Ramp Up Time

The bigger the innovation, the more you can tolerate failure. If we had these kinds of execution problems with a product that wasn’t this innovative, we’d be in real trouble.”

Boeing chairman and CEO Jim McNerney’s comments on the 787 execution at an IBM think tank forum in New York just ahead of the delivery—some 40 months late—of the first 787 to All Nippon Airways (ANA) are sobering, particularly considering that the last game-changing Boeing aircraft, the 747-100, was just two months late.

Pan Am received its first 747-100 for passenger service on Dec. 12, 1969, just 44 months after its president, Juan Trippe, placed the launch order.

While the delivery of the first 787 to ANA was both an accomplishment and a relief, the 787’s “execution problems” are hardly over, with many analysts predicting a far slower production ramp up than Boeing hopes. It is a measure of the 787’s problems that unlike virtually all previous commercial aircraft programs, ANA’s first delivery is the eighth off the line and its second is the 24th.

And in stark contrast to earlier aircraft programs, Boeing has written off the first three test aircraft and the final three will go to VIP customers.

So while there is no doubt, as McNerney told his audience in New York, that Boeing has “learned a lot from it,” the learning experience is far from over, with the remaining 820 787s on order yet to be delivered to an increasingly impatient roster of airlines.

New York-based Bernstein Research predicts that Boeing will take up to nine months longer than planned to reach a 787 production rate of 10 units per month. Bernstein said consistently through 2011 that it assumes “a slower production ramp up than Boeing’s plan [10 per month rate reached in late 2014, rather than late 2013].”  In a Sept. 27 report, Quick Take - Boeing: 787 Signed, Sealed, Delivered – And Now?,  Bernstein reiterated that it “expects the production ramp up to be a challenge, particularly to reach Boeing’s planned rate of 10 per month beginning in late 2013.”

It notes that “production is currently at 2 per month, although the plan had been to be at 2.5 per month by now. Boeing now intends to make a decision in Q4 regarding a potential rate increase to 2.5 per month. The fact that production is currently behind plan makes it even less likely that the 10/month goal will be met in 2013.”

Bernstein believes that Boeing will deliver eight 787s this year, compared to the manufacturer’s target of between 12 and 20; 61 in 2012; 78 in 2013 and 107 in 2014. It notes that Boeing is working on an additional Dreamliner surge line in Everett which, combined with the existing line and the Charleston, S.C., line, could lift the 787 production rate to 17 a month by 2016. The Everett surge line will be operational in early 2012.

McNerney, however, insisted at the handover of the first 787 that “we have a robust plan. We’ve got a surge line here in Everett. We’ve got a factory in South Carolina to bolster the core of it, which is here in Everett. We have healed up our partners’ production processes.”

“We have a plan to be at 10 787s a month by the end of 2013 and we have confidence we can make it,” McNerney said.

Bernstein’s less optimistic 787 production ramp up assessment is supported by airlines such as Air New Zealand (ANZ)—launch customer for the 787-9. In July, ANZ CFO Rob McDonald told an Aviation Outlook conference in Sydney that delivery of the 787-9, for which ANZ is the launch customer, has been pushed into 2014. “It would be an understatement to say we are frustrated and disappointed [by the 787 delays],” McDonald said. “We are in discussions with Boeing around delivery dates and the financial implications of that.”

Qantas Group CFO Gareth Evans told ATWin August that the airline does not expect to get its first 787-8, to be operated by subsidiary Jetstar, until the first quarter of 2013 rather than late 2012 as scheduled.

In a recent client report, 787 Learning Curve & Implications,UBS Investment Research said Boeing will not reach 10 a month until late in 2014. Its guidance is for 17 this year, 46 in 2010, 82 in 2013 and 118 in 2014. Boeing, however, strongly reaffirms its guidance on production of 10 a month by close of 2013.

On the production line now are the first 787s for United Airlines and the third for China Southern.

A significant part of the deliveries equation relates to the rework being done at various facilities, including Aviation Technical Services’ 950,000 sq. ft. facility at Paine Field in Washington state, which has been dubbed “Boeing South.” ATS has five bays and is involved in the massive job of completing well over 130,000 open tasks on 787s that clog every spare area of tarmac and concrete at Paine Field. The airport has even closed runways to accommodate 787s and 747-8s.

Boeing also moved 787 work to its Global Services & Support site in San Antonio, Texas in March. Line number 23—for Japan Airlines—was the first to undergo change incorporation to conform with the standards established as part of type certification efforts. The center is handling three aircraft for airlines and three of the flight test aircraft that are not being scrapped.

Some of the work done in San Antonio includes installing electronic and mechanical equipment, completing software upgrades, testing functional systems, and removing and reworking wiring or equipment that needs to be updated to current configuration requirements.

South Carolina Challenges

Adam Pilarski, SVP at consultancy Avitas, has concerns about the South Carolina 787 final assembly facility that is expected to produce three 787s per month. He says it will take “considerable time to get up to speed.”

“There’s a reason people get paid good money in Seattle. They’ve been doing it a long time. It’s not as easy as it sounds,” Pilarski said.

Boeing opened the 642,720 sq. ft. Charleston assembly building on June 10 with Boeing VP and GM Boeing South Carolina Jack Jones promising that “in this building, our talented Boeing South Carolina teammates are going to assemble the finest, most technologically advanced commercial widebody airplane in history.”

Ironically, the building that Boeing hopes will get its 787 back on track opened six months ahead of schedule. Final assembly of the first SC 787 will begin shortly.

But the assembly line is now the subject of a labor dispute with the International Association of Machinists (IAM) and the US National Labor Relations Board, which both accuse Boeing of building a non-union 787 plant in South Carolina to punish the IAM for past strikes.

Boeing emphatically denies that claim, saying the jobs in South Carolina represent new employment, not the relocation of existing work. However, Boeing did not select the South Carolina location. Its then partners Vought and Alenia chose the east coast site when they set up the JV Global Aeronautica. Vought, a long-time Boeing supplier, built a facility to produce the aft fuselage 23-ft. long section 47 and the 15-ft. section 48, which includes the aft pressure bulkhead.

Vought’s contract for the 787 built on a long and continuous history of structural work with Boeing, including the empennage of the 747, 757 and 767, and wing center box of the 767. The company also has extensive composite structural experience on developments such as the wings for the Northrop Grumman Global Hawk and the horizontal stabilizer and engine nacelles for the C-17. 

Vought partnered with Alenia to form Global Aeronautica to build an adjacent production hall for mating and stuffing of the entire fuselage, except for the nose, which is built by Spirit AeroSystems.

Alenia builds the 27.9-ft. long Section 44 and 32-ft. Section 46 at its 690,000 sq. ft. factory in Taranto-Grottaglie, Italy, and these are flown to South Carolina with section 43 from Kawasaki and section 45/11 from Fuji Heavy Industries.

Boeing purchased Vought’s 50% share in Global Aeronautica in March 2008 after the company moved to increase oversight at the Charleston facility and it then acquired Vought’s aft fuselage facility in July 2009.

Boeing announced the South Carolina 787 line in October 2009 and completed the acquisition of the remaining 50% share of Global Aeronautica from Alenia in December of that year.

To support the South Carolina facility, Boeing opened a 35,000 sq. ft. vertical fin composite assembly line at its plant in Salt Lake City, Utah, on June 28. Operated by Boeing Fabrication, the site will build the vertical fin assemblies for the 787s built at Boeing South Carolina. The Salt Lake City facility supports fabrication activities across all Boeing’s commercial models. It is scheduled to deliver its first vertical fin to Boeing South Carolina during the fourth quarter 2011.

Boeing and its partners have, however, made significant progress in refining the production process of the 787 with far less clutter surrounding the aircraft on the production line. Boeing VP 787 systems Mike Sinnett told ATWin September that the travelled work situation had improved dramatically.

“For the aircraft that are coming in right now, they’re coming in a very good condition and our final assembly and delivery is able to move those airplanes through,” Sinnett said.

He added that Boeing is now finishing 787s on the line and the wing-to-body join rework is completed.

Boeing director of final assembly Larry Coughlin conceded, however, that work remains to be done. “It’s not all perfect yet. It’s getting better,” Coughlin told the Seattle Times.

Over the past two years, Boeing has also moved engineering and administration offices to both its Everett and Renton production halls to better connect staff with the aircraft.  One of those offices is the Production Integration Center (PIC), set up in December 2008 as a mission control headquarters for the 787 global supply chain. The facility monitors in real time, second by second, changes at suppliers from the lowest to highest tiers and the potential impact of any glitches. Not one part of the 787 moves—or doesn’t move—without the PIC knowing.

Parts are now under way for the 787-9, which is 20 ft. longer than the -8, after a critical design review in September, according to Sinnett.

To achieve the 20-ft. stretch, the forward section 43 built by Kawasaki and the after section 46 built by Alenia are being lengthened by 10 ft. Mandrels and jigs are being installed for the longer barrels.

The 787-9 will carry about 40 more passengers and fly to a range of 8,500 nm.

To accommodate the additional takeoff weight, which climbs 50,000 lbs. to 553,000 lbs., the wing, fuselage and empennage skins will be of a heavier gauge while the landing gear is being beefed up.

It is not clear what line number the first 787-9 is, but a general consensus is 139.

The Profit Line 

There is also general consensus that Boeing has set itself an aggressive target for the 787 learning curve to achieve program profitability.

Bernstein said in an Aug. 16 client report Boeing: A Profitable 787? It Depends on the Time Horizon – A Detailed Assessment of Potential Scenariosthat “it appears unlikely to us that Boeing will deliver a positive gross margin over an initial accounting block of 1,000 airplanes.” Balancing that assessment, however, Bernstein noted there were numerous factors at play and Boeing insists to ATWthat it is not looking at a loss on the first 1,000 787s.

Bernstein claimed that when the 787 program was launched, pricing was set at a level that did not adequately reflect the airplane’s costs. “Then, to make matters worse, the program was extraordinarily successful, with more than 800 orders that locked in pricing through 2018. The distributed supply chain has also made cost reduction more challenging than on prior programs, with uneven levels of performance by different suppliers.”

Adding to the challenge, Bernstein said, has been the need to compensate customers for delays and address assertions by suppliers that have been negatively impacted by design changes and delays.

“Boeing management has said that it has been successful at both increasing price and reducing cost. Price increases have been through conversion of 787-8 orders to 787-9s, as well as through renegotiating price as slots are adjusted,” Bernstein said.

According to Bernstein, the program is in the unusual position of benefiting from order cancellations because it may be able to raise prices on new orders. “Still, input we have received regarding pricing suggests that the pricing upside is limited. We understand that at least half of the 787-8 orders have options to move to a 787-9, which fixes the pricing upside. Furthermore, some 787-9 ‘upgrades’ are being used as a means of compensating airlines with 787-8 orders for delays (i.e. no added pricing).”

There are many cost reduction programs underway, including redesigning the horizontal stabilizer on the 787-9 and bringing it in-house from Finmeccanica.

Despite its concerns, Bernstein remains upbeat on the long-term success of the 787.

“Despite what we see as a high degree of difficulty in avoiding a forward loss on the 787, the situation has a positive side. Assuming our base cost estimate, with $120 million pricing and an 82.5% learning curve, unit number 1,000 should have an 18.7% gross margin, which starts to approach current 777 margins which we estimate at about 22%. This means that despite a tough initial period for the 787, this program could deliver profitability comparable to other programs,” Bernstein said. Its base calculations are taken from aircraft number 45.

First Delivery 

On Sept. 26, all the challenges ahead were put aside as Boeing celebrated the delivery of the first 787 to launch customer ANA in a ceremony adjacent to the factory where the aircraft was assembled.

Boeing Commercial Airplanes president and CEO Jim Albaugh presented a ceremonial key to ANA president and CEO Shinichiro Ito.

By the end of ANA’s fiscal year on Mar. 31, the airline expects to have 12 787s in service and will take delivery of another eight in the following fiscal year. ANA’s 787-8 for domestic and short-haul routes has 12 business and 252 economy seats.

ANA has orders for 55 787s, including 15 -9 variants. Its archrival JAL has ordered 35 787-8s.

“It’s not often that we have the chance to make history, do something big and bold that will change the world in untold ways and endure long after we are gone,” Albaugh said at the ceremony. “That’s what the 787 Dreamliner is and what ANA and Boeing have done together—build what truly is the first new airplane of the 21st century.”

Ito, in receiving the long-awaited Dreamliner, said he could not wait “until the skies are filled with 787s.”

Boeing has much work ahead of it to achieve that goal.