The 787 Dreamliner program has taught Boeing (NYSE:BA) a costly lesson. Speaking at the annual investor conference in the Fairmont Olympic Hotel in Seattle, Boeing's CEO Jim McNerney said "Every 25 years a big moonshot ... and then produce a 707 or a 787 — that's the wrong way to pursue this business. The more-for-less world will not let you pursue moonshots."
McNerney was referring to the big development programs to build airplanes with new technology from the scratch as a shot for the moon. He was saying that in today's world where carriers are constantly demanding more features, fuel efficiencies, reduced carbon emissions, and more at lower prices, this can't be the right business model. Boeing's answer to this dilemma is reengineering. Has Boeing finally cracked the puzzle, or is it going to be a costly mistake?
Preferring guaranteed returns over heavy investments in all-new technology
A big reason why the aerospace major has taken reengineering as its next strategy is the billions that it sunk in the 787 Dreamliner program. Boeing and Airbus (NASDAQOTH:EADSY) have exhausted billions in their widebody projects -- the 787 and A350 -- in an effort to create an all-new revolutionary long-range aircraft using carbon-fiber composite material with breakthrough technology.
Boeing estimates its Dreamliner loss to run as high as $25 billion by next year before it starts subsiding. However, David Strauss of UBS warns investors that the loss might pile up to $35 billion in the next three years.
As part of the fallout, Boeing is opting for the evolutionary approach rather than revolutionary and has reduced stressing on "moonshots." Dennis Muilenburg, company vice chairman and COO, says that Boeing would use the best of its engineers, who have previously worked on developing new technology, to divert efforts to "innovative reuse."
This would result in faster execution, higher productivity, minimal cost, and most important of all would boost cash generation. Airbus is also on a similar path. After spending heavily in the A350, the European giant is considering the safer route of revamping existing planes. It's also planning for a new A330neo for the same reason -- less risk, lower cost, higher profitability, and fixing the "cash situation."
"Replicating systems and technologies already proven and paid for"
The reuse and reengineering approach simply means utilizing existing platforms and technologies to develop an upgraded airplane. With fierce competition from Airbus and constant pressure for lowering prices, Boeing wants to shift its focus on innovative usage of what's already been "paid for."
The plane maker is concentrating on the development of its next-generation narrow-body plane, the 737 Max -- a remodeled version of the top-selling 737. Deliveries of the 737 Max are scheduled for 2017. The idea of making improvements to the existing aircraft could have occurred to the plane maker back in 2011 when it was trying to counter Airbus A320neo in a cost-effective way. Boeing claims that the 737 Max 8 would have the lowest operating expense in the narrow-body segment and would be better over competitor's per-seat cost by a good 8%.
The jet maker also unveiled the successor of the 777, the 777X, in the latter half of 2013. The airplane is slated to enter service in 2020. Since the launch of 777X, orders for the 777 have fallen. Its current orders should free up Boeing by January 2017. While several analysts believe that the jet maker might have to slow down its current production rate of 8.3 planes per month, Boeing is upbeat about getting additional orders to keep its capacity occupied and facilitate a smooth transition until 777X enters service.
Boeing is building aircraft on a ready platform and using the best of engineers to enhance current technology. As an example, it's adding new engines with fresh composite 787 wings to churn out the 777Xs from the 777 aircraft. Preparing the Dreamliner's composite wing was a costly affair, but now the tested technology can be put to use on bigger jets at a much more reasonable cost. Such tried and tested means save a lot on cost and pose fewer technical challenges. Airbus Group CEO Tom Enders echoes the same sentiment, saying "Why should we spend large amounts of money when we can make significant incremental improvements?"
Foolish last word
Boeing's and Airbus' approach to be at the frontier of innovation has made the two come out with awesome technology. Even their deep pockets couldn't save them from feeling the tremors of the cash drained in the 787 and A350 projects. Now that considerable advancements have been achieved, it's time to capitalize on this innovation. Boeing's strategy to give a makeover to its popular jets using cutting-edge technology could be a sound tactic.