A Plane That Could Change The Game

Boeing's 7E7 will slash costs for carriers and take half the time to build

Cutting costs has become an obsession for major carriers worldwide. Nowhere is that more true than in the U.S., where big airlines closed out July with a second-quarter loss of $2.1 billion, as they continued to battle rising costs. While foreign carriers tend to be in better shape, the industry knows the key to survival lies in being lean and mean.

If only carriers could get their hands on a Boeing 7E7 now. Experts say the plane, which will go into service in 2008, could redraw airline economics. Much has been said about the 7E7's fuel-sipping nature. But Boeing Co. (BA ) is luring carriers with other potential cost savings, too. And thanks to more efficient factories, it aims to build each 7E7 in half the time it takes to crank out a widebody jet. That would get new planes to carriers faster when demand surges. "The 7E7 is a significant step forward for the economics of a plane," says Peter Gardner, vice-president for technical issues at Cathay Pacific Airways Ltd.

While U.S. carriers are not in a position to buy new planes now, Continental (CAL ), American (AMR ), and Northwest (NWAC ) have all shown interest in the 7E7. Meanwhile, foreign carriers have ordered 62 7E7s, and Boeing expects 200 more orders by yearend. And while strong defense sales helped the company post second-quarter income of $607 million on $13.1 billion in revenues, reversing a year-ago loss of $192 million, Boeing is hiking its 2005 earnings forecast thanks to renewed strength in its commercial business. Says Boeing Commercial Airplanes CEO Alan R. Mulally: "We feel good about where we're going."

So will Boeing deliver? Much depends on getting its new manufacturing process right. In the 1990s, Boeing ramped up hard after putting in place a supposedly more efficient system -- with nearly catastrophic results.

This time, key suppliers believe Boeing will do better because it has been improving the work flow in its factories. "Nothing like a near-death experience to change bad habits," says Richard Aboulafia, an aerospace analyst at Teal Group. "Boeing's factories are more efficient than at any time in its history." Indeed, Boeing has cut the final assembly time of a 737 in half, to 11 days; Airbus has only been able to reduce its A320 final assembly from 40 days to 24.

With the 7E7, Boeing aims to work even faster. Suppliers will build huge chunks of the fuselage, which -- in a break with the past -- will be packed with plumbing, electrical systems, and computers before being shipped to Seattle for final assembly. By outsourcing more of the manufacturing, Boeing aims to build a 7E7 -- from start to finish -- in four months, rather than the traditional 12. The strategy, though, carries logistical risk, since it relies heavily on suppliers. Still, most analysts believe Boeing has established a sufficiently strong relationship with its partners.


If Boeing can build its plane faster, carriers stand to benefit. Typically, by the time airlines take delivery of a new plane, they must reconfigure the interior because the market has changed. That's expensive: It once cost Cathay $1 million to shift a toilet three inches on one 747. "If you cut the delivery time in half, you can respond to market changes and avoid costly interior makeovers," says Gardner.

Carriers also like how the plane could help cut costs and lift revenues. The plane is expected to be 10% cheaper to operate. Its composite fuselage won't require checking for cracks, which costs $2 million to $4 million per plane for aluminum jets. And its 20% better fuel economy will allow airlines to carry cargo on longer flights, a potential revenue-booster.

Boeing still faces plenty of challenges. Airbus says it will respond with an improved or new A330, which will closely match the 7E7's operating costs. Boeing also will have to manage a whole new way of building planes. And with delivery three years off, airlines have time to see if Boeing can hit its performance goals. But if it does, the 7E7 could be the best news the industry has had in years.

By Stanley Holmes in Seattle, with Michael Arndt in Chicago

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