On-Time 787 Delivery? Dream On

Boeing announces daunting tech problems and postpones the launch of the cutting-edge 787 by months

Aircraft No. 1 sits inside a cavernous plant in Everett, Wash., its needs tended to more devotedly than those of any monarch. For every mechanic working on the plane, there are hundreds more engineers, managers, and other staffers. The retinue seems to grow by the day, and with it, concerns about when the 787 Dreamliner, viewed as the future of Boeing (BA) and of the commercial jetliner industry, will be ready to fly.

In the face of growing skepticism, Boeing on Oct. 10 announced a six-month delay in its planned initial deliveries of the 787 Dreamliner due to "continued challenges completing assembly of the first airplanes." The Chicago aerospace giant had maintained that the first flight test of its new "plastic" plane would be in mid-December—already delayed twice from the original first flight in August—and that its first delivery would follow in May, 2008. But now the company's long record of delivering new airplane programs on time will come to an end with the Dreamliner—though the company claims that the delay will not have an adverse financial impact to earnings. "We are disappointed over the schedule changes that we are announcing today," said Boeing Chairman and Chief Executive Officer Jim McNerney. "Notwithstanding the challenges that we are experiencing in bringing forward this game-changing product, we remain confident in the design of the 787, and in the fundamental innovation and technologies that underpin it."

In an interview with BusinessWeek on Oct. 9, Boeing had acknowledged for the first time what may be the program's biggest challenge right now: integration of the systems software that controls basic, critical functions such as navigation and fuel usage. People who have come into contact with the plane say that could delay a test flight until January, which Boeing officials are now confirming.

Company Claims No Financial Impact

Boeing declined to discuss the status of Aircraft No. 1, but cautioned that its status changes daily. It noted in a statement that "pacing issues" for first flight and first delivery "present risks to our schedule beyond current plans" and that it's working to understand the full implications of "our continued struggle with these issues."

The process of building any plane is an intricate orchestration of millions of parts and thousands of people. But the Dreamliner raised the bar. Not only would Boeing build the world's first plane made of 50% composite fiber, which allows it to be lighter and more fuel-efficient, but it would also outsource much of the never-before-attempted manufacturing work around the globe. As partners struggle to master new techniques on Boeing's schedule, delays have inevitably set in, and Boeing has thrown immense resources at mounting problems, sending teams of technical experts to work with overseas suppliers to share best practices. Such efforts caused the company to increase 2007 research and development costs by a half-billion dollars in the second half of the year.

Just how far those costs may exceed the contingency funds that Boeing has set up will determine whether a one-time write-off or revised earnings guidance is in the offing. Boeing officials claim the delays will have no financial impact. That question was at the heart of an unusual Oct. 5 analyst report put out by Lehman Brothers' (LEH) Joseph Campbell Jr. titled, "Time for More Frank Commentary," the report was essentially a plea for Boeing to concede there could be delays beyond the one-to-three months many industry experts expect. "Thus far, Boeing has been able to avoid any need to adjust earnings downward, but it is less clear that this can continue if the program needs to slip," wrote Campbell. Boeing's stock closed down 2.2% on Oct. 5, and has dropped more than 5% since Campbell's remarks.

Airbus Delay Had Provided an Opening

Even though Boeing's business has become more diversified over the past decade, the commercial airplane division still drives the stock. And investors are spooked by the ghost of manufacturing disasters past. In 1997, after refusing to disclose mounting production problems, Boeing revealed that it would have to stop two production lines to catch up on behind-schedule work, pay millions in late delivery fees, and book a one-time charge of $2.5 billion. Then there's Boeing rival Airbus, which unveiled a stunner of its own last October—a two-year delay in its A380 super-jumbo jetliner. That's projected to knock more than $6 billion off parent company European Aeronautic Defence & Space's (EAD.PA) bottom line through 2010.

Such memories haunt Boeing executives. If mounting delays had gone undisclosed, McNerney's position would have become increasingly uncomfortable. When he took over as Boeing CEO in July, 2005, he promised a more open and transparent company following a series of scandals that had plagued the planemaker. What's more, Boeing commercial airplane execs had vowed that the next time it built a new jetliner, it would never repeat the mistakes of the past. And Boeing has been more forthcoming than in the past, admitting delays to earlier test flight dates due to higher-than-anticipated amounts of uncompleted work and problems with the flight-control software system that are now largely resolved.

Airbus' delay debacle in 2006 with the A380 gave Boeing an opening to gain a competitive edge. When Airbus was late delivering the A380, Boeing execs wanted to prove to customers that it could deliver a more complex and revolutionary airplane faster and cheaper than its key rival—and on time. The Dreamliner is that airplane. And Boeing was tantalizingly close to fulfilling its promises. The first commercial jet made out of lightweight carbon fiber promises airlines a 20% savings in fuel compared with similar-sized aircraft and a 10% improvement in overall operating economics. The 787 program has set new sales records. Boeing has firm orders for 710 of the ultra-modern, twin-engine aircraft. The Dreamliner has been the most successful commercial aircraft launch ever, with a backlog of $110 billion.

All-in-One Software Issues

Now it must contend with integrating the system software that controls navigation, fuel systems, air data, electric power switching, and a host of other capabilities. "It's a big integration task to do for the first time," says an executive whose company is one of the systems suppliers. In the past, each of these functions came in a separate black box, and each had its own computers and software systems. But that proved cumbersome and heavy. So Boeing came up with a revolutionary new architecture that aims to integrate the different software functions into one central computing resource, built by Smiths, now a subsidiary of General Electric (GE).

The new system saves weight and will be more efficient. But the challenge is to integrate the different software functions into one processing unit just like how Microsoft (MSFT) integrates different software programs into Windows Office. Unlike Windows, though, engineers have to ensure each software system operates independently, so if the pilot opens up the navigation software, the plane will navigate. Blue screens, or software crashes, are simply unacceptable. "They are not going to fly the first airplane until they prove out the software in systems integration," the executive said. "It's as big an issue as any."

Finally, Boeing still has to put the first six Dreamliners through what execs admit is a shortened but demanding Federal Aviation Administration flight-test program. Vice-President Michael Bair acknowledged the compressed flight-test schedule of about six months, vs. 11 months for its 777 jetliner, leaves virtually no margin for error if the test uncovers a major performance glitch requiring redesign or retesting. No new plane in the history of commercial jet aviation has sailed through a flight test without snags that set the program back weeks or months. "We are eating into our buffer," Bair said at a September press conference.

"Still a Killer App"

Airline industry executives are willing to be patient, up to a point. "The question is how long the delay would be," says John Pleuger, president of International Lease Finance in Los Angeles, the world's largest aircraft leasing company and Boeing's biggest Dreamliner customer, with 74 orders. "But we've always told Boeing that it's more important to get it right."

In the end, what really matters is whether the performance of the Dreamliner matches the promise. "If the Dreamliner performs as advertised then it's still a killer app," says Richard Aboulafia, aerospace analyst at Teal Group. "These delays will be remembered with a shrug and the usual sense of jaded nostalgia."

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