Boeing: A Flight to Safety?

It may drop plans to build the speedy Sonic Cruiser--although that could mean losing ground to Airbus

Plans for Boeing Co.'s Sonic Cruiser dazzled the airline world when the Chicago company unveiled them more than a year ago. It was a bold stroke: a jet that promised to transport 250 passengers at nearly supersonic speeds without burning up profits in higher fuel costs. Chairman and CEO Philip M. Condit said as recently as a month ago that things were going so smoothly that Boeing (BA ) might begin to take orders next year for 2008 delivery.

Behind the scenes, though, the Sonic Cruiser is moving at anything but the speed of sound. Executives at many major carriers, including American Airlines, Delta, United (UAL ), British Airways, and Japan Air Lines, say they don't plan on buying it. Only Continental Airlines Inc. (CAL ) still expresses interest. With even business travelers now scrambling for deeply discounted fares, a key idea behind the Sonic Cruiser--that passengers would be willing to pay a steep premium for quick flights--seems like a quaint vestige of the '90s. "Given the present flying environment," says Gordon McKenzie, United Airlines Inc.'s director of new aircraft programs, "the Sonic Cruiser might be something in our distant future, but not something we'll see in the next 10 years."

The weak prospects have Boeing hedging its bets. Boeing engineers are considering two alternative designs to the Sonic Cruiser, according to airline sources and Boeing insiders. One is a conventional jetliner that would be more fuel-efficient and cheaper to build than the slow-selling 767. The second is yet another radical new design: a flying wing shaped like the B-2 bomber. Boeing's board is expected to choose among the three designs this fall. With Britain's Farnborough Air Show, a global gathering of aerospace executives, beginning on Sunday, July 21, Boeing will be under pressure to clarify its plans.

Odds are, the board will abandon the Sonic Cruiser and go the conservative route, according to former Boeing executives and industry leaders. The company says it can make the conventional 250-seat jet up to 30% more efficient to operate and cheaper to buy than today's airplanes. That's a huge advantage for cost-conscious airlines. It would fly slightly faster and incorporate lightweight composites in the fuselage and wing--along with other advanced avionics being developed for the Sonic Cruiser. And Boeing could probably sell a 767 replacement much more cheaply because of big efficiency gains made in manufacturing the 767 itself.

A conventional jet, delivered in about six years, would give airlines more bang for the buck at a time when they need it most. Executives from American and United say they're interested in this alternative principally because of its lower operating costs--although no orders have been placed, since it's just a preliminary design. Another advantage: Because an update of the 250-passenger conventional jet design would cost much less than the $10 billion required to develop an all-new airplane, Boeing could simultaneously do early development work on a more radical design.

Even though shelving the Sonic Cruiser would be a black eye for Boeing, choosing a design that doesn't fit the market would be much worse. It risks losing its market-leading position for the first time to archrival Airbus Industrie. Airbus already is gaining market share fast: Since 1994, it has upped its total share from 30% to nearly 50%. The European company has begun manufacturing its next-generation jumbo jet, the 555-seat A380, a double-decker flying behemoth. It has sold more than 100 of the jets and plans to deliver the first airplane in four years. The A380 is expected to take more sales away from Boeing's aging 747, which carries 420 passengers. That leaves Boeing's 300-passenger 777 as its one major success. Boeing needs another hit jet to regain a decisive market lead.

Boeing officials insist that the Sonic Cruiser is still their first choice, though Condit acknowledged during an earnings announcement on July 17 that there were questions about its viability. "We want to understand the market before we commit to [the Sonic Cruiser]," he said. Boeing believes the jet would cut air-travel trips by about one hour for every 3,000 miles flown, shaving nearly two hours from the flying time between New York and Tokyo. The company thinks passengers are prepared to pay a premium--not just to fly faster, but to avoid congested hubs and fly directly from city to city.

At least one major airline chief executive agrees with Boeing. Gordon Bethune, Continental's CEO, insists that business travelers are still willing to pay extra for faster service, but they haven't had to do so lately because of all the bargain fares available, with all the industry's excess capacity. He believes Boeing should stick with the Cruiser, and he's interested in buying some if Boeing can offer operating costs comparable to those of the 767. "They know that is the only thing they can differentiate themselves with," Bethune says.

But the Sonic Cruiser requires leaps in engine and aerodynamic technology to make it competitive. Flying just below the sound barrier, the ride tends to be bumpy and unpredictable because shock waves form around the airplane as it approaches Mach 1. The turbulence also drives up fuel costs. So far, Boeing's engineers haven't shown the airlines a design that solves these problems, say airline execs. "The Sonic Cruiser caters to the rapidly evaporating premium market,"' says Richard Aboulafia, a Teal Group aerospace analyst. "Now, more than ever, the bus-travel theory of air transport seems to be the right one."

Market conditions can change, of course. But, if Boeing decides to put its chips on a more radical design, analysts say it might be better off picking the wing jet, known as the "blended wing." Such an aircraft would be substantially lighter than a conventional tube-and-wing design. The 480-seat version would burn 32% less fuel than the A380, according to Boeing. That's a huge cost advantage. The blended wing can fly faster and be built more cheaply than conventional jets because of its unusual design. There's one major drawback: no windows for passengers. But Boeing engineers may be able to deal with that by providing video views of what's going on outside. A handful of airlines are interested in the design, though they wouldn't be ready to buy it for perhaps a decade.

For now, Boeing executives have to decide which direction they're going with their next jet. Until they do, it will be investors who are flying blind.

By Stanley Holmes in Seattle, with Wendy Zellner in Dallas

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE