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787 DREAMLINER: CLEARED FOR TAKE OFF?

PART B

Vitaliano Fiorillo
Raffaele Secchi
Silvia Zamboni
SDA Bocconi School of Management

(n° 11722)
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 613-007-1
SDA Bocconi School of Management 787 Dreamliner: cleared for take off? – Part B
(n°11722)

Vitaliano Fiorillo, Raffaele Secchi, Silvia Zamboni

787 DREAMLINER: CLEARED FOR TAKE OFF? – PART B

Delivering Dreamliner N.1

2005 marked the real take-off of the Boeing 787 project. Orders from Air Canada and Air India gave the de-
finitive green light. Another order of 18 Dreamliners from Northwest Airlines was an important point in Boe-
ing’s favor, stealing a loyal customer from Airbus in the wide-body products range. The project gained the
trust of airlines and, at the end of the year, Boeing registered 288 orders.

In September 2005, the design specifications were sent to partner companies and production of the first mod-
el was finally launched. The parts made by global partners had to come to Everett, complete with wiring and
hydraulic systems, to be assembled in a nearly "plug & play" / snap-together process.

After all the enthusiasm and the confidence, shortly after kicking off the first prototype, in May 2006, Mike
Bair had to recognize that not all suppliers in the network were sufficiently prepared to deliver the parts
meeting all technological requirements. This would have required the intervention of Boeing’s mechanics in
the final stage in Everett and to split the plane in more sections than planned. Difficulties were also coming
from the plane’s software: systems manufactured by different suppliers were having troubles “talking” to
each other (Holmes, 2006).

The impact was minimized by company officials and problems dismissed as normal start-up issues, but ana-
lysts were suspecting that this would have caused delays in the project.

Observers in Wall Street followed with increasing attention the case of the 787, and some of them argued that
the program was already suffering serious and costly delays, due to the extreme outsourcing policy Boeing
was applying. The Dreamliner's technical challenges casted doubts on whether such a radical business model
could succeed, and whether the advantages of partnering with suppliers on a global scale could be deemed, or
even exceeded, by the disadvantages of losing supply chain and design control (Holmes, 2006).

In an attempt to appease the voices, in May 2007 Boeing showed the first 787 coming together at the assem-
bly plant in Everett. Less than a month later, however, the concerns of customers grew when Boeing faced an
unexpected bolts and fasteners shortage with the main huge sections of the plane aligned and ready for as-
sembly. Alcoa, one of the few aviation-grade titanium bolts manufacturers, did not recover from the 9/11 cri-
sis yet and 41% of its employees in the bolts division were fired. It only took a few bolts for the first 787, but
Alcoa needed to consolidate some larger orders to cover the high set-up costs of a very complex production
process (Lunsford and Glader, 2007).

Other assembly problems were slowing down the program: the nose and cockpit section and the contiguous,
produced respectively by Spirit and by Kawasaki, were misaligned by one third of an inch. In the traditional
assembling of an airliner, such gaps are quite common, and they can be filled by rearranging internal parts,
such as flooring and wiring, pushing fuselage sections apart. With the 787, however, a similar gap can be
much more complicated to manage because, with production fully running, parts would have arrived in Ever-
ett completely furnished with interiors and hardly modifiable (Gates, 2007).

Despite the problems, in July 2007, Boeing broadcasted live the first official roll-out of the 787 worldwide.
What was spectacularly presented as the achievement of an important project milestone was in facts a media
event for easing customers and the stock market. The plane was far from being complete and it was some-
thing more than a hollow shell assembled with temporary bolts and fasteners (Thomas, 2008). The event,

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SDA Bocconi School of Management 787 Dreamliner: cleared for take off? – Part B
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however, was sufficient to restore confidence in investors and customers. At end of the month Boeing shares
flew higher than ever at $107,8 (See Figure 1).

In October, more coordination problems with suppliers forced the company to announce a six months delay
on first delivery, moving it from May to November 2008. Main issues were related to “out of sequence” work
coordination and integration of software and systems with and among suppliers. The Exostar and E2Open
systems deployed to foster collaboration among partners in the 787 supply chain, were not as effective due to
inaccurate input information from suppliers. When Vought hired AIT as a tier 2 system integrator for subas-
semblies, Boeing was not informed. With AIT outside of the supply chain coordination network, Exostar was
missing valuable information. Other suppliers, because of cultural differences were not entering accurate and
timely information in the system (Tang, 2009).

This milestones postponement implied that the company had no more slack time left for other mistakes. To
Mike Bair it meant losing his leading role in the program. Pat Shanahan, from Boeing’s Defense Division,
was then appointed with the lead of the 787 program. Despite the embarrassing announcements, the 787 hit
285 orders record in 2007, reaching the remarkable number of 635 units/airplanes.

The year 2008 had a less fortunate start. In January, the first delivery was pushed back to early 2009, adding
some 3 more months. Once again causes were to be found in a very complex management of the supply
chain. Parts from suppliers were coming to Everett still incomplete and major reworking was needed before
putting them in the final assembly line (Gates and Turim, 2009).

In April, Boeing had no choice but to reformulate its schedule under a more conservative and cautious per-
spective: first delivery was then planned for last quarter 2009 and only 25 planes would have been produced
within the year, according to a less steep production ramp-up plan (Boeing Press Release, 2008). At this
point, the program was about 15 months behind with what was initially planned and some of the main cus-
tomers would have been receiving their planes 2 years later than scheduled.

The situation could not have been more fragile when, in September, long disappointed requests made by ma-
chinists at Boeing broke into a strike. 27.000 machinists’ union (IAM) members crossed their arms demand-
ing employment stability and salary increases according to the company’s higher revenues. According to a
contemporary Merryl-Lynch analysis, should the strike last for a month, Boeing could lose as much as $2,8
billion taking a deep dive on the stock market. Since its first announcement in October 2007, shares had had
already been losing 38%.

With the strike going, the production line was close to complete paralysis except for testing and management
rearrangements (e.g. redesign of the production ramp-up, suppliers integration work). The Dreamlifter was
grounded for the whole month of September (Thomas, 2008) and the idea of a first flight in early 2009 was
quickly fading away.

The machinists strike ended on November 1st and with the assembly line on hold for 57 days, suppliers were
able to realign to the schedule. Nevertheless, it took time before the line could return to its pre-strike pace
and the company had again to announce another 6 months delay. Management was once more reshuffled: Pat
Shanahan was put in charge of the whole Commercial Division and Scott Fancher, from the Defense Divi-
sion, was now in charge of the program.

Before the strike started, Boeing had orders and options for 1,209 units of 787s (with Bernstein Research
forecasting 25 deliveries for 2009, 38 in 2010, 70 in 2011, 103 in 2012 and 120 per year in 2013 and beyond.
At the end of the strike, forecasts were more conservative with zero planes being delivered in 2009, 41 in
2010, 55 in 2011 and 87 in 2012, a major shortfall of 134 (Thomas, 2011). While the fiscal year was closed
with more than 900 orders for the 787, the first flight was now expected to be around second quarter 2009,
and the first delivery (to ANA) around beginning of 2010.

Some suppliers’ financial commitment for the 787 was also starting to stretch their balance sheets to the
breaking point. When entering the program, Vought invested about $250 million to build a dedicated factory.
Hit by a sales drop in other market segments, the company had to invest $300 million more in 2008 to stay in
the program, most of which financed through debit. Whit the 787 lost in endless delays, under the risk-

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SDA Bocconi School of Management 787 Dreamliner: cleared for take off? – Part B
(n°11722)

sharing contract Vought was nearly breaking, “burning” as much as $25 million a month in cash to keep up
with the project.

In 2009 the effects of the global crisis dramatically hit Boeing’s customers: in June, middle-eastern leasing
company LCAL and Russian airline S7 Group cut 37 Dreamliner in total. Other airlines were forced to push
back their 787s delivery dates hoping a fast recovery from global crisis.

In Everett, meanwhile, Dreamliner n.1 was rolled out on the runway for ground tests and the first flight was
scheduled for the end of the month. Shortly after, engineers found a serious default in the wing-body connec-
tion and asked for a sine-die postponement until the problem could be fixed.

After the announcement, Boeing’s largest airline customer, Qantas, canceled 15 orders of 787-9 and pushed
back delivery of another 15 units of 787-8 by four years. Despite cancellation and deferrals, Qantas still had
50 planes on order at Boeing. Qantas officially stated that the decision was driven by the unfavorable eco-
nomic situation and not by the newly announced design flaws (Seattle Times, 2009).

While tensions with machinists were still threatening the project, the schedule set now the first flight at the
end of 2009 and the first delivery in the last quarter 2010.

On December 15, 2009, the first Dreamliner finally took air, lifting off from Payne Field in Everett, in front
of a crowd of thousands of Boeing employees, fans, and journalists.

The problems were nevertheless far from being over. In August 2010, National Aviation Co. of India, parent
state-owned company to Air India, announced it was demanding compensation of $840 million from Boeing
for delays in the 787 program. The company said the delays hampered its growth plans, according to Bloom-
berg (Sharma and Ray, 2010).

The negotiation started with the Indian company had soon to be followed by other settlements with many
customers.

After grounding the program once again in November 2010 due to fire in the control panel aboard one of the
test planes, the company announced first delivery in late 2011, 3 years behind with schedule.

Eventually, ANA celebrated its Dreamliner N.1 on September 26th 2011.

Figure 1. Boeing’s stock market from 2003-2012. Events and delays.

Source: Authors’ elaboration based on referred articles in Part B.

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SDA Bocconi School of Management 787 Dreamliner: cleared for take off? – Part B
(n°11722)

References

Gates D. (2007), Boeing finds 787 pieces aren't quite a perfect fit. Seattle Times. Available at
http://community.seattletimes.nwsource.com/archive/?date=20070612&%20slug=787gaps12. Accessed
November, 2012.
Gates D., Turim D. (2009), Building the 787 Dreamliner: a timeline. Seattle Times. Available at
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2012.
Holmes J. (2006), The 787 encounters turbulence. Business Week, Bloomberg L.P., New York, USA.
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data/news/bernstein-787-ramp-program-profitabilitychallenges-boeing-0817. Accessed November, 2012.

Copyright © SDA Bocconi, Milan, Italy 5