747-8 delay causes doubts about Boeing

Boeing added $1 billion in escalating costs as it delayed another new airplane program Tuesday, and industry analysts pinned much of the blame on poor management and a thinning of the ranks among the company's vaunted technical experts.

The company unexpectedly announced that the first new 747-8 jumbo jet, slated to fly in November, now won't leave the ground until next year. The postponement contrasts sharply with confident assertions made by the head of the program just six weeks ago, declaring that three of the massive, 250-foot-long jets would be flying by year end.

Coupled with the ongoing series of delays for the new mid-size 787 Dreamliner, the latest setback has company observers looking for a pattern.

Richard Aboulafia, an aviation analyst with the Teal Group, said the common denominators for the two delayed jet programs are a lack of adequate project-management expertise and a shortage of engineering resources.

"There were an awful lot of good people retired after 2000," Aboulafia said. "That, coupled with the decision to outsource major chunks of engineering requirements to suppliers and partners, seems to have resulted in a severe talent shortage and a loss of tribal knowledge."

Scott Hamilton, an aviation consultant with Leeham.net, said the blame doesn't rest with Boeing's engineers and mechanics, who eventually have to fix all these problems.

"It's a management problem," Hamilton said.

With Tuesday's delay, a program that seemed set to boost flagging Boeing morale has now instead delivered another black eye.

Boeing will take a $1 billion charge to its third-quarter earnings. About two-thirds of that hit reflects mounting 747-8 production costs and the rest comes from a decision to slow production due to reduced near-term demand for the plane.

The company said it now expects the first flight of the 747-8 early next year, one year past its original timetable. Flight tests will follow and first delivery is now expected in the fourth quarter of 2010, pushed out three months from the previous schedule.

The 747-8 is a stretch version of Boeing's iconic humped jumbo jet. The first ones will be built as freighters. In the passenger version, seating 467 people, the jet will compete with the 525-seat Airbus A380 double-decker for a relatively small market.

Boeing added new wings, new engines and a new interior cabin to the previous model, all of which have proven costly and technically challenging.

But on a 747-8 production-line tour at the end of August, program chief Mohammad "Mo" Yahyavi said he expected the three flight-test airplanes to roll out at intervals of 20 days apart this fall, putting all three in the air by the end of December.

Two days earlier, on Aug. 24, the full Boeing board had visited the Everett plant, and Yahyavi said he had given them the same briefing and forecast the same flight schedule.

Yahyavi has headed the program since February, moving over from the successful Renton-built Poseidon anti-submarine plane for the Navy.

He reports to Pat Shanahan, who moved from Boeing's defense side two years ago with a mission to fix the 787 program. Shanahan was placed in charge of all airplane programs last December.

Shanahan's boss is Jim Albaugh, who came in only five weeks ago as head of Boeing Commercial Airplanes. All answer ultimately to Jim McNerney, Boeing chairman and chief executive since July 2005.

McNerney, when asked during an Aug. 31 teleconference specifically about the 747-8 program, said, "The program is going well."

Already losing money

The 747-8 program was already in a loss position — meaning Boeing currently projects it will lose money on the plane without further firm orders — due to previous delays and cost increases caused by wing-design changes a year ago.

With the latest charge, the total projected loss on the program is at least $1.7 billion. That tally doesn't include some $3 billion to $4 billion in research-and-development expenses.

Approximately $640 million of the new charge reflects higher estimated costs to produce 747-8 airplanes at both Boeing and supplier facilities, the company said.

Boeing spokesman Tim Bader said the "root of the problem" is that a heavy workload made the program's engineering staff late releasing their designs, which in turn disrupted manufacturing when parts already installed on airplanes had to be reworked.

Hamilton, of Leeham.net, said Boeing suppliers and customers told him those changes included redoing a piece of the leading edge of the wing that didn't fit, as well as redesigning a part where the engines hang from the wing.

Analysts attribute the work overload to a diversion of engineers to the more crucial 787 Dreamliner program, leaving the 747 program with a shortage of expertise.

"It's a knock-on effect of the 787 sucking up all the resources," Hamilton said.

The mix of older 747 structure with newly designed elements is one cause of the engineering problems.

Boeing engineers created the entirely new sections — such as the wings — using the latest digital computer-modeling tools, while retaining the older blueprints for sections of the jet that remained unchanged.

In August, Yahyavi had acknowledged challenges in the areas of the structure that were modified but still kept some of the old design. However, he said Boeing had overcome those issues.

Tuesday, spokesman Bader cited problems arising from the use of mismatched design tools as part of the new delay.

"The build up of tolerances between structure designed with older tools and the new design tools has caused fit-up issues that have been discovered and are being resolved in the final assembly process," Bader said in an e-mail. He declined to elaborate.

Engineering tolerances are the room left for error in part specifications, typically measured in thousands of an inch. If a succession of parts are all out by several thousandths of an inch in the same direction, all those allowable tolerances can build up to an unacceptable gap requiring substantial rework when the parts are to be joined.

Stan Sorscher, an engineer and analyst with Boeing's white-collar union, the Society of Professional Engineering Employees in Aerospace (SPEEA), reacted scathingly to the failure to keep track of tolerance buildup.

"That's unforgivable," Sorscher said. "Tolerance buildup happens on every single program. If you can't handle that, what are you doing?"

Sorscher said Boeing has fallen badly short in managing both the 787 and 747 projects, which he attributes to a long-term hollowing out of the company's expertise through outsourcing that has shrunk the talent pool available in-house.

"This is a tough business on its best day," Sorscher said. "There's only so much you can give away in terms of your resources and your competence and your authority before it starts to fall apart."

In a speech in Arlington, Va., last week, Boeing Commercial Airplanes head Albaugh seemed to go further in agreeing with that position than executives have previously done.

"To continue to have a work force that understands design and how parts integrate with higher level systems, some level of design needs to be in-house," Albaugh said. "We need to think more strategically about outsourcing, on why we do it and the long-term effects it is going to have on the company."

The remaining $360 million of the $1 billion charge is due to what Boeing's press release calls "challenging market conditions" and the company's consequent decision to delay a planned ramp-up of production.

Customers in no hurry

The first 747-8s are freighter aircraft, and this market has faltered badly in the past year.

In June, Japanese air-freight company Nippon Cargo Airlines (NCA), one of two 747-8 launch customers with an order for eight jets, announced that its fleet expansion plans were on hold, a step necessary "for NCA to survive."

Boeing has been reallocating early delivery slots on all its programs as airlines worldwide seek to defer planned capacity increases. On the 747-8, with just 105 firm orders booked, there's much less scope to shuffle the delivery order.

So Boeing will now maintain the 747-8 production rate at 1.5 airplanes per month nearly two years longer than previously planned, deferring the planned increase to two per month.

Boeing said it will provide more details on the 747-8's problems only when it reports third-quarter results on Oct. 21.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com