A Plane, A Plan, A Problem

Early word on Boeing's 7e7 is positive, but it's under terrific cost pressure

For the first time in a long while, Boeing's (BA ) commercial-plane division has some good news. In closed-door meetings in Seattle on Nov. 12 and 13, airline executives told Boeing they liked how plans are shaping up for its proposed new 7e7 jetliner -- a plane designed to lower operating costs sharply for cash-strapped carriers. "The aircraft has developed positively," Lufthansa (DLAKY ) Senior Vice-President Nico Buchholz said. Then came the caveat: "But we have a way to go."

He's right about that. With Boeing Co.'s board expected to grant preliminary approval on Dec. 15 to market the 7e7, commercial-aircraft chief Alan R. Mulally has yet to convince suppliers and customers he can keep costs low enough to make the plane viable. Wall Street and the carriers reckon Boeing must develop the 7e7 for less than $8 billion, but that could be a tall order. Already, budget-busters are popping up, including a recent decision to build separate wings for planes targeted at the short- and long-haul markets. Says an international airline exec: "Boeing is saying the right things, but can it work smarter for less cost?"

The stakes couldn't be higher. Boeing badly needs a hit if it is to claw back share from rival Airbus. To succeed, the planemaker will have to slash development and manufacturing costs ruthlessly. Boeing won't give an exact price for the 7e7. But one thing is clear: Boeing must match or beat the amount Airbus jets fetch.While jetliner prices vary widely from deal to deal, airline execs say Airbus undercuts Boeing by as much as 15%. Boeing insists that the 7e7 will be attractively priced and still generate a 10% profit margin. "We expect to hit our numbers," says Michael Bair, the executive in charge of the 7e7.


To get there, Boeing is rewriting the way it does business. While the outfit will devise the 7e7's basic outlines, an unprecedented amount of detail work is being farmed out, especially to Japanese companies. For the first time, Mitsubishi, Kawasaki, and Fuji, which helped build the 777, have been invited to design and produce the fuselage and wings. Boeing is taking this step in part to get Japan Airlines and All Nippon Airways to launch the 7e7. But Boeing also expects the Japanese government to provide money to local suppliers to help fund the development. Boeing's board has said it wants suppliers to pick up at least half the costs.

In another break from tradition, Boeing wants suppliers to take equity stakes in the project in exchange for absorbing some risk. Analysts say Boeing's Japanese collaborators probably will. But getting other suppliers to share the risk is by no means guaranteed. According to company insiders, Boeing execs in mid-November expressed concern that they haven't yet lined up enough equity partners.

Finally, Boeing is demanding that suppliers cut their costs by 20%. It wants suppliers to fund their own development work, for example, and is offering extremely low prices to do so. "Boeing is asking for the sun and the moon," said a senior exec for a major U.S. supplier.


Still, it's nearly impossible to say how much the 7e7 will cost to develop and produce. Never before has an airliner relied so heavily on expensive composites. Half of the 7e7's skin and structure will use high-tech materials. Composites cost up to eight times as much as aluminum, and the newfangled plane will require suppliers to retool the manufacturing process. "All of the partners are concerned about whether we can build this plane affordably," says an exec for a large supplier. That, say people close to the project, is why they aren't eager to share the risks.

Boeing's efforts to keep its Japanese customers happy also could push costs above expectations. The company bowed to JAL and All Nippon's demands that it build a short-range version of the plane, which will require a separate wing design and engine -- possibly adding more than $1 billion to costs. Moreover, Boeing plans to ask General Electric, Rolls Royce, and Pratt & Whitney to make engines exclusively for the 7e7. That, says Richard Aboulafia, aerospace analyst at the Teal Group Corp., "will make engine manufacturers less likely to help Boeing financially in the costly certification and testing process."

The last new Boeing plane -- the 777, launched in 1990 -- cost twice the budgeted $6 billion. Many Boeing watchers believe the 7e7 could end up a $12 billion project, too. "I think it's going to be an expensive airplane to do right," says a Boeing consultant. "My real fear is that they will not face up to it." Boeing had better prove the skeptics wrong. The company's future depends on it.

By Stanley Holmes in Seattle

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