McNerney says the company’s Dreamliner bet will still pay off
handsomely, especially if it can stay ahead of Airbus in using the composite
technology to update other models.
“We got the plane right,” he said. “And the good news is that when we get
all this done, we’re going to be far ahead of our competition.”