Will Boeing's New Idea Really Fly?

Its fuel-sipping carbon 7E7 faces major hurdles

Two years ago at the Paris Air Show, Boeing (BA ) Commercial Airplanes CEO Alan R. Mulally assured the world that his company's proposed superfast Sonic Cruiser was destined for a long run. "On a scale of 1 to 10, I am at 11," he told journalists. "That's how sure I am that the Sonic Cruiser will go into commercial service." Good thing Mulally is not an odds maker. Just 12 months later, Boeing Co. killed the Sonic Cruiser amid a sharp slump in air travel.

Now, Boeing is trying again. At this year's Paris Air Show, beginning on June 15, the jetmaker is unveiling the latest details for its next big project: the 7E7. The superefficient plane, which could enter service in 2008, is critical to Boeing's future. Without investing in new commercial jets, Boeing will lose more and more business to rival Airbus Industrie, and, some experts fear, eventually fade from the industry. "This is a big deal for us," says Michael Bair, a Boeing vice-president who oversees the 7E7 program. "If we don't get it right, it influences our future in the business."

At first glance, it seems a good time for Boeing to launch a fuel-sipping jet. Carriers, battered by the falloff in travel, are desperate to cut costs. Boeing believes it could sell 2,500 7E7s in the next 20 years, as carriers retire the aging 767 and become more flush.

That's an ambitious plan -- and skeptics say the 7E7 faces huge challenges. To build the plane, Boeing would have to reengineer its production. It would need to overcome technical hurdles, including building a plane designed for both short and long hauls. And because Boeing killed the Cruiser, as well as plans for a 747 upgrade, carriers are loath to commit at this stage. Says one Asian airline exec: "We've been up and down this road a few times, and they've come up with nothing. Boeing cannot afford to promise the earth and end up with salt."

What exactly is Boeing promising this time? Nothing less than a jet that carries between 220 and 250 passengers but consumes less fuel than planes of similar size now flying, such as the Airbus A330-200 and its own 767. The 7E7 would also be the first commercial aircraft built mostly of composites. The carbon-reinforced material is stronger and lighter than the aluminum used in most jetliners. Boeing says the lighter plane would use 20% less fuel and would be 10% cheaper to operate than the A330-200. In the highly leveraged airline industry, such a saving could mean the difference between a loss and profit.

By building the plane with composites, Boeing hopes to cut its own production costs, too -- enabling it to aggressively compete with Airbus on price. The idea is to build a "monolithic" structure that requires fewer components. Boeing also aims to assemble each 7E7 in three days, compared with the 20 or so it takes to weld and rivet a 767. Boeing would do so by relying on key suppliers to deliver completed plane sections, meaning fewer workers would be required to actually assemble the 7E7.

None of this will come cheap. Development costs could reach $8 billion over five years -- and analysts wonder if Boeing can keep assurances it will keep costs below 3.5% of annual revenues. But Boeing execs insist they've got the financial wherewithal needed. Despite the worst airline slump ever, they say, Boeing is holding its own financially. Its commercial airplane unit will generate a 4% operating margin this year. And its defense affiliates are doing well, too. Last year, the entire company earned $2 billion in operating profit on revenues of $54 billion. And this year Boeing expects to generate $2 billion in cash.

Yet skeptics abound. While the 7E7 is technically possible, industry experts say that it will be difficult to build. For starters, composite materials are tricky -- and have never been used extensively on a commercial aircraft. It took Lockheed Martin (LMT ) Corp. 13 years to resolve lamination problems with its all-composite F-22 fighter. And though Airbus has used carbon in the tail section of its planes, the design is a leading suspect in a crash in New York in 2001. Any all-composite airliner would prompt intense regulatory scrutiny.

Building the plane also would require a radical departure from Boeing's current production practices. The company's history on making such shifts isn't reassuring. In 1997, in another effort to cut costs, Boeing ramped up production too quickly based on unrealistic assumptions. As a result, it lost control of the entire production system, forcing the shutdown of two assembly lines for 30 days. Boeing missed hundreds of airplane deliveries, and the fiasco cost the company more than $2 billion during the biggest boom in commercial airplane history. "It was a total disaster," says Hans Weber, a San Diego aviation consultant and expert in manufacturing processes.

Finally, there is the matter of building a plane that serves two markets: short hops in Asia and long-haul routes across the Atlantic. Pulling that off would require two versions of the plane with different wingspans. "It's going to take unprecedented engineering to reconcile this," says Richard Aboulafia, senior aerospace analyst at Teal Group consultants. One possible solution, according to a Boeing insider, would be to develop snap-on wing extensions. But that would be costly and technically daunting.

Given the challenges, Airbus executives insist they're none too worried. John Leahy, the jetmaker's chief of global sales, dismisses the 7E7 as the "Dreamliner -- a salesman's dream and an engineer's nightmare. " Boeing will be working overtime at the Paris show to prove him wrong. With its European rival gaining altitude fast, it may have no choice but to go ahead with its risky new project. Success would bring restored credibility and renewed market leadership. For Boeing, the alternative is unthinkable.

Corrections and Clarifications Boeing Co.'s 2002 profit was incorrectly stated. Boeing earned $2.3 billion in income before extraordinary items.

By Stanley Holmes in Seattle

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