The Boeing Company: the Grounding of the 787 Dreamliner

The Boeing Company: the Grounding of the 787 Dreamliner

The Boeing Company: The Grounding of the 787 Dreamliner


Though January, 2013 hadn’t even come to an end yet, Jim McNerney, CEO of

The Boeing Company was already experiencing a bad year. For more than half the

previous decade, Boeing had invested heavily in its new flagship airplane, the

Boeing 787 Dreamliner. Problems with the production and assembly of the

aircraft had delayed its initial delivery but its long expected arrival to the market

had finally come by the end of 2011. Less than two years later, the 787 had once

again become the source of McNerney’s headaches.

As McNerney prepared for the earnings conference call scheduled for January

30, he wondered how he would respond to the unavoidable questions that would

arise regarding the 787 Dreamliner. The aircraft had become the center of

attention after a series of incidents that culminated with the emergency landing of

an All Nippon Airways 787 Dreamliner and the subsequent mandatory grounding

of all 787 models in the U.S. and other jurisdictions.

Investigating causes for the fires had become Boeing’s top priority. Neither

the company nor regulators had made any headway identifying the exact reason

for the problem, even if there were good reasons to implicate the Lithium-Ion

batteries. The model’s safety was being questioned and the market had not

responded kindly. He had to decide whether to continue producing a product that

was likely to be faulty. He knew the impending conference call would be full of tough questions about the fires. He also knew that his response and decisions about current production would be critical in shaping the public’s response. It seemed that with every passing day, the Dreamliner was becoming more and more of a nightmare.

Sequence of Events

The bad news started on Jan. 7, followed quickly by a series of other events:

1. January 7: Fire on a Japan Airlines Dreamliner in Boston. The

incident occurred while the plane was grounded and no passengers

were on board. The battery was found to be the source of the fire. It

took firefighters 40 minutes to extinguish the flames.

2. January 9: All Nippon Airways (ANA) canceled a domestic flight to

Tokyo after a computer wrongly indicated that there was a problem

with 787’s brakes.

3. January 11: Separate inspection started on a Japan Airlines flight

that leaked fuel in Tokyo’s Narita airport, after flying back from

Boston, where it also leaked fuel.

4. January 11: A cracked windscreen on another 787 cockpits was also


5. January 16: Smell of smoke on board an ANA flight from Ube to

Tokyo. Fire started while the plane was taking off; the plane was

rerouted to make an emergency landing in Takamatsu. All 137

passengers and crew were evacuated. One elderly passenger mildly

injured his hip while descending through the emergency rafts on the

side of the plane. No other passengers or crew were injured.


6. January 16: ANA voluntarily decides to ground all 17 of their Boeing

787s. Japan Airlines does the same its seven Dreamliner.

7. January 16: FAA decides to ground all 787 Dreamliners present in

the U.S. Acknowledging that the fire had started in the battery section

of the aircraft, the FAA specifically states that all 787 Dreamliners

would be grounded until the safety of the batteries could be proven.

8. January 17: European Aviation Safety Agency and Indian aviation

authority order grounding of all 787s in their jurisdictions and four

other agencies follow suit. Chilean LAN airlines voluntarily decides

to do so as well. Only Poland’s national carrier LOT continues to fly

one of their two 787s. The other is stranded in Chicago.

The History of Boeing

Boeing draws its history from 1910 when William Boeing bought a shipyard in

Seattle. This would later become his first airplane factory. In 1916 Boeing

became incorporated as a company. From the beginning, the company served

both commercial and defense segments. Boeing grew throughout the years by

serving both segments and after signing a contract with the U.S. Postal Service,

it created its most popular commercial plane to date: the 737. In 1997, the Boeing

Co. merged with McDonnell Douglas Corporation, making it the biggest aircraft

manufacturer in the world.

Today, Boeing employs more than 170,000 people worldwide.2 It has

produced roughly 75% of the world’s fleet of commercial jetliners, which

amounts to nearly 12,000 aircraft. More than 80% of all Boeing jetliners have

been ordered by non-U.S. customers, making Boeing a truly global company.3

Additionally, their customers are divided between commercial at roughly 55.3%

and defense at roughly 44.7% (2011 data).

The 787 Dreamliner

The Creation

During the late 1990’s Boeing envisioned a truly progressive change to the

aircraft market and began to produce the fastest commercial aircraft ever. In

2001, Boeing initiated work on the Sonic Cruiser. After they began production,

the September 11th terrorist attacks put a halt on manufacturing. Shortly

thereafter, the airline industry plummeted as oil prices rose dramatically. Boeing realized that in this new market, costs were more important than speed and thus

decided to put an end to its Sonic Cruiser project. Using the technology

developed during this period of time, however, Boeing began production one

month later on the Dreamliner 787 (then known as the 7E7), a real game changer.

The plane is thought of as “revolutionary” for many reasons. For one, the 787

aims at being the most fuel-efficient commercial aircraft, for which reducing

weight was extremely important. Some 50% of the airplane is made of carbonfiber

composites, a material stronger, 20-30% lighter than aluminum and less

likely to corrode.5 Weight was also reduced by using lighter weight lithium-ion

batteries instead of the standard nickel cadmium design. As if reducing weight

and thus boosting fuel efficiency weren’t enough, Boeing also reinvented the

manufacturing process.

Contrary to how the aircraft manufacturing process usually works, 70% of the

787s component parts were outsourced to some 900 subcontractors all around the

world.6 After production, the parts are shipped back to the United States where

Boeing assembles the aircraft. This cuts assembly time by 75% to three days and

many have compared the process to the innovations of Toyota with their lean

operations model and Ford with its Model T assembly line.7 Though there are a

number of benefits to this process, disadvantages quickly became apparent. For

one, if at any point in time the company would run into problems in the

manufacturing process, the source would prove harder to pinpoint. Secondly, the

problem resolution procedure would likely take longer and would fall outside of

Boeing’s hands, as changes would have to be made at the subcontractor level and

within operations that weren’t under Boeing’s direct control.

Popularity and Delays

As word emerged that Boeing planned to produce a lightweight, fuel-efficient

carrier, orders began pouring in before a single 787 had ever been assembled.

Unfortunately, Boeing had several issues along the manufacturing process that

led to repeated and continuous delays. Although the model was scheduled to take

its first flight by the end of August 2007, the company anounced in December

2006 that the aircraft that had been built were overweight and the company would

delay the first flight.

Following the initial delay, the company faced significant problems due to its

highly outsourced supply chain, an ongoing shortage of fasteners, lack of

documentation from foreign suppliers and problems with the flight guidance

software. In 2007 the Dreamliner’s program manager was replaced. A Boeing

statement issued in January 2011 acknowledged “We made too many changes at

the same time – new technology, new design tools and a change in the supply

chain – and thus outran our ability to manage it effectively for a period of time.”8

Following a series of seven delays, the first flight was moved from August 2007

to December 2009 and Boeing delivered the first 787 in September 2011, more

than three years behind schedule.

Yet none of the interruptions was due to malfunctions and this situation did

not stop orders from continuing to pile up. Boeing received more than 600 before

the first 787 was assembled in 2007 and more than 800 before the first airframe

took flight.9 Moreover, and despite all the delays, Boeing remained confident in

its progress. In December 2012, Boeing CEO Jim McNerney said, “We’re having

what we would consider the normal number of squawks on a new airplane,

consistent with other new airplanes we’ve introduced.” He continued comparing

the number of problems with what the aircraft manufacturer faced in the 1990s

after introducing the Boeing 777.10

Since the first 787 was delivered in 2011, there had been no reported

incidents onboard any of the aircraft. The model’s popularity was outstanding and

by January of 2013, Boeing had 848 orders from commercial airlines all around

the world. The company had struggled at first but until the series of 2013

incidents, everything seemed to be going well.

Customer Responses to the Grounding Order:

At the time of the grounding, eight airlines counted 787 Dreamliners among their

fleets. ANA and Japan Airlines owned 24 of the 49 delivered so far. The other operators were Air India, Ethiopian Airlines, Chile’s LAN Airlines, Poland’s

LOT, Qatar Airways and United Airlines.

Ten days after the initial grounding, more than 1,000 flights worldwide had

been cancelled.

ANA had cancelled 459 flights since January 16, affecting more than 58,000

passengers. The airline either used substitute planes or rebooked passengers,

incurring heavy logistical and financial costs.11 The airline estimated that the 787

grounding would reduce its revenue for January by $15.4 million.12

To Boeing’s good fortune, most of the company’s customers had so far

decided to back the company and had publicly expressed their support.

After a meeting with the Japanese transport minister, ANA Chief Executive

Shinichiro Ito, told reporters “we are not in a situation where we should change

the strategy we have been pursuing.”

United’s chairman, Jeffery A. Smisek, considered the fuel efficient 787

“terrific” and added that he believed Boeing would come up with a solution soon.

The spokesperson for Qantas Airways Ltd. said the company was “confident” the

problems would be resolved before it took its first deliveries in the second half of

2013, while state-run Air India said its six Dreamliners were operating normally.

Only Polish airline LOT was not so supportive as its officials said they would seek

compensation from Boeing.13

Despite these supportive announcements, many believed that, in private,

airline executives were becoming increasingly nervous since the exact cause for

the problems had not been determined. Polish LOT had already threatened

Boeing with a lawsuit and McNerney feared that other airliners would follow in

their step.

Market Responses

The market had mixed feelings concerning the 787’s grounding. On one hand,

Boeing’s stock had been punished by the stock market, seeing a 2.5% decrease

only five days after the initial grounding order and shedding a total of $1.5 billion

in market cap. On the other hand, there had been no changes in flight reservations

in Japan or anywhere else. To Boeing’s good fortune, it seemed that passenger bookings hadn’t changed much, as few passengers chose their flights based on the

type of aircraft used and instead selected by airline.

For the moment, it seemed like some of the market shock had been insulated

because Boeing didn’t deal directly with end consumers. Nevertheless, the risk of

a brand boycott due to safety concerns still existed. A frequent flyer was quoted

saying: “If I was going to fly on a Dreamliner for this trip, I would cancel it and

re-book on another flight using ‘proven winner’ airplanes that have a good safety

record.”14 If this trend continued, Boeing would begin facing very serious issues.

Possible Causes

Although investigators weren’t sure about the exact cause of the fires, both the

Japan Airlines and ANA fires had started in the battery section of the 787s.

Furthermore, Lithium-Ion batteries, the batteries employed in all 787 models had

a reputation for being prone to overheating and, as a consequence, causing fires.

Thus, although the exact causes remained a mystery, the batteries were targeted

as the likely culprits, as shown by the FAA’s initial grounding order.

Deeper into Lithium-Ion

The Lithium-Ion (Li-ion) battery provides several advantages compared with

other types of cells. It has a high energy density, which is typically twice that of

comparable nickel cadmium units. In addition, the higher cell voltage allows

battery packs to be designed with significantly fewer cells connected in series.

They are lighter, and low maintenance. They have no memory effect (taking less

and less charge with every recharge) and have very low self-discharge rates.

Li-Ion batteries and the 787 Dreamliner

Boeing has gone to great lengths to make the Dreamliner lighter, more efficient

and easier to build. One such innovation comes from the complete redesign of

aircraft systems. The Dreamliner is the first aircraft to completely remodel its

hydraulic and electric configurations, as well as most other in-flight systems.20

Heavily dependent on electrical power and more so than any other commercial

jet, the 787 boasts two 32 Volt battery packs, consisting of eight Li-Ion cells each.

However, due to the instability often associated with this type of high-power

battery, the FAA required Boeing to install four separate layers of protection in

the 787 to prevent short-circuits in any of the individual cells, as well as guarding

them from heat generated in contiguous cells.

Compared to a more traditional Nickel Cadmium power source, Li-ion

provided a weight advantage for the 787 Dreamliner of about 40 lb., or about the

same as a single piece of luggage. However, redesigning the existing battery

system to incorporate a different type of battery would ground the existing 787

fleet for as long as a year, pending FAA approval.

Boeing, the FAA and the NTSB

The Federal Aviation Administration or FAA is the agency authorized to regulate

and oversee all aspects of civil aviation in the United States. A branch of the

United States Department of Transportation, the FAA is in charge of regulating

and creating all pertinent standards for the U.S. airspace, while encouraging and

developing civil aeronautics and new aviation technology. The investigation of

transportation accidents however, falls to a separate and independent agency

called the National Transportation Safety Board, (NTSB).

As the largest aircraft producer in the U.S., Boeing’s relations with both the

FAA and the NTSB are constant and tumultuous at times. In the case of the 787

Dreamliner, several of the delays in the design and early production phases were

caused by compliance issues with FAA standards and regulations. On the other

hand, since Boeing is the dominant aircraft producer in the U.S., the FAA has also

been accused of playing favorites with them. According to Reuters, the FAA

granted the 787 special conditions, knowing that the batteries could cause

problems and saying that existing contain-and-vent systems would be enough to control the buildup of explosive or toxic gases created in the event of a battery

bursting into flames. Other instances in which the FAA might have sidestepped

processes to Boeing’s advantage have been mentioned, but none have been

properly documented.

The Earning Call

Jim McNerney had successfully appeased previous market concerns regarding the

787. But this time, he was worried that things could get out of hand. He had been

comfortable thus far comparing the 787 to other aircraft models, ensuring the

public that the delays and issues were nothing more than teething problems.

On the inside, however, he wasn’t sure whether this was the case anymore.

Unfortunately, there would be no way for him to know until the NTSB figured out

what the real problems were. He felt as if he were swimming in an ocean of

uncertainty and his hands had been tied behind his back.

He had to make big decisions regarding whether he would go ahead with the

production increase of five to 10 airplanes per month or whether he would slow

or halt production. Furthermore, he would have to deal with the earnings call

knowing little more than anyone else. The earnings call, he knew, would be

crucial for Boeing’s reputation and he needed to address it smartly.