Outsourcing, Technology or Bad Luck – What’s Behind Boeing’s Dreamliner Woes?

 

Dreamliner-Boeing

The Boeing Dreamliner has many good things going for it. It is lighter, can travel long distances, is cheaper to operate (by 30%?), passengers are more comfortable, etc. Part of the weight reduction comes from not just cutting-edge composites in the fuselage and the body but also a bunch of innovations with electronics and associated systems to replace legacy hydraulics and pneumatics. 

A small part of that reduction in weight comes from using lithium-ion batteries, which are unfortunately prone to overheat and catch fire – which is what happened recently and grounded the entire Dreamliner fleet the world over. Before delving into that, let us take a small detour to see why the Dreamliner is such a strategic bet by Boeing on the future of flying and aviation. 

Airbus, Boeing’s principal competitor, thinks that the future of airlines and flying is a hub-and-spoke model. Gigantic aircraft fly between major population centers and airline hubs. Those hubs then ferry passengers to their final destinations on smaller planes. Its Airbus A380 is designed to ferry passengers between these mega hubs. 

Boeing on the other hand thinks that passengers will prefer flying from point A to point B and avoid the current hub-and-spoke model. So its 787 Dreamliner is designed to carry a lot of people efficiently and comfortably from one point to another that is up to 7000 miles away:

That means it (the Dreamliner) can fly nonstop routes that larger planes can’t profitably support, such as San Francisco to Manchester, England or Boston to Athens, Greece…“It’s going to be a hub-avoiding machine,” said Ernie Arvai, partner with aviation consulting firm AirInsight. “You’d pay extra not to go to (London’s) Heathrow.”

What this means is that both Boeing and Airbus have a lot riding on (in?) the 787 and the A380, respectively.

In 2011, Boeing was quite happy when, after numerous delays, the first Dreamliner was delivered to ANA (All Nippon Airways). The first commercial flight from Tokyo to Hong Kong on Oct 26, 2011 was deemed “Spectacular“. Most maiden Dreamliner flights for different airlines around the world had been garnering similar attention and praise. Ironically it was an emergency landing for an ANA Dreamliner (because of the lithium-ion battery catching fire) that triggered the current crisis, following, as it did, a battery unit catching fire in a parked Japan Airlines Dreamliner just a few days before that.

The subsequent grounding of the 787s is not good for either Boeing or various global airlines that must now use less efficient, older and more expensive (to operate) aircraft on the Dreamliner’s routes:

a. Boeing’s reputation (and the Dreamliner’s) takes a (big?) hit. So far, it hasn’t seen any massive cancellations hitting its order book, but the longer the FAA investigation and probe goes on, the higher the probability that customers balk at taking delivery of more such planes.

b. Airlines are going to lose some money, though it is possible that they may seek compensation from Boeing:

Mann estimates that airlines flying the Dreamliner will lose $2.5 million per aircraft for every month the model is out of service. ANA, which has the largest 787 fleet, with 17 currently in service, will be more severely affected. Here’s one projection, courtesy Reuters”Keeping the 787s on the ground could cost ANA alone more than $1.1 million a day, Mizuho Securities calculated, noting the Dreamliner was key to the airline’s growth strategy.”

Naturally, inquisitive minds want to know how Boeing and the Dreamliner got to this point. 

The three leading theories are:

a) Technology - The lightweight lithium-ion batteries used in the Dreamliners have a tendency to overheat and catch fire. But why did they use these batteries and not, say, Nickel-Cadmiums or others? Simple. Weight.

But then again, so many technologies in use by mankind today are safe only under very specific operating conditions. So as long as Boeing took adequate measures to assure that the batteries wouldn’t overheat, it would have been in the clear. Unfortunately for Boeing, that does not seem to be the case.

The latest here is that America’s FAA and Japan’s officials are pursuing slightly divergent investigative paths (while cooperating with each other though)

One facet of the effort led by experts from Tokyo appears to concentrate heavily on potential problems with the batteries themselves, while their counterparts in the U.S. seem more centered on possible hazards stemming from the manner in which the batteries interact with the plane’s novel electric grid.

It might take a while (or not) for the investigations to conclude, for the “root cause” to be identified and fixed. What must be frustrating is that in the 1.3 million hours of test flying, Boeing did not see (page 1, last paragraph) this problem even once. 

b) Outsourcing – An important sidebar for the lithium-ion technology discussion from above is that these batteries, the systems that charge the batteries and various other parts of the Dreamliner are made by a staggering array of globally dispersed suppliers.

According a CNN article, 45 companies supply the major parts and more than 100 supply the smaller ones, including the electronics. Sliced another way, 70% of the planes parts come from American suppliers and 30% from global suppliers. Now, one such supplier, the Japanese company “GS Yuasa” is under the microscope because it made the fire-catching batteries.

And this is where the outsourcing argument comes in. Those that blame aggressive and excessive outsourcing argue that while outsourcing may result in labor-cost savings in the short-term, in the long-term, outsourcing causes cost overruns, loss of design expertise and problems with quality. 

Links to various articles blaming outsourcing here, here, here (widely quoted LA Times article) and here

Those arguments certainly sound plausible…but it is rather difficult to blame outsourcing (only?) as the culprit. The nature of the airline industry over the last 10 – 15 years is such that global supply chains are the rule, not the exception. Suppliers in this industry include many venerable names with deep experience and expertise. Consider GS Yuasa. The company is no greenhorn. It is a 100+ year old company that has been in the battery making business for a long time (though Lithium-Ion batteries are relatively new for it). And Japanese companies in every vertical are known the world over for their QA/QC processes. 

What we can expect for sure is Boeing conducting a rigorous and thorough investigation into the outsourcing angle – not just because of the hundreds of unfulfilled Dreamliner orders but also because its operating model is at risk here. 

c) Bad Luck - Luck of course has a lot to do with this and at the same time very little to do with this. More than anything else, the timing is bad. New planes also experience many teething issues and the Dreamliner is no different…So while it still looks like Boeing has a hit on its hands with the Dreamliner, this is the kind of publicity that lingers in the public mind long after the underlying issues have long disappeared. 

If there is one thing Boeing must be happy about today, it must be diversification. Boeing’s 737 and 777 lines are “printing money” and it can’t make these planes fast enough to meet demand. Still, with its reputation, future sales and jobs at risk, it must be waiting for Dreamliners around the world to spend more time in the air and less time in their hangars. 

 

3 Responses to “Outsourcing, Technology or Bad Luck – What’s Behind Boeing’s Dreamliner Woes?”

  1. Some interesting thoughts on Brand Equity and Crisis Management as they relate to Boeing (and GS Yuasa)

    http://www.forbes.com/sites/richardlevick/2013/01/25/the-dreamliner-boeings-big-brand-hangs-in-the-balance/

  2. Interesting read from The New Yorker on what might have gone wrong here…but from a Boeing/McDonnell Douglas merger/history perspective

    http://ow.ly/hb283

    (spoiler alert: it seems to blame outsourcing…)

  3. Various other perspectives and commentary from Kellogg faculty on Boeing and Outsourcing. Highly recommend it.

    http://bit.ly/WRkqYo

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