Boeing's 787 Premiers On 7-8-07

| About: The Boeing (BA)

On Sunday 7-8-07, Boeing (NYSE:BA) premiered its first new commercial airplane in 12 years, the 787 Dreamliner. This premier is only an exhibit of the structure of the plane, none of the components from seats to flight controls are installed yet. Still, I believe the 787 will fly as scheduled at the end of August.

Boeing estimates that a Dreamliner will only take 3 days to manufacture once production and manufacturing capabilities are in full swing. Even though Boeing is still in the development stage of this test flight “prototype” for the August launch, the manufacturing and production methods are likely being developed alongside the prototype construction. Thus, with the components being developed and tested independently, it is reasonable to assume the completed components can be fully installed in a matter of days.

The only difference with the actual production model is the prototype will still require time for the components to be tested together in the plane and ultimately, a test flight at the end of August. With the first scheduled delivery in May 2008, I believe all these concerns about shortage of bolts and cost overruns will be solved by then.

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The much more efficient production methods of the 787 should more than make up for any cost overruns in the early stages of the 787 production. And remember, about 50% of Boeing’s business is defense, which is also in super-bull mode. Don’t just look at Boeing as a commercial plane manufacturer. If Boeing can blow up million dollar test rockets for fun and you never see it hit its EPS, some cost overruns for the 787 wouldn’t matter much either.

The development schedule of the 787 underscores Boeing’s lead over Airbus’ production capabilities. Airbus’ A380 had its test flight more than a year ago on April 27th, 2005, but the first A380 will not be delivered until October 2007, if that. If Boeing’s 787 remains on schedule, it will have a testflight in August 2007 followed by the first delivery to All Nippon Airways in May 2008.

Back in college, my professors would make fun of French engineers all the time, even while we had French exchange students sitting in the front row. I did not truly understand where my professors were coming from until I saw some of the early production methods of Airbus’ A380. The most ridiculous example is moving the A380’s gigantic wing at 2 miles per hour through the tiny streets of France in the middle of the night, with only inches of clearance on either side from knocking over buildings. Now, you don’t have to be a professional in the industry to know that’s probably not the most efficient, safe, or fast way to get your parts together. Not to mention the eventual complaints from people who live along the transport route of the nightly parade of plane components rumbling through their streets.

Meanwhile, Boeing’s plans for the 787 production should stamp out Dreamliners like hotcakes just as Henry Ford’s production lines stamped out Model-T’s. Moreover, Boeing has taken a new production model with the 787, namely making the 787 production a collaboration between numerous partners and suppliers from Japan to Italy.

Taking a closer look, this collaboration looks oddly similar to the “zero-defect” production model that Toyota (NYSE:TM) has so successfully used to dethrone the Big-3 automakers in Detroit. Toyota’s production line consists of a series of “suppliers” and “clients” where each step is also a supplier and a client. As the next step down the production line, you are the client with the need to make sure your suppliers are providing you with a zero-defect product. As a supplier passing down the product, you want to make sure your product is perfect as well, so your product does not get rejected and returned to you.

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Likewise, having various suppliers for everything from interior panels to engines, Boeing is effectively doing what Toyota does, using the relationship between suppliers and clients. Now, for each component, there are effective and efficient checks built in to make sure the component is perfect. Unlike previous production models where everything is made in-house, Boeing now has the leverage with its partners and suppliers to demand top-grade products or move the business to someone else. While this “zero-defect” model seems to slow things down by scrutinizing every detail whenever a component is delivered, it actually happens thousands of times a day on Toyota production lines and has actually helped Toyota build the most reliable cars in the world, and do so quickly.

I believe Boeing’s variation of the “zero-defect” production model, known generally as lean manufacturing, will help the 787 become the most widely used commercial plane in the coming years. Watch for expanding margins for the 787’s first year or so of production as orders keep rolling in and the manufacturing advantages lower costs.

In the next article, let's look at the 787’s global team of partners and suppliers. For a preview, visit Boeing’s 787 International Team Facts. As a side note, I believe the 787’s biggest advantage over the A380, and any other previous planes for that matter, is the composite structure. In this Reuters coverage of Sunday’s 787 premier, Reuters cites: "The use of fatigue-resistant and rust-free composite materials means air in the cabin can be more humid, leaving passengers less dried out and jetlagged after a long flight."

However, composite materials have much more advantages that should make composites the material of the future, replacing metals in everything from planes to cars and likely buildings. We’ll touch on this topic soon as well, but my favorite producer of composite materials is SGL Carbon, symbol (OTC:SGGGY) because of its global footprint and distribution office. Note: I don’t believe SGL Carbon is a supplier for either Boeing or Airbus. Boeing’s main carbon composite supplier is Toray Industries.

Reuters’ Boeing 787 Factbox: http://www.reuters.com/article/businessNews/idUSB74429120070708

Disclosure: I own shares of Boeing as of this post.