All aircraft manufacturers face the same problem. Let it be Boeing, Airbus, Lockheed, McDonnell Douglas. This cost of developing can even worth more than the value of the company itself.Figure
Written by: Gunn Ochaphan
Contact: gunnochaphan@gmail.com
"There are no historic precedents or current parallels for the magnitude of financial exposure risked by an American airframe company" – George Ball, managing director at Lehman Brothers, 1982
"You can't win, you can't break even, and you can't quit" – Jean Pierson, former CEO of Airbus
Last couple years, the world has been shocked by 3 serious incidents in a row. One main player in these 3 incidents is the same player; Boeing. In this article we'll explore the decline of american number one commercial aircraft manufacturer, and cut throat business they're in.
Looking back the downfall likely initiated since the merger in 1997 with McDonnell-Douglas, another american commercial aircraft manufacturer(1967-1997). Since then, Boeing had become a so-called stock price-driven company rather than engineering-driven company. The reason for this isn't entirely wall street, but the whole structure of commercial aircraft industry in general. Commercial aircraft industry is brutal on its own.
Simply said, Company develops products and try to sell it enough to cover costs of developing and manufacturing like any other industry. One different is the scale.
First is to understand that to get 70 tons of metal to fly up in the sky with the speed of hundreds of kilometre per hour is not, by any means, an easy task. Aircraft is incredibly complex. Materials and technologies are cutting edge. And since one small failure can cause hundreds of casualties, extensive test, maintenace, training are non negotiable.
In order to develop new "clean sheet" aircraft model is incredibly expensive. the budget is often more than billions of dollars. In reality, they often face with 3 time or more f overrun cost.
Car or drugs are actually similar in term of high cost of developing new products. What difference is that car or drugs companies can sell their finished products to the mass market and ,hence , increase chances of getting money back. Commercial aircraft only sells around 1,000 aircrafts per year. And that creates lots of difficulties.
One is that learning curve is steep and less likely to get less steep. (Learning curve basically says that it's get cheaper and faster to manufacturing if you have been manufacturing for some times already. you can think of it as experience. We'll dive deep into this concept in the next article). if you only plan to sell a few hundred of something, a relatively small number of sales will have a large impact on how efficiently you’re producing and how profitable you are.
When it comes to marketing, making sure that new products can satisfy the market's needs, this poses another impossible problem. Accurate prediction of the market is very important. Getting the prediction wrong is fatal.
Guessing right is not ideal either... Let's say they predict the market's need right and has been developing new aircraft for this identified needs. If the program gets delayed, due to overrun costs or manufacturing difficulties (which has its own difficulties of its own), they can lose orders to competitors and, as a result, lose confidence from the airlines (business of airines is also cut throat!)
(Just to get you the idea of why it is so important to retain customers. Generally, airlines spend a lot of money for pilot's training and maintenace. That's why airlines, generally, have either fleets of Boeing or Airbus. Not both. Losing customers mean losing tens, if not hundreds, of orders)
They also have to pay compensation to airlines if the orders get delayed.
Often success comes down to luck, for a lack of better word. A330, 737, 747's success are good example.
Aircraft manufacturers are faced with the inevitable task of trying to navigate this landscape while putting billions of dollars at risk. They try to pitch their products to a limited number of customer. Airlines industry is also brutal, they always need new technologies to help with their margin Losing one order means a lot because there’s tend to be momentum. It's winner-takes-all market. Though you win, you'll only get 5% profit margin.
Naturally, this drives competitors away. Only a few jet models like 727 and 707 are actually profitable. This is the reason why instead of developing new models, aircraft manufacturers tend to modify the existing model. Modification can cause 10-20% less than developing clean-sheet but has a potential to be as profitable.
This, sadly, has led to incidents we've seen recently.
Boeing 737 was first developed in 1960s. it was designed for short range, small capacity. It was intended to go against McDonnell Douglas's DC-9 in low-end market. 737 was not particularly successful nor was it expected to be.
DC-9 had 2 years head start. While 727 was doing pretty well already, 727 has 3 engines (that costs more to operate than 2 engines model). 737 was then designed to share as many parts as possible with 707 and 727 (but 2 engines).
Time passed by. Advanced version of 737 in 1970 with improved aerodynamics. But sale were still sluggish. At the time, Boeing only manufacture 2 of 737 per month. Untill 1973, the program almost got canceled. That time, Boeing nearly went bankrupt. They laid off 75% of its workforce. Eventually, Boeing was saved because they can finally sell more than production cost (hadn't covered development cost yet).
It started to gain sales untill 1978, it had bacame the most selling jetliner in the world. Luckily, The new government bills fueled the growth of 737's sale. The operation of airlines changed. Airlines started to fly shorter routes (imagine those low-cost airlines).
The McDonnel Douglas also upgraded thair DC-9, the Super 80. it has quieter, better fuel efficient engine than 737. The 737-300 had then since begun in 1981. The 737-300 has more passenger capacity, improved aerodynamics, high-bypass turbofan from CFMI. Although fitting new large engine was cahllenging.
737 was originally design to have low ground clearance to accommodate "second tier" airports. The new engine is big, but extending the landing gear to raise the plane would have changed the structure of the plane and they might have to design the new plane altogether. Instead they give the engine's casing telltale ellipsoid shape.
In 1984, new challenger emerged. the Airbus' A320. A dirent competitor to 737 model. A320 was a clean sheet model, equipped with advanced technologies, such as fly-by-wire (electronics instead of heavy hydraulic system). Airbus racked up 400 orders from Northwest Airlines, A long time Boeing customer.
Boeing had, arguably, potential to kill A320, If (and that's the big if). If Boeing decides to also develop the new clean sheet jetliner model. The 7j7, 737-sized aircraft with UDF engine from GE. Theoretically, the 7j7 would have been 60% more fuel efficient, with technologies like fly-by-wire. But they had one issue: the UDF engine produces too much noise to pass the legal requirement. Boeing ,then , decided to cancel 7j7 and , instead, developed 737-400 and 777.
The 737-400 couldn't kill A320. Airbus' A320 would continued to encroach on the market. Boeing's customers turned to Airbus. The 777's cost was also spiraled out of control. The cost overran up to $28B against $5B budget. The replacement of 737 was indeed required for Boeing to stay in this business.
Instead, Boeing launched NG737, another upgrade version of 737. New wing design, more efficient engine which could reduced cost by 9% and maintenace cost by 15%, added winglets, 33% less part count, and retain so much commonality with old 737 to require minimal pilot retraining and stay within FAA's derivative rules.
NG737 was first delivered in December, 1997. It became quite popular. Selling more than 5,000 aircrafts over the next 20 years. A320 also continues to sell well though.
Early 2000s, Boeing 737 and A320 have become the most important products of Boeing and Airbus. Combined, they made up 70% of the market for commercial airlines. And once again, Boeing began to consider a replacement.
"Project Yellowstone" was to explore a new clean-sheet to replace 737 model. But there weren't a lot of improvement. A new advanced engine wasn't fully developed until 2014. technologies like composites would be difficult scale up to the high volum production required for a new 737-model replacement. So they were gun-shy.
Again, in 2010, the new engines like P&W's GTF and CFM LEAP were ready to commercialise. It was the perfect time for Boeing to finally start the development of their new clean sheet aircraft. Their hand were, again, tied when Airbus launched A320neo in 2011.
A320neo has significantly improved performance. Some of Boeing customers like American Airlines turned to Airbus. Customers, in their part, lost confidence in Boeing that they could deliver a new aircraft on time after all 737's debacle. And at the time, Boeing customers would also prefer modified 737. It would have the same benefit (15% fuel saving vs 20% fuel saving by new clean sheet model). Costs perhaps 10-20% to develop, and also avoid cost of airlines having to retrain their pilots. The rest is tragedy.
A newer generation of 737, following 737-400. 737 Max would fit even bigger engines. Under FAA's derivative rules required shifting the engine very far forward and angling them up slightly, which changes the characteristics of the airplane.
With changes of flight characteristic. To keep its performance similar to previous 737s, MCAS was developed. MCAS is a set of system, including software and various sensors, designed to automatically adjust the angle of the aircraft, to emulae the behaviour of earlier 737s.
The MCAS software and its interactions with various sensors malfuntioned, ultimately caused two fatal crashes of 737 Max's flights
For the Alaska Airlines, the incident happened to be caused by a simple mistake from manufacturing process. Simply said, someone forgot to install the door plug properly.
(technicalities of these 3 incidents deserve its own seperate article.)
none of business comes close to busines of commercial aircraft. what seems to be someone's fault happens to be a fault of some bigger system. That is not to say Boeing is not wrong. Commercial aircraft industry has extensive safety policy for a reason.
This article was a lesson at how technology and innovation works. Technological advancement alone was not enough. there's also economical and industrial part of it. Looking at bigger picture and see things the way it is will help us progress better to the future.
Thanks for reading.
