A retrospective of the McDonnell Douglas MD-11 and the last passenger flights for enthusiasts contains lessons for Boeing, or McBoeing as many still call the combined companies.
Aviation Week’s story by highly respected technical reporter Guy Norris contains this key paragraph:
Despite its many technical advances, most notably on the flight deck, the MD-11 was handicapped from birth by its derivative dependence on the obsolete DC-10. Created on the eve of the era of the fuel-efficient big twin, the MD-11 emerged as a committed three-engined product too early to be redesigned around the new generation of big turbofans. Notoriously starved of serious investment by its ‘MD’ leadership, all attempts by the Douglas product development group to develop either twin-engined or larger stretched versions of the MD-11 sadly came to nothing. (Emphasis added.)
Boeing, burned mightily by the twin program development debacles of the 787 and 747-8, isn’t about to take any more “moonshots,” says CEO Jim McNerney. Yet Boeing is now at a crossroads where another moonshot is needed.
Airbus dominates the single aisle market today and is increasing the pressure with the A321neoLR to replace the Boeing 757 on long, thin routes. The A330neo should revitalize this product line into the 2020s and with the A350 coming on line, Airbus is poised to surpass Boeing production in wide-bodies by 2017 for at least the next five years.
But it’s the bread-and-butter single-aisle product line where Boeing has to take its moonshot–and this has to be done in the next few years.
The 737 MAX is widely characterized in the industry, even among customers who have ordered the airplane, as a band-aid solution response to the A320neo family. The launch of the 7E7 in December 2003 was influenced by the McDonnell family and McDonnell Douglas dominance on the Board of Directors and Boeing executive offices to engage in the industrial outsourcing that had become prevalent at MDC before the 1997 merger with Boeing. Spread the financial risk became the mantra. We saw how well that worked.
The McDonnells starved Douglas Aircraft for money, as Guy Norris noted above. After the Boeing merger, the McDonnells became the larger group of shareholders in Boeing and MDC’s CEO Harry Stonecipher became the largest individual shareholder. “Shareholder value” became the driving force and derivatives became the business strategy. The 757-300 and 767-400 became the “new” airplanes under the merged company strategy and funding for research and development plunged in the name of shareholder value.
Spreading the financial risk on the 7E7 would prove to be a financial disaster, which had an insidious affect on product strategy. The plan had been for the 787 to enter service in May 2008, after which a clean-sheet replacement for the 737 would follow and then a clean replacement for the 777 would come after that.
Given the billions of costs on the 787 program, coupled with the large losses on the 747-8 (itself also adversely affected by the 787 program delays), Boeing’s executive and board of directors became understandably nervous about green-lighting new airplane programs when the 787 and 747-8 were still in disarray. But that was in 2011, at a time when the 787 and 747-8 had yet to be delivered and a decision had to be made: launch the MAX or launch the New Small Airplane. The commercial unit wanted to go with the NSA. Chicago made the decision to go with the MAX, a decision forced upon executives by Airbus’ growing runaway success with the A320neo and a surprise capture of the order from American Airlines.
But now, with Airbus dominating the single-aisle market and soon likely to take over the twin-aisle sector, the McDonnell Douglas derivative mentality and McNerney’s no-moonshot philosophy risks recreating the McDonnell Douglas decline in commercial aviation.
The prospect of Boeing launching one new small airplane to replace the 757, let alone two NSAs to cover the entire 130-220 seat spectrum, scares the investment community and some lessors. The billions of dollars in costs and the impact on the MAX values are at the forefront of concerns. But to do nothing risks Boeing’s presence in the single aisle space. The 737-7 has but a sliver of the market share in this space, and we understand from our Market Intelligence Boeing doesn’t even want to build this airplane. The 737-9 has already lost the market share battle to the standard A321neo and will be further marginalized with the A321neoLR. Lessors are reluctant to buy the 737-9 because of its limited market appeal. This reduces the MAX line to predominately one model, the 737-8.
While investors look at the expense involved in developing one or two NSAs, lessors fear the NSAs will drive residual values down on the 737-8 before they have a chance to get their return on investment on the MAX.
Launching the NSA sooner than later will certainly put a chill on the MAX, but holding off too long will set Boeing back decades in its fight with Airbus. The prevailing view in Boeing Commercial Airplanes with those we have talked with is that there will never be another new airplane as long as Jim McNerney is CEO. The expectation is that he will remain in power through 2016 to see the 100th anniversary of Boeing. What his presumed successor, President and Chief Operating Officer Dennis Muilenburg, will be willing to do is a big question mark. What the hand-picked McNerney board of directors will be willing to approve upon a Muilenburg recommendation is also food for thought.
Boeing is between the proverbial rock and the hard place.