Higher: 100 Years of Boeing (2015)

9 The Business of Success

The 777 was the first commercial jet to be 100-percent digitally designed.

Boeing took advantage of the economic downturn of the 1970s to reevaluate its business prospects and risks, reappraise its skill sets and core competencies, and determine how best to capture opportunities when the inevitable turnaround came.

This strategic introspection guided a virtual reinvention of the company in the 1980s. Transformative geopolitical and technological shifts were under way at the time, including the winding down of the Cold War; the development of revolutionary technologies such as the personal computer and computer-aided design and manufacturing; and the emergence of the Internet. This fundamental reshaping of the world was both a promise and a challenge for Boeing’s future business growth.

By 1977, the company had begun to show signs of a rebound from the previous years’ woeful financial conditions. That year, customers ordered 228 airliners at a combined value of $4.1 billion—nearly double the value of orders received the prior year. More than half were for the 727, the world’s best-selling jetliner at the time. The 747 also continued to sell well, with 300 jumbo jets in the skies in 1977 and another 100 orders for additional planes placed by the decade’s end.

Many economic signs indicated that the industry’s boom-bust cycle was shifting again: inflation began to taper off, the U.S. gross domestic product saw several consecutive years of growth, and employment and median household income increased. Buoyed by the improving conditions, Boeing CEO T. Wilson announced the development of not one new Boeing airliner but two—the 757 and 767. With its earnings up by 75 percent in 1979 and an order backlog worth $11 billion, Boeing could finance the $3 billion development cost of the new planes out of its own earnings. “Wilson doesn’t expect to have to borrow a dime,” Financial World magazine reported in 1979.

The two jets would help the company compete more effectively in the shorter-range jet market, which was growing fast. Passenger capacity of the aircraft ranged from 200 to 300 people. Developed simultaneously, the 757 and 767 shared many features—they were nicknamed the “medium twins”—making production, maintenance, and flying easier and more efficient.

Pilot training, for instance, was simplified by the jets’ common flight deck, and pilots could fly both airplanes with the same type rating, even though the narrow-body 757 had a single aisle and the wide-body 767 had twin aisles. The jets also were the first to replace conventional electromechanical gauges with a two-crew “glass cockpit” featuring cathode-ray tube displays for most of the primary instruments. For pilots, the changes reduced the workload involved in managing an airplane’s systems.

Both jets were also versatile; the 767, for example, was later converted into a tanker. And they were fuel efficient and produced less noise—business and regulatory necessities in the post-energy-crisis era.

The jets’ new features “reaffirm the company’s reputation for innovative technology and superior metal bending,” Fortune magazine reported in 1982. “The cathode-ray display screens [in the cockpit] would do a video arcade proud.” The article quoted former astronaut Frank Borman, then CEO of Eastern Air Lines, stating, “The cockpit far exceeds anything I saw during the Gemini and Apollo programs.”

Both jets sold well. United Airlines ordered 30 767s, American Airlines and Delta Air Lines each ordered 50 transcontinental versions of the 767, and British Airways and Eastern Airlines each ordered 40 757s. More than 1,000 757s have been delivered to more than 50 customers, while more than 1,100 767s have been ordered by some 71 customers worldwide.

The 757 and 767 jetliners share many features, including a computerized “glass” cockpit.

At the same time that Boeing was developing the two jets, a new kind of competition was emerging from an unexpected source. European aviation manufacturers had long lagged behind their American counterparts, despite designing and developing many innovative aircraft through the years. The French, German, and British governments now stepped in to discuss the merits of a collaborative pan-European venture. In December 1970, these meetings led to an agreement to establish Airbus Industrie.

The new competitor initially drew little attention from the major U.S. aerospace companies. Other smaller manufacturers had come and gone through the decades without leaving a ripple. “There was probably an element of arrogance in the U.S. aerospace sector when Airbus was created,” said aviation consultant Loren Thompson. “The presumption was that this was a political initiative that could not possibly succeed.”

Airbus could not easily be dismissed, however. Other European governments added their financial clout to the consortium, while Spain joined its neighbors as a full member and Italy and Belgium signed on as associate members for selected aircraft programs. Slowly but surely, the upstart carved inroads into the market.

In 1972, the consortium’s first aircraft, the Airbus A300—a short-to-medium-range wide-body airliner—made its maiden flight. The jet was the first in the industry to be built using just-in-time manufacturing, a mode of production in which parts and materials are made available only as needed, reducing inventory costs and reducing waste. In a then-radical new commercial manufacturing process, complete aircraft sections were built by Airbus partners across Europe and then airlifted to France for final assembly.

Sales were slow at first, but the A300 caught the attention of the U.S. aviation industry when Eastern Air Lines ordered 23 of the twin jets in 1978, citing their fuel efficiency as a draw. Orders from Pan Am and a number of Asian airlines followed. No longer could Airbus be dismissed as just another fleeting competitor.

However, Boeing was flourishing as the economy recovered, with sales just short of $10 billion in 1980. Employment picked up sharply, reaching 109,098 workers the same year. Each month, 25 planes rolled out of production. Once again, Boeing had gone from the brink of bankruptcy to the pinnacle of market success.

Glowing reports replaced the negative publicity that had hounded the company just a few years earlier. In 1981, the Association of Professional Flight Attendants publication Skyword featured a cover story titled “Boeing: ‘King of the Sky.’ ” The article noted the remarkable success of its 700 series of “beautiful transports.”

They were more than just beautiful. The 747 was the world’s largest plane in production, the 727 and 737 were the best-selling twin jets, the 707 had flown more revenue miles than any other airliner, and both the 757 and 767 were racking up their share of orders.

“A stirring recovery is all but in the bag [for Boeing], by far the most profitable of the big aerospace companies,” Financial World stated in 1981. “[It] is so far ahead of every other maker of commercial aircraft that at times it appears to have no competition.”

Military orders also grew in the 1980s. Chief among these for Boeing was the highly competitive $4 billion contract from the U.S. Air Force to develop an air-launched cruise missile (ALCM) system. Time magazine, in an April 7, 1980, cover story on T. Wilson, called the ALCM “a key weapon in the nation’s nuclear arsenal … to maintain a strategic edge over the Soviet Union.” The missile, launched from a B-52 bomber, was known for its pinpoint accuracy over a range of 1,500 miles.

The 767 (previous) and 757 (above) were designed with commonality in mind. This meant that pilots, mechanics, and other workers could be easily certified to work on both types of airplanes.

The McDonnell Douglas F-15 Eagle was designed as an air superiority fighter—and with a record of more than 100 victories and no losses in air-to-air combat, it has proved to be highly successful in that role. Versatile and rugged, it remains in production more than 40 years after it first entered service.

The early part of the decade also boomed for McDonnell Douglas, which continued to build on its strong position as a producer of military aircraft. The company’s F-15 Eagle—a twin-engine, all-weather tactical fighter designed to achieve superiority in aerial combat—entered service with the U.S. Air Force in 1974. It remains one of the world’s elite air-to-air fighters, capable of launching an anti-satellite (ASAT) missile for strategic military purposes.

On its heels came McDonnell Douglas’s F/A-18 Hornet supersonic combat jet, which entered service with the U.S. Marine Corps and Navy in 1983. The Hornet was the first tactical aircraft designed from the outset to accomplish both air-to-air and air-to-ground missions. The versatile jet could even switch mission capabilities in the middle of a mission, if necessary. The Hornet also was the first tactical fighter to use digital fly-by-wire flight controls and the first with carbon-fiber wings. The single-seat F/A-18E and dual-seat F/A-18F Super Hornet jets, introduced in the mid-1990s, were even larger and more versatile than the original Hornet.

Other vital military jets followed. In 1986, McDonnell Douglas unveiled the F-15E Strike Eagle, an all-weather multi-role strike fighter with an unparalleled range and weapons load, which was derived from the F-15. With a highly effective air-to-ground capability and modern avionics systems, the Strike Eagle could perform air-to-air or air-to-surface missions at all altitudes, day or night, in any weather. The jet is considered the backbone of the U.S. Air Force today.

In 1984, McDonnell Douglas acquired Hughes Helicopters, one year after the first AH-64 Apache attack helicopter rolled out of the Hughes factory in Mesa, Arizona. The tough all-weather Apache, with its formidable weapons array, quickly became indispensable to the U.S. Army. The AH-64D Apache Longbow, which first flew in 1992, added fire-control radar to the combat-proven helicopter’s capabilities. Today, the AH-64 Apache is the centerpiece of the U.S. Army’s all-weather ground-support capability, carrying a combination of laser-guided precision Hellfire missiles, 70-mm rockets, and a 30-mm automatic cannon. To date, more than 1,800 Apaches have been delivered to customers around the world.

McDonnell Douglas complemented its formidable arsenal of military aircraft with crucial weapons systems, such as the BGM-109 Tomahawk cruise missile and the AGM-84D Harpoon anti-ship missile system, originally developed for the U.S. Navy and now sold all over the world.

While military contracts represented the majority of McDonnell Douglas’s business, the company also made inroads on the commercial side in 1980 with the MD-80 airliner, a single-aisle twin jet based on the popular Douglas DC-9. More than 1,100 MD-80s ultimately were produced in six variants, and the jet became the basis for the MD-90 and MD-95 jetliners unveiled in the early 1990s.

In contrast with its rival, Boeing still derived 90 percent of its revenue from passenger airliner orders—a good portion of that from sales of the 737. Versatility, reliability, and a constant modernization program accounted for much of the continuing popularity of the company’s smallest jetliner, and the company enhanced its features on a nearannual basis.

Boosting the 737’s steady sales was approval from the U.S. Federal Aviation Administration for the jet to fly 120-minute extended-range twin-engine operations (ETOPS). ETOPS provided the most direct routing to destinations that previously were off limits to twin-engine aircraft. The aircraft could now fly a greater distance from suitable alternative airports en route. All Boeing jetliner twin jets have earned ETOPS ratings, yielding significant reductions in travel times and fuel consumption, especially on long overwater routes.

Thanks to T. Wilson’s leadership, Boeing was well positioned to take advantage of the business upswing. During the 1970s, he had made decisions to severely downsize, earmarked more capital toward research and development, promoted adaptive architecture principles to build on the technological successes of competitors, and prepared for the inevitable economic rebound with a long-term view that considered the types of aircraft that buyers would need and want.

“Wilson’s stiff medicine brought Boeing back from the brink,” Financial World stated in 1981. “Every dime Boeing has spent … has helped make production faster and better. There are now more people working for Boeing than there were before Wilson’s draconian cuts—109,000 in all.”

By the middle of the 1980s, airline traffic across the planet had surged to the highest volume in history. In 1985, Boeing’s commercial customers ordered 390 airliners valued at $14.9 billion. The next year brought another $16.3 billion in sales, and the year after that $20.2 billion. In the last year of the decade, Boeing announced that it had received orders for 963 commercial aircraft totaling a staggering $47.5 billion.

Frank Shrontz succeeded Wilson as CEO in 1986. Shrontz had worked at Boeing early in his career before leaving to become assistant secretary of the U.S. Air Force. Upon his return to the company, he was named vice president and general manager of the 707/727/737 division and, later, Boeing president.

The company’s market lead continued under Shrontz through the 1990s, a decade marked by several breakthrough technological achievements. Among them was the first all-new Boeing airliner in a decade: the 777 long-range wide-body jet, which the company began developing in 1986. The 777 was digitally designed using a three-dimensional computer-aided design/computer-aided manufacturing (CAD/CAM) system. This revolutionary design process permitted more efficient representations of shapes, sizes, and surfaces. Boeing engineers could simply simulate the geometry of an airplane’s design, eliminating the costly and time-consuming manufacture of physical mock-ups.

The 777 was designed to be the widest and most spacious passenger jet in its class, able to transport more than 300 passengers more than 10,350 miles. Its ability to travel such long distances was supported by two factors: the jet’s engine was the largest-diameter turbofan of any aircraft hitherto manufactured, making it highly fuel efficient; and its design used an improved aluminum alloy known as 7055 in the upper wing skin and stringers (the stiffening members in a wing, fuselage, and tail). The 7055 aluminum alloy weighed less than conventional alloys and offered better compression strength and corrosion and fatigue resistance.

Other unique materials in the 777 included carbon fiber embedded in toughened resins used in the tail and in the cabin floor beams. Ultimately, composite materials such as carbon fiber accounted for 12 percent of the airliner’s overall structural weight.

For the first time in history, airlines had the option to use a large, efficient twin-engine jet to fly long-distance routes. Carriers could expand their networks with long routes that were not traveled frequently enough to support a larger aircraft. Adding to the 777’s allure was its early ETOPS safety rating for 180 minutes rather than the then-standard 120 minutes. United Airlines placed the first 777 order in 1990, and the jet entered service in 1995. To date, some 60 customers have ordered more than 1,750 777 jetliners.

With the 777, Boeing also broadened its production-sharing agreements with equipment and materials suppliers in other countries. Boeing had partnered with these firms before; in 1974, for instance, it had signed a contract with Mitsubishi in Japan to produce inboard flaps for the 747. But the company’s global collaboration efforts grew markedly with the 777. In the 1960s, the amount of 707 content produced outside the United States was around 2 percent by value; by the 1990s, the outside content in a 777 accounted for 30 percent by value.

While Boeing was in the thick of developing the 777, Airbus Industrie quietly toiled in the background, improving its aircraft design and engineering capabilities. The consortium was determined to directly compete against the predominant aircraft of the day. To sustain production, Airbus eyed customers in regions that the major players paid less attention to, such as Asia, Africa, and the Persian Gulf states. It was a sound strategy “that made it possible for Airbus to catch up in a hurry,” said William Kovacic, former chairman of the U.S. Federal Trade Commission.

Catch up it did, in good part because of the consortium’s successful efforts to reduce aircraft operating and seat-per-mile costs. But Airbus had another important advantage over its American counterparts: it received hefty subsidies from European governments. This backing would soon take a financial toll on its competitors.

The 777 introduced many innovations, including its digital design process and use of new materials such as carbon fiber.

The popular McDonnell Douglas (later Boeing) MD-80 jetliner was based on the equally popular Douglas DC-9. More than 1,100 MD-80s were built.

McDonnell Douglas is a case in point, stuck “in a squeeze play between a subsidized European supplier [Airbus] and a much bigger and more successful Boeing,” said aviation consultant Loren Thompson. “They simply couldn’t generate the resources necessary to match those other two behemoths in all the relevant market sectors.”

After years of discounting Airbus as a competitor, Boeing began to pay close attention, particularly when the consortium introduced the Airbus A320 in the late 1980s. More than 400 orders for the jet flew in before its maiden flight in 1987. Among the buyers was United Airlines, until then a major Boeing customer. “It was a shock … a strong wake-up call,” said former Boeing president and CEO Phil Condit, who succeeded Frank Shrontz in 1996.

The shocks reverberated. Airbus’s subsequent A330 family of efficient midsize, wide-body twin jets garnered more than 1,200 airline orders, although the Boeing 777 would overwhelm its sister jet, the four-engine A340. Boeing could no longer dismiss the new antagonist, especially given Airbus’s government-funded deep pockets.

As Airbus consumed increasing market share, several U.S. aerospace manufacturers foundered, leading to a progressive series of stunning divestitures, acquisitions, and consolidations. Lockheed Corporation exited the passenger airplane business following the delivery of its last L-1011 TriStar wide-body trijet in 1984, in part because of competition from Airbus. In 1995, Martin Marietta Corporation, which had been created in 1961 with the merger of Glenn L. Martin Company and American-Marietta Corporation, merged with Lockheed to form Lockheed Martin.

The following year, Boeing acquired Rockwell International’s aerospace and defense units. At the time, Rockwell was struggling with $2.2 billion in debt, which Boeing agreed to assume in the transaction. The space systems, aircraft division, Rocketdyne, Autonetics, missile systems, and aircraft modification units of Dutch Kindelberger’s former company were renamed Boeing North American Inc. and operated as a subsidiary before being fully integrated into the company. The acquisition broadened Boeing’s reach into new markets.

These transactions were just a prelude to what would happen next. On December 15, 1996, Boeing announced the biggest aerospace merger in history: a $13.3-billion deal to acquire McDonnell Douglas. The great manufacturer of military and commercial aircraft had struggled to recover from the financial impact of another round of military spending cuts as well as deep incursions by Airbus into its passenger airliner business. Two months earlier, McDonnell Douglas had called off development of the MD-XX superjumbo jet, a derivative of the MD-11 that would have seated 300 to 400 passengers. Earlier that year, the company was unable to advance in the Pentagon’s critical Joint Strike Fighter competition, which was held to replace a broad range of existing military fighter aircraft. McDonnell Douglas lost the fly-off stage of the contest to Boeing and Lockheed Martin.

The Boeing—McDonnell Douglas deal was momentous news across the world. Although McDonnell Douglas’s commercial airliner business was relatively dormant, the company still enjoyed a premier position as the nation’s second-largest defense contractor after Lockheed Martin.

Analysts praised the merger. “The acquisition makes Boeing the only manufacturer of commercial jets in the United States, while catapulting it ahead of the Lockheed Martin Corporation as the world’s largest aerospace company,” the New York Times stated.

Fortune magazine succinctly declared that it was the “sale of the century.”

For Boeing, the deal made unquestionable sense: by uniting the companies’ product lines and expertise in commercial jetliners and military and space aircraft, the combined organization could better ride out these markets’ cyclical downturns. In 2000, Boeing further broadened its portfolio with the acquisition of Hughes Space and Communications, maker of the best-selling 601 satellites and the new 702 communications satellites.

Once the dust cleared on the industry’s extraordinary consolidation, most of the companies that were the pioneers of the American aircraft manufacturing industry—Boeing, Douglas, McDonnell, and parts of North American Aviation and Hughes Aircraft—had become one. As a new millennium dawned, this powerhouse combination of technological ingenuity, craft, and drive faced the future with tremendous promise—and the knowledge that now, more than ever, the company must compete not just domestically but globally.

The International Space Station (next) continues to be one of the most complex and internationally cooperative science efforts in history. An artist’s conception (above) imagines how scientists might appear through a porthole.