Bad Batteries Seen as Best Case for 787 Overcoming Past

A telling image of the development of Boeing Co. (BA)’s 787 Dreamliner came in mid-2011, when dozens of them sat, unfinished, crammed into nooks and crannies around Boeing factories and rented tarmacs spread across two states. Concrete blocks hung from their wings to prevent them from tipping because they didn’t have engines to keep them balanced.

With delay after delay plaguing the aircraft’s entry into service, Boeing ultimately had built about 40 by the time it got final Federal Aviation Administration certification. That became a drag on Boeing -- at one point it had $16.2 billion of inventory related to the 787 -- and an important element of the current crisis in which every Dreamliner worldwide has been grounded after two suffered lithium-ion battery failures.

About 800 Dreamliners are still on order from the world’s airlines, with years of deliveries ahead on planes whose list price starts at about $207 million. In buying a new model, airlines make major decisions about the future, such as whether to replace old jets or add destinations. Route networks can be determined a decade in advance by a new-generation plane.

“The thing the company has to get right is the 787,” Chief Executive Officer James McNerney, a protege of Jack Welch who had a bright career before joining Boeing, told Bloomberg News in 2006. “Executing that program is our biggest opportunity and our biggest risk if we don’t do it well.”

New Model

The 787 is the first U.S. commercial airliner the FAA has grounded since the DC-10 in 1979 after a Chicago crash that killed 271 people. Other countries followed the FAA’s 787 lead, in effect parking the global fleet. LOT Polish Airlines SA’s 787 was stranded in Chicago after its maiden trans-Atlantic flight.

U.S. officials and Boeing are investigating whether defective batteries from the same batch caused the failures, according to two people familiar with the incidents. If confirmed, it could show a flaw causing the incidents was confined to a small number of 787s, rather than a systemic fault with the plane’s engineering, design or manufacturing, and could speed the resumption of flights.

Boeing fell 0.3 percent to $75.04, extending its decline since just before the Jan. 7 fire to 3.4 percent. The shares are down 26 percent since the day before Boeing’s October 2007 announcement of the first of seven delays in the 787’s initial delivery.

Dreamliner Narrative

The issue for Boeing is that the current struggles solidify the existing narrative about the Dreamliner, which has been troubled for years. Its story is a sweep of history that includes the 9/11 attacks, a major corporate merger and the question of why and how the U.S. government ultimately approved technology that, at the moment, may appear flawed.

Photographer: Stuart Isett/Bloomberg

Assembly of Boeing Co.'s 787 Dreamliner takes place at the company's factory in Everett, Washington, U.S., on Monday, Sept. 19, 2011. Close

Assembly of Boeing Co.'s 787 Dreamliner takes place at the company's factory in... Read More

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Photographer: Stuart Isett/Bloomberg

Assembly of Boeing Co.'s 787 Dreamliner takes place at the company's factory in Everett, Washington, U.S., on Monday, Sept. 19, 2011.

The 787 is a replacement for Chicago-based Boeing’s 767, an aging twin-engine model that has been losing sales to the Airbus SAS A330. It’s Boeing’s first new commercial jet since the 777 in 1995 and the first produced since the company acquired McDonnell Douglas Corp. in 1997.

Boeing’s engineers in the 1990s began working on the plane of the future, an airliner that could approach supersonic speeds. They had done big -- the 747 -- and they were planning their next challenge.

Under Alan Mulally, Boeing’s commercial airplane unit proposed a model called the Sonic Cruiser in early 2001. It would fly 95 percent of the speed of sound and shave about an hour off the flight time between New York and London. The Sonic Cruiser project was revered within Boeing and given significant resources and attention.

Several carriers signaled interest, including AMR Corp. (AAMRQ)’s American Airlines.

Sept. 11

Boeing dropped the idea after the Sept. 11 attacks and their aftermath -- recession, higher oil prices -- spurred airlines to focus on fuel efficiency. Boeing cannibalized technology from the Sonic Cruiser and used it for the proposed 7E7, which wouldn’t be any faster than current planes, but would burn 20 percent less fuel. Boeing variously said the “E” stood for “efficiency” or “environmental.”

The 7E7 was later renamed the 787, and not just because that was the next logical step in Boeing’s lineup after the 777. The number eight is considered lucky in China, and the 787 was supposed to be ready in time for Chinese airlines to debut it at the 2008 Olympics in Beijing.

The new jet would use more composite plastics than any other airliner. While composites had been used for military fighters, and for some parts of other planes like part of the 777’s tail, no commercial plane had ever used nearly as much, making it considerably lighter and more fuel-efficient.

New Power

That means the airplane could go long distances with two engines instead of four, giving it greater range than its twin- engine peers and better fuel economy than jumbo jets. To do that, the plane would need a new kind of power.

Other aircraft bleed air off the engines for a pneumatic system to power a variety of critical functions, such as air conditioning. That diverts power from the engines that they could otherwise use for thrust, and means they use more fuel.

With an electrical system for the jet’s other needs, the engines become much more efficient. The 787 uses five times as much electricity as the 767, enough to power 400 homes. To jump- start a so-called auxiliary power unit that’s used on the ground and as a backup in case all the plane’s generators failed, Boeing decided on a lithium-ion battery because it holds more energy and can be quickly recharged, Mike Sinnett, the 787 project engineer, said in a briefing last week.

More Flammable

Those capabilities also make lithium-ion cells more flammable than other battery technology, and they can create sparks and high heat if not properly discharged. Chemicals inside the battery are also flammable and hard to extinguish because they contain their own source of oxygen, Sinnett said.

In a worst-case scenario in which the batteries burn, they are designed to do so in a way that doesn’t threaten the aircraft, Sinnett said. If the jet is airborne, smoke is supposed to be vented out of the compartment so it doesn’t reach the cabin, he said, and the plane’s ability to stay aloft wouldn’t be harmed even if all of the battery cells ignite.

While all of the work on the 7E7 germinated, Boeing was in the midst of a huge corporate change. The McDonnell Douglas purchase was supposed to boost the defense side of the business, helping balance the cyclical nature of commercial planemaking. Longtime Boeing people still grouse about the move.

New Tone

McDonnell executives were given a significant role in the combined enterprise. Before this, Boeing had been considered an engineer’s company. It had the feel of a gritty sort of family company that cared about making good planes no matter what the cost. It was almost entirely based in Seattle, where Bill Boeing built his first float plane on the shores of Lake Union in 1916.

Now engineers were required to make finances a priority. Boeing’s leadership even moved the corporate headquarters to Chicago.

Mulally, then the head of the commercial unit, needed to rein in costs under Chief Operating Officer Harry Stonecipher, who came from McDonnell Douglas and championed boosting shareholder value. Mulally decided he could only build the 7E7 by sharing the investment and costs with suppliers. A new production system was devised, with 70 percent of the plane designed and built by suppliers around the world.

In the past, Boeing had more control over the design and the work of its suppliers. Now, Boeing turned the suppliers into partners instead of servants, and gave up its control.

Orders rolled in -- the most for any new airliner in history.

Scandal Fallout

Boeing’s management, meantime, was roiled by scandals, many at the military businesses acquired from McDonnell Douglas. CFO Michael Sears left in 2003 in a procurement scandal -- he later went to jail -- and Boeing CEO Phil Condit quit. Stonecipher resigned in 2005 over an affair with a subordinate.

Competition for the CEO job came down to Mulally, who had led development of the 777 and was a favorite of Boeing’s engineers, and McNerney, the former General Electric Co. executive and CEO of 3M Co. (MMM) The board chose McNerney. Mulally became Ford Motor Co. (F) CEO in 2006 and returned the automaker to profit with a strategy that hinged on vehicle efficiency and quality.

Temporary Fasteners

When Boeing rolled out the 787 in a big public ceremony on July 8, 2007 -- 7/8/7 -- the celebration masked the uncompleted jobs and engineering work still to be done. The plane was held together with temporary fasteners.

Meantime, Boeing notified the FAA that it wanted to use lithium-ion rechargeable batteries in ways that had never been tried before on a large commercial jet.

During this period, the FAA was attempting to change its culture. In President George W. Bush’s administration, FAA Administrator Marion Blakey began what was known as the “customer-service initiative” to make the agency more responsive to industry, according to a 2003 fact sheet.

Responding to complaints that the agency didn’t apply regulations equally and took too long to act, Blakey sought to “make every FAA employee accountable for achieving the agency’s mission,” the fact sheet said. The FAA would consider airlines and manufacturers, such as Boeing, its customers.

The initiative ran into trouble in 2008 after congressional investigators found that an FAA supervisor in Texas had given Southwest Airlines Co. (LUV) permission to fly Boeing 737s without performing required inspections for cracks.

FAA Administrator Randy Babbitt, appointed by President Barack Obama, rescinded the initiative in September 2009.

Transcending Rules

Normally, the design of an aircraft is governed by longstanding federal regulations. In the case of the Dreamliner, there was nothing on the books to guide the FAA on lithium batteries, certain types of which had been banned from passenger flights in 2004 because they were so flammable.

To ensure that the jet was safe, the FAA considered the request under what was known as “special conditions.”

In April 2007, the agency said in the Federal Registry that it was considering Boeing’s request and asked for comments from other interested parties. Two months later, the Air Line Pilots Association, the largest North American union for flight crews, responded, saying that it conditionally supported the measure, while seeking greater protections.

“We are concerned with a fire erupting in flight, and being able to rapidly extinguish it,” wrote Richard Kessel, an engineer with the pilots group. “The special conditions should require that there be a means provided to apply extinguishing agents by the flight (cabin) crew.”

Battery Approval

The FAA approved the batteries for the 787 in October of that year, according to the Federal Register, rejecting ALPA’s request for a requirement that battery fires could be extinguished. The rules were designed to prevent fires from happening in the first place, the FAA said.

The rules, which applied only to the 787, required that battery cells wouldn’t overheat, emit toxic gases that could accumulate in the plane, or explode. If a battery did fail, it couldn’t damage equipment, wiring or the aircraft’s structure, the agency said.

Boeing had said at the rollout that it was targeting a maiden flight in fall 2007 and the first delivery, to All Nippon Airways Co. (9202), in May 2008. In October 2007, Boeing acknowledged that suppliers were drastically behind and the plane’s entry into service would be delayed.

First Postponement

This was the first postponement. The seventh came after a fire during a test flight in November 2010, which was linked to the new electrical system and which forced the entire test fleet to be grounded for six weeks. That added six months to the delay while Boeing engineers redesigned software and hardware.

In the meantime, Boeing kept building Dreamliners, which is why there were 40 sitting around by the time the first delivery occurred on Sept. 25, 2011.

Usually, far fewer planes are finished by the time a plane is handed over, so if a problem comes up, there aren’t that many to fix. In this case, Boeing already has 100 to check out after the battery fires.

“You might build a dozen and put those into service and then start to build more, and a small number might have problems and you fix those and build more,” said Richard Aboulafia, a consultant with Teal Group in Fairfax, Virginia. “That’s the unprecedented aspect of this program -- those delays between building the planes and certifying them has been the painful gift that just keeps on giving.”

Leaking Cell?

A flaw in a battery, such as a manufacturing defect that allowed the flammable liquid inside to leak, might trigger a fire in one battery cell that would then ignite other cells within the pack, according to tests on generic batteries conducted by the FAA.

“The battery failures resulted in release of flammable electrolytes, heat damage, and smoke on two Model 787 airplanes,” the FAA said in a statement this week. “These conditions, if not corrected, could result in damage to critical systems and structures, and the potential for fire in the electrical compartment.”

Blakey, the ex-FAA chief and current president of the Aerospace Industries Association of America trade group, said yesterday that the agency was responding properly to the fire threat discovered on the Dreamliner.

‘Go Forward’

“It makes all the sense in the world to address something early, figure it out and go forward,” Blakey said at the Bloomberg Global Markets Summit in New York. “I think all of the customers are going to be pleased that happened, even though it’s inconvenient.”

The batteries in the Dreamliner were made by Kyoto, Japan- based GS Yuasa Corp. (6674), which has said the Dreamliner’s faults may go beyond the batteries.

Hiroharu Nakano, a spokesman for GS Yuasa, declined to comment on whether the company has heard any customer complaints. Marc Birtel, a spokesman for Boeing, said he couldn’t discuss anything related to the battery probe.

Financial risks to Boeing include possible compensation to buyers under warranty, design and manufacturing expense, and delivery disruptions, Howard Rubel, a Jefferies Group Inc. analyst in New York, told clients in a note.

The most likely outcome may be a cost of about $550 million, according to Rubel, who based his estimates on the probability of different scenarios for Boeing, such as customer reimbursements and spending on any redesign work. His buy rating on Boeing is one of 23 such recommendations in a Bloomberg survey of analysts, along with five holds and one sell.

Stock Gain

Boeing’s stock has risen 16 percent since July 1, 2005, the day McNerney became CEO. That trails gains of 24 percent for the Standard & Poor’s 500 Index (SPX) and 31 percent for Airbus parent European Aeronautic Defence & Space Co. (EAD) in the same period.

In the long run, the 787’s struggles may turn out to be another passing phase in the jet’s development. This week, at the Detroit auto show, Ford’s Mulally was asked about the Dreamliner.

“I haven’t been at Boeing for six years now, but I will assure you that the 787 is going to change the flying experience again, just like every other Boeing airplane,” he said. “New airplanes are very hard, the issues that they’re having right now in the big scheme of things are relatively small. They’ve worked their way through. It’s going to be a fantastic airplane.”

To contact the reporters on this story: Susanna Ray in Seattle at sray7@bloomberg.net; Alan Levin in Washington at alevin24@bloomberg.net; Peter Robison in Seattle at robison@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Bernard Kohn at bkohn2@bloomberg.net

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