Development of Boeing 787 (Dreamliner)
Table of Contents
On October 26, 2011, ANA (All Nippon Airlines) flew the first commercial flight on a brand-new Boeing aircraft from Tokyo Narita to Hong Kong. Per Boeing’s conventional numbering scheme, this aircraft was numbered 787. However, this was a special aircraft, and Boeing had decided to market its exclusivity by marketing it as “the Dreamliner”.
The Dreamliner brought many advances to modern commercial aircrafts. These include, extensive use of composite material for lighter weight, 20% fuel efficiency over the 767 (which it intended to replace), substantially more open space in the cabin, 65% larger windows, mostly electrical flight systems, raked wingtips, and noise-reducing chevrons on its engine nacelles. While these and many such advancing features have set a new bar for aircraft design and development, there is another side of the story (perhaps more accurately a part of the story) without which the picture will not be complete. And that is about how the Dreamliner got here – the years of its design and development.
The Dreamliner was more than 7 years in the making, over 3 years beyond how long it was supposed to take. And the company had to spend way over what it had initially budgeted for. While is rewriting history in many positive ways, during its development phase as well as its early years of operation it wrote a few pages in the history books in many other ways – in the form of lessons to be learned from Boeing’s missteps and failures in developing this aircraft and putting it in stable operation. And then, it must have done many things correct, to be able to get the project back on track and finally deliver on its promise (albeit three years late).
In this report, we intend to present the facts on the project that was undertaken to build the Dreamliner.
Below is a chronological ordering of events as they took place during the development of the Boeing 787 aircraft.
15 Jun: The name “Dreamliner” chosen by online vote. Earlier, the aircraft was only referred to as the 7E7.
16 Dec: MILESTONE: Everett selected as final assembly
Apr 26: MILESTONE: First order (50 aircrafts) by Launch Customer (All Nippon Airways)
Delivery date set for late 2008
Jan 31: BASELINE: Baseline dates confirmed:
First test flight date confirmed as August 2007
Delivery date confirmed as May 2008
Jul 8: MILESTONE: First Press Display - Rollout
Aug: BASELINE: Original date for Maiden flight
Sep 5: SCHEDULE: First delay - 3 to 4-months delay for first test flight
First test flight date moved to Nov/Dec 2007
ISSUE: Shortage of bolts and issues with flight controls
Delivery date on schedule (for May 2008)
Oct 10: SCHEDULE: Second delay. 6-months delay for first test flight/delivery
Jan 16: SCHEDULE: Third delay. 3-month delay for first test flight/delivery
ISSUE: Problems with unnamed suppliers and slow assembly progress
First test flight date moved to June 2008
Delivery date moved to early 2009
Apr 10: SCHEDULE: Fourth delay. More delay for first test flight/delivery
First test flight date moved to December 2008
Delivery date moved to September 2009
May: BASELINE: Original date for First Delivery
Nov 5: SCHEDULE: Fifth delay - First flight moved to 2009 Q2
ISSUE: Incorrect fastener
Jun 23: SCHEDULE: Sixth delay - First flight moved to 2009 end.
ISSUE: Alenia has halted production of its mid-section barrels of the plane, after inspectors discovered structural flaws.
Jul 7: ISSUE: Another lithium-ion battery destined for the Dreamliner fails at a testing facility in Rockford, Illinois.
Dec 15: MILESTONE: Maiden flight
Aug 2: SCHEDULE: Seventh delay – Delivery: Mar 2011.
ISSUE: A Trent 1000 engine fails at a Rolls-Royce facility during testing. It causes further delay, pushing first delivery back to early 2011
Nov 09 ISSUE: Test aircraft suffers in-flight electrical fire, forcing an emergency landing in Laredo, Texas.
Jan 19: SCHEDULE: Eight delay – Delivery: Sep 2011.
ISSUE: In-flight electrical issues.
Aug 26: MILESTONE: Boeing gets approval from the FAA, certifying the 787.
Sep 25: MILESTONE: Date for First Delivery
Oct 26: MILESTONE: First Commercial Flight
3. Industry ContextTop
This aircraft was conceptualized in the early 2000’s. Those were post-9/11 days, and the market had changed from the heydays of 1990’s. Fuel prices had started to trend up, and airline companies had started to focus more on the bottom-line. Even Boeing’s home turf (its position as a leader of the commercial aerospace industry) was being challenged by Airbus. The key factors effecting the airline industry in those days were:
Growing interest in efficiency: In the post-September 11 attacks, petroleum prices were rising. Companies were focusing more on efficiency. The chart below illustrates the dramatic increase in crude oil price from late 90’s to around 2008, the time-period that shaped the development of the 787.
Fig 2. Chart on Historical Price of Oil
Move from hub-and-spoke model to point-to-point model: Due to growth in air traffic from all over the globe as compared to just big hubs, there was a lot of congestion. To solve this issue, a move from the hub-and-spoke model to point-to-point model was taking place.
Fig 3. World air travel passengers by Volume (1950 to 2012)
Fig 4. Number of US Cities with over 200K population
Challenge from Airbus: The third factor was Boeing’s own situation and its leadership position being taken over by Airbus. Airbus SE (then known as EADS) was set up in the 1970’s in Europe to compete with Boeing. At that time, the commercial aerospace industry was pretty much monopolized by Boeing. Over time however, Airbus started to close in on the gap and by early 2000s Airbus had started to lead in the number of order (and shortly thereafter, in the number of deliveries). This was a clear threat to Boeing’s position and status in the market. Boeing’s existing line of products were not doing good, and they needed to be replaced.
Table 1: Comparison of Orders of Boeing and Airbus
Table 2: Comparison of Deliveries of Boeing and Airbus
4. Organizational Context
4. Business Model
The creation of the Dreamliner was required in order to strengthen Boeing's business model and drive it forward through the extension of its product-line. Thus we need to take a look at Boeing's business model (at least at a high-level) in order to understand this project better.
At its core, Boeing's (Commercial Aviation division's) business model is about selling safe, secure, comfortable, efficient and highly-maintainable aircrafts to its clients (Airline companies) at competitive prices. As technology advances, the expectation of consumers and regulatory bodies increases and its competitors come up with alternatives, all of qualifiers within its business model needs to shift in order to maintain differentiation and competitive advantage. In the Commercial Aviation sector this results in redesign of existing aircrafts from time to time. However, once in a while, the scale of the shift needed becomes so huge that a redesign is not capable of delivering it. In such a case, an aerospace company, such as Boeing decides to develop a completely new aircraft. Development of the Dreamliner was just such an attempt.
Below are the key components of the Business Model that Boeing wanted to revitalize with the Dreamliner:
Extension of Product Scope - By offering a new aircraft at a new passenger capacity and range level.
Extension of the Basis of Differentiation - By offering a new aircraft with an attractive fuel efficiency, low levels of engine sound, much larger cabin space and higher level of passenger comfort.
Attractive Pricing Structure - By setting up an expansive supplier/partner network for components to be developed at a highly competitive price.
Expansion of Value Network - By the huge expansion of the supplier network.
We'll later explore how these choices made by Boeing while, making the Business Model stronger, adds a lot of risk to the project. The differentiation aspect leads to Boeing pursuing certain Technological paths with the Dreamliner, thus increasing technology uncertainties and risks, and the expansion of the supplier network and Boeing's increased dependency on it leads to procurement related risks.
5. Project Case
Boeing understood the market dynamics and direction very well. Based on its understanding of the key driving factors in the market, Boeing believed that if it could deliver on extraordinary efficiency and comfort in a mid-sized wide-body aircraft with a capacity in the range of 200 – 300 people, it could lead the surge into a point-to-point model as compared to today's hub-and-spoke model. That would not only provide a replacement for its fledgling line of products but also reinstate its leadership position in the market.
The Dreamliner's "Project Case" would have consisted of the following:
Change of Market Trend: Boeing believed in a change of market trend towards a point-to-point model with more smaller aircrafts connecting more number of smaller traffic destination. Per Boeing, this assumption was supported by their market study.
Opportunity Exploitation: The core assumption combined with the fact that there was a limited product offerring in the mid-passenger capacity segment for aircrafts, it meant that there was an opportunity that Boeing could exploit.
Threat Diffusion: The next point in the project case must have been diffusion of threat from Airbus by leading the surge into the point-to-point model of aviation.
In commercial aerospace business, there are two sets of customers that any aircraft product impacts – one is the Airlines, who buys and operates the aircrafts. The other is the passenger, who buys a seat on the aircraft to get from point A to point B. Thus, Boeing built its key requirements to target both these customers:
Efficiency Requirement: Make the Boeing 787 20% more fuel efficient than the Boeing 767, which it was intended to replace.
Product Differentiation Requirements: Make a remarkable improvement in the passenger experience through several product differentiations from its competition:
Low engine noise both inside and outside the cabins
Improvement in air quality and cabin pressure
Improvement in cabin ambiance
Higher cabin humidity levels
Product Segment Requirements: Then there were requirements that would allow the product to actually target a specific market-segment. These requirements can also be defined as standard requirements or specification requirements:
Ability to carry between 200 to 300 passengers
Cruising speed: Mach 0.85
Maximum speed: Mach 0.89
Range at typical seating: 7,355 nmi
While Boeing’s target end-product was a commercial aircraft, it had to accomplish many other objectives to be able to deliver and operationalize the brand-new aircraft. In addition to that, the aircraft also consists of many smaller components, each of which had to be designed and built through almost like a mini-project.
Thus, the whole project can be broken down into the following.
The Product: The final product that Boeing needed to deliver was a flight-worthy commercially viable and highly efficient aircraft that took passenger comfort to the next level. An aircraft consisting of the many components. Some of the key ones are:
Fuselage – Front/Mid-section/Tail
Electrical Wirings/Plumbing/Air Conditioning
Others - The list of components identified above only consists of the highly visible and evident components. There are many components which may not be that visible – like screws and bolts, tapes etc.
Product Development Support Structure: While developing a new aircraft, a support structure is required to support the development process. Though the development support structure is not end-deliverable it is an intermediate deliverable that is required to get to the end-deliverables. For the Boeing 787 many things were needed to be developed to be part of this development support structure:
Development Supply Chain: This is the supply chain that is used to source parts for the development of the aircraft, building the prototypes, display models as well as the first test aircrafts. In case of the 787, the development supply chain was inherited as the operational supply chain. During the process, it did see some changes within the supply chain (most-notably the financial issues of two critical suppliers which were then acquired by Boeing).
Software for Design & Development: A unique custom product may need unique tools for its development. Aircrafts need software for design and coordination during development. The 787 was no exception.
Plant for Assembly (of the Prototypes and Test Planes): Large products need large spaces where they can be put together – an assembly plant. The 787 needed to have one as well, or at least a part of an existing one.
Transport Vehicles: To gain efficiencies by transporting the parts by air and using a point-to-point model, Boeing decided to transport parts/components of the 787 using modified 747s. Modifications to existing 747 were made to be able to carry parts of the Boeing 787.
Transition to Operations: Moving a product from development to operations is a big step. A form of a bridge is needed for this transition to happen smoothly. Transitional work is mostly related to change management. In case of a new aircraft launch, this typically involves changes to airport infrastructure etc. Boeing tried to minimize on this by keeping the plane’s interface design the same as existing planes (the Boeing 767 and 777) which were operational at the time of the launch of the 787.
Operational Support Structure: In the case of commercial aircraft development (as in any product development for manufacturing project), it is not enough to just develop the product. The company also needs to develop a support structure that the aircraft’s successful operations must rely upon. For an organization that is already in the business of (and is a leader in) selling aircrafts, portions of this structure may be pre-existing. Some parts may need to be extended, while others newly developed. The parts of this operational support structure include:
Operational Supply Chain: The operational supply chain is the supply chain that is used to meet customer demand for the product once the product has been launched. Good portion of this supply chain is derived from the development supply chain. However, as the demands on an operational supply chain is very different from a product development supply chain, it could be considered a different scope entity. Many-a-times the development supply chain is simply extended or augmented for use as the operational supply chain (esp. if most of the links in the chain must deliver something unique). In the case of the 787, that was mostly the case – the supply chain used for product development was used for meeting ongoing operational demands.
Sales Forces Extension/Augmentation: A new aircraft means newly trained sales force, and likely more of them.
Training Structure: There needs to be an organization that supports the training process of all the airline personnel who needs to be trained. This organization needs supplied with a workforce of trainers/instructors and be enabled by the right software (e.g. simulators for training).
Contact Center/Maintenance and Support Organization: This is the organization that is responsible for supporting the product in operation – provide a way for customers (airlines) to contact the manufacturer in case of issues and provide maintenance. This again will be an extension/augmentation of an existing organization, but to add strength and substance for the new product.
While the aircraft went through many changes during the development process – based on feedback through numerous verification steps (for instance design changes per feedback from wind tunnel tests), the changes were not significant when compared to the overall scope of the development effort. Nevertheless, it was not an option for Boeing to have delivered half an aircraft to its customers.
For the 787, it seems all changes were well managed through the development, review and certification process.
Back in 2004, Boeing estimated a cost of $5.8 billion to develop the new aircraft. However, after over seven years of development and cost-overruns, the total price-tag of developing this product stood at a staggering $16 billion (as per estimates from Seattle Times – as Boeing does not breakout development cost of specific aircraft development programs). That amounts to an unbelievable 158% overrun in cost.
Baseline (2004): $5.8 billion
Final (2011): $15 billion
Variance: $9.2 billion overrun
There are a few factors that are not included in this number. As some of these factors are big elephant sized, we need to take those into some consideration as well. So, let’s look at the full view of what Boeing was spending on the aircraft program before the product was first delivered. Since, we don’t have any numbers from Boeing, we’ll be using estimates from the Seattle Times.
Development Cost: $15.0 billion
Build (Batch 1–40 aircrafts): $16.0 billion
Build (First 3 planes): Unknown
Buy troubled partners: $1.0 billion
TOTAL Cost of Program $32.0 billion+
A breakdown of the budget and the study of variances of the various budget components would have been very insightful. However, we do not have a breakdown of the budget and variances at component level.
Budget Variance Timeline
We do not have a lot of information on budget variance for this project, as Boeing has not been reporting on budget updates to the media.
However, we have two points in time when the budget of the project was reported – one in 2004 (an estimation at the very beginning), and another in 2011 (actuals which was declared a bit later). For the actuals, we have two data points – one reported by Boeing and another reported by the Seattle Times (derived based on calculations on Boeing’s overall financial reports – Boeing did not separate out the spend on the Dreamliner project in the financial reports).
We do know a few other factors and can make a few assumptions:
Boeing involved several suppliers from around the globe. The deals with these suppliers were rev-share deals, and there were clauses for payment on delivery of the final product. So, Boeing would not have paid entire contract amounts to these suppliers. A workable structure of a deal would have rather involved a structure of the following form:
Payment on signing
Payment on component delivery
Payment on successful integration
Payment on delivery of the first 787 to customer
There may be intermediate payments, but for the purposes of our analysis, let’s assume none.
Boeing had to buy two of its suppliers to ensure continuity, and prevent weakening of its global supply chain for the 787.
2008: $55m for Vought’s stake in Global Aeronautica, a joint venture with Alenia of Italy which assembles 787 fuselage sections.
2009: At least $580m for the facility that makes chiefly composite sections for the 787 - South Carolina plant from Vought Aircraft Industries – owned by the Carlyle Group, the private equity firm
Boeing had its internal team working on the project through the entire period of the project.
Boeing had set up a team of third party consultants to support the training and coordination with the suppliers.
Boeing was under tremendous stress to deliver on this project as early as possible. So, from the point trouble hit the project, we don’t believe Boeing would have lowered internal resourcing for the project. Instead, it would have maintained the level of resourcing or increased to a feasible extent.
The counter-force to the argument of increasing resources is that, we know additional resources beyond a certain point could hurt a project rather than helping it. And we’re sure that Boeing’s management was smart enough to realize that as well. So, resourcing would not have exceeded beyond a certain point – unless the addition of new activities.
All these data points and assumptions allow us to derive a possible picture of budget timeline and variance for the 787 project.