Boeing's Dreamliner Experiment Already Paying Off

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Boeing Co.'s next-generation 787 Dreamliner marks a sharp break from the old way of doing things at the world's largest aerospace company, a move that's already paying off in dramatic fashion.

As of last week, Boeing (BA) had booked 185 order commitments for the Dreamliner this year, and that was before Australia's Qantas said last Wednesday that it may buy up to 115 Dreamliners, worth more than $15 billion.

That level of demand by airlines around the world has ushered in a historic year for Boeing, helping its stock sail to an all-time high, while also giving arch-rival Airbus a run for its money.

"Airbus had Boeing on the ropes heading into 2005, but Boeing fought its way back with the 787 this year," said Matt Collins, an analyst at Edward Jones.

Even cash-strapped U.S. airlines like Northwest Airlines this year ordered 18 Dreamliners and Continental Airlines ordered 5, lured by its promise of greater fuel efficiency and lower maintenance costs made possible by the plane's extensive use of lighter-weight carbon-fiber construction materials.

"From design to materials to production, the Boeing 787 is a completely different aircraft than those previously produced," said Giuseppe Giordo, an executive with Alenia Aeronautica, an Italian aerospace contractor that is working on the plane.

When it comes into service in 2008, few of the innovations will be noticeable to passengers. But it's the airline executives who are excited about the Dreamliner, and that's what matters most at Boeing headquarters.

Smart, Not Sexy

The plane's sticker price, starting at $125 million, is kept low because outside contractors are doing more work than ever before, reducing the cash outlays Boeing has to invest in production.

What the Dreamliner lacks in glamour it makes up in dollars and cents.

Indeed, Boeing has given up the notion of having an unusual look in favor of conventional contours, underlining the airline industry's hard-nosed focus on business basics as it weathers an era of record-high jet-fuel prices and lower airfares.

With the Dreamliner now in the spotlight, it's easy to forget that the plane surged to the top of the company's drawing boards by leapfrogging over plans for a much faster and more sophisticated jet.

Yet it's the Dreamliner's cutting-edge technologies like composite materials -- in place of old-fashioned aluminum -- that make a more affordable plane possible at all.

"We're at a point now where we can build these composite airplanes for less than aluminum airplanes," said Boeing executive Mike Bair, who is in charge of the 787 program.

Composite Picture

When passengers step onboard a Dreamliner when it goes into service in 2008, what they may notice first are the larger-than-usual windows -- made possible by having a fuselage built carbon fiber, which is stronger than conventional materials.

Airline executives already knew that composite skin costs less than aluminum to maintain.

For years, composites were common on tail sections, but using them for the fuselage as well as the wings is an unprecedented step forward in commercial aviation.

Airbus has long been seen as the industry leader in using such materials. With the Dreamliner, that's no longer the case, said William Alderman, head of Alderman & Co., an aerospace investment bank and advisory firm in South Norwalk, Conn.

"Boeing was less aggressive on new materials in aircraft than Airbus, and now Boeing is more aggressive," he said.

Composites also have become ubiquitous, now found in everyday items like ski poles and sports cars, making them more affordable for Boeing to obtain.

In planes, there are obvious advantages to using composites.

They're lighter than most metals and they don't have the corrosion and fatigue factor that come with aluminum. On the 787, maintenance costs will be 30% lower than the 767 it replaces, according to Bair.

Boeing says travelers will complete long-haul flights on the Dreamliner feeling fresher than on conventional planes because the composite fuselage allows for maintaining a more comfortable level of pressurization inside the cabin.

Another advantage of composites: Boeing expects to get more for its money.

For every five to six pounds of aluminum it buys, only one pound of that may end up being built into the plane's body, according to Bair.

'Additive Process'

"Composites are just the opposite," he said. "You probably get 90% of the material flying away because it's an additive process."

A fuel-thrifty design also is thought to help airlines keep their budgets more stable, even in a time of sharp price swings.

That may be the tonic domestic airline customers need as they wrestle with huge fuel bills.

Yet so far, Northwest Airlines and Continental Airlines (CAL) are among the only major U.S. airlines that have gotten in line to shop for Dreamliners. And Northwest has gone bankrupt since placing its order. Others, like American Airlines (AMR) , are making do with their current fleet because money is so tight.

John Greenlee, Continental Airlines' director of fleet planning, said that the 787's fuel efficiency is a "huge attraction" but it's more than that.

"They've tried to make a true comprehensive design from the start," he said. That includes looking at how configuring planes helps or hurts their residual values and how much maintenance will be needed by using composite materials.

Greenlee adds that the plane's simplified choice of interiors and ability to quickly swap engines make it easier to sell it to another airline, giving it a higher value in the end.

The 787 has a list price of $125 million to $135 million, which is in the middle of the range for Boeing's 767 line.

There will be three versions of the 787, capable of carrying anywhere from 210 to 330 passengers. The range will span 3,000 to 8,800 nautical miles, depending on the model.

Its engines, made by General Electric (GE) or Rolls-Royce, will also be more efficient with fuel.

Boeing is also borrowing another page from the Airbus playbook by giving more work to contractors.

"What Boeing has done is stepped up to the bar and recognized the improvements to production and design that Airbus has brought to the industry, yet it has exceeded some of those," said Alderman.

In the wake of a machinists strike that halted production on Boeing's commercial aircraft line this year, some analysts say the 787 is going to change labor-management relations at the company.

"This was a huge issue when they were making those outsourcing decisions," said Richard Aboulafia, vice president of analysis at Teal Group, an aerospace consulting firm based in Fairfax, Va.

When Boeing sold its commercial operations in Wichita this year, the company took a major step toward shaking up its traditional business model. The group is now owned by Canadian firm Onex Corp. and will still supply major parts of the 787.

Freeing Up Capital

The arrival of the Dreamliner means that Boeing's commercial airplane suppliers, which now number about 1,200, are going through big changes in how they work with the aerospace giant not just today, but in the future.

Bair said that the business model being developed on the 787 will be used on the company's future aircraft models.

It can use fewer workers on the production line and tie up less capital during the plane's development when its suppliers take on bigger roles with engineering and manufacturing.

"What's to me more exciting is that they've gone to a complete outsourcing business model," Alderman said.

For Rockwell Collins, the 787 has meant bundling even more of its components and technology into a sale.

Clay Jones, chief executive officer of Rockwell Collins (COL) , said research and development spending on the 787 is about the same as its work on the 777, 747-400, 757 and 767. Staying on budget, however, is far easier because Rockwell Collins has more control over the production plan, both saving time and money.

The company has bundled together fly-by-wire flight control systems, surveillance and communications systems and displays on the flight deck, effectively taking on more work than it otherwise would.

"There is less hands-on micromanagement by Boeing on how we do everything we do -- it's more a functional design requirement," Jones said.

In pursuit of the best deals and state-of-the-art technology, Boeing is going abroad for more components than ever before.

To build the center fuselage and parts of the tail, Italy's Alenia Aeronautica is setting up a new plant in Italy.

In Japan, decades of work with Fuji Heavy Industries, Kawasaki Heavy Industries and Mitsubishi Heavy Industries has evolved so that the trio will build the 787's wings, which will be flown on modified 747s cargo jets from Japan to Boeing facilities north of Seattle.

Moreover, Boeing benefits by tapping into another country's industrial base because compatriot airlines there are often big potential customers.

Together, Japan's All Nippon and Japan airlines have ordered 80 Dreamliners, accounting for almost one-third of the total firm orders.

Some 70% to 80% of the Dreamliners are going to be sold outside the U.S., according to Bair, the plane's chief executive. "So to think that we can just do all the work ourselves here in the U.S. and not share anything with anybody is just silly," he said.

Boeing's defense-contracts division is positioning itself so that it can supervise ever bigger contracts where it has more authority over subcontractors while carrying out less of the actual work itself.

A similar trend is at work with the 787, Aboulafia said.

"Manufacturing is not a big part of the profit model. Maintenance, finance, support ... the service aspect is."