Parallels in production: 7E7 and 717
Seattle Times aerospace reporter
But it's not entirely new. A smaller-scale but even more radical version of the strategy is already up and running: the Boeing 717.
Acquired as part of Boeing's 1997 merger with McDonnell Douglas, the 717, once called the MD-95, was conceived as the world's first totally outsourced jet. At one point, even the plane's final assembly was going to be outsourced.
The 717's turbulent history includes much that no one would want to emulate, from a zigzag search for a final assembly site to the disastrous failure of a key supplier to deliver at a critical juncture.
Moreover, the 100-seat plane has been a flop with airlines, with just 123 delivered in five years. Despite all the foreign outsourcing, only 26 of those aircraft have been sold overseas, with no sales at all in any of the major airframe supplier countries: Italy, Korea, Japan and Taiwan.
If more orders do not materialize next year, the 717 line in Long Beach, Calif., will shut down, marking the end of a once-great center of commercial aviation in Southern California.
Yet the 717 has its defenders. The plane was a good design, they say, trapped in an unfortunate market niche. Meanwhile, McDonnell Douglas' strategy of sharing risk, costs and profits with global partners worked well, they contend.
"The basic model of risk-sharing is a good one," said Dave Williams, a former executive at McDonnell Douglas' Long Beach plant who led marketing of the airplane. "This was the first program with so much risk-sharing. Being the first one, we made some mistakes. Hopefully, people looking at the 717 are learning from those mistakes."
When Mike Bair, head of the 7E7 program, announced on Nov. 20 the full extent of outsourcing on the 7E7, he explicitly compared the business model with that of the 717.
"(The 7E7 model) is very similar to the way we are managing the 717 program," Bair said. "It's clearly given us some experience in how to manage a program a little differently than we have in the past."
The 717 business model, a McDonnell Douglas legacy, has become Boeing's future.
MD-95: Using outside labor
In 1991, McDonnell Douglas, with a narrow commercial-jet product line and losses on the defense side, was skirting bankruptcy.
To pay for development of the MD-12, a proposed jumbo jet aimed at competing with Boeing's 747, the company offered a 40 percent stake in its commercial-jet business to a government-backed firm in Taiwan.
Frank Shrontz, Boeing's chairman at the time, complained that the proposal would turn McDonnell Douglas into "an Asian Airbus," with Taiwan government subsidies unfairly underwriting airplane development.
The $2 billion deal with Taiwan never happened, and the MD-12 was never built. But McDonnell Douglas did proceed with a plan to use outside money to develop a smaller jet.
The plan was to design, brand and market a new jet — the MD-95, a 100-seater based on the 1960s-era DC-9 — while hiring others to do all the labor.
"The only way we could develop a new airplane was basically using other people to do it," said Williams. "The corporation didn't have the cash to develop this product on its own."
In 1994, McDonnell Douglas sought global partners to share development costs. It also began a search for a low-cost final assembly site.
Halla Group in South Korea was selected to make the wings; Alenia of Italy the entire fuselage; Aerospace Industrial Development Corp. of Taiwan, the tail; ShinMaywa of Japan, the horizontal stabilizer; and a manufacturing division of Korea Air Lines, the nose and cockpit.
In an unprecedented move, McDonnell Douglas announced that final assembly would be taken away from the longtime Douglas plant in Long Beach, Calif.
Instead, it tapped a modifications and maintenance operation, Dalfort Aviation in Dallas, Texas, to assemble the MD-95.
The city of Dallas readied a $70 million bond issue to aid Dalfort in setting up the assembly plant. But the main incentive was cheaper labor and a streamlined all-Teamsters union structure that gave management flexible work practices.
"Total labor cost in Long Beach including health benefits was $56 or $57 an hour. We were down at about $32 an hour," said Bruce Leadbetter, now chairman of boutique investment firm Beta Capital Group and the former owner and CEO of Dalfort Aviation. "We concluded we could save about $4 million per airplane."
Only months later, in the spring of 1995, management and unions in Long Beach reached an agreement to hold down wage costs for the life of the program.
McDonnell Douglas tore up the preliminary agreement with Dalfort and left only the sour taste of its courtship in Dallas.
The wings fall off the plan
A bigger reversal followed with the suppliers.
The planned wing supplier, Halla, a conglomerate controlled by a prominent South Korean business dynasty, was primarily a shipbuilder; it had never built airplane wings.
Halla pulled out and persuaded McDonnell Douglas to transfer the contract to a subsidiary of the Hyundai conglomerate, run by a brother of the founder of Halla. Halla later went bankrupt.
Then, after McDonnell Douglas merged with Boeing in 1997 and the MD-95 was renamed the Boeing 717, Hyundai, which also had never made airliner wings, tried to renegotiate the contract.
"(Hyundai) didn't have the experience," said Douglas Tyler, chair of the Canadian Auto Workers union at Boeing Toronto, the former McDonnell Douglas wing factory. "They couldn't build them for what they said they could."
In 1998, even though it had completed a new wing plant in Seosan, Hyundai pulled out. The wings had fallen off Boeing's supplier plan.
Luckily, Boeing had a fallback. It had agreed to ease Hyundai into production by manufacturing the initial wing sets in Toronto.
Boeing Toronto is still making the 717 wings today, though at a low production rate.
In March 2000, Boeing informed union reps that it intended to eventually close and sell the factory. Only 250 workers remain at the plant.
Pushing to save the 717
Uncharacteristically, Boeing refused interviews with 717 program executives for this article and wouldn't grant access to the Long Beach plant.
In an e-mail message, Boeing Long Beach spokesman Warren Lamb explained the refusal as "primarily because of the current media interest in the 7E7 program and the connections being made to the 717 program."
Against stiff competition in the small-jet market from both Airbus and the regional jet makers, Boeing is pushing for new orders to save the 717 program.
Boeing in September proposed a stretch version of the jet and is targeting sales efforts on four members of the Star Alliance group of airlines — Air Canada, Austrian Airlines, Lufthansa and Scandinavian Airline System — as well as Northwest and Delta.
Sales potential is hampered by the limited range of the airplane and its status as an orphan. The lack of commonality with other Boeing jets adds expense for airlines with mixed fleets.
Pending those order decisions, 717 program director Pat McKenna told union officials that Boeing has pushed out until mid-2004 a decision on whether to maintain or to kill the program.
In the meantime, 717 production limps along at only one jet per month, the last vestige of commercial aviation in California.
Only about 1,500 employees remain on the program, and Boeing is selling off large chunks of the Long Beach plant, for years home to the Douglas Aircraft company.
Some veteran Douglas employees blame the long decline of the Long Beach commercial-jet unit on lack of investment by McDonnell Douglas.
"The corporation never invested in the factory," concedes Williams, the former executive. "We really didn't have a modern factory. It was a lack of investment all the way around."
And yet Williams eschews blame.
"I don't think there was any intention by the McDonnell family to get out of the commercial side of the business," Williams said. "They didn't see risking the amount of cash it was going to take for the returns they were going to get. They were strictly business decisions."
In October 1996, McDonnell Douglas CEO Harry Stonecipher decided finally that the company had no future in commercial aviation. Two months later, he agreed to the Boeing merger.
McDonnell Douglas brought little commercial-jet business to the table.
But it did bring a business model that serves as a legacy for the 7E7 and Boeing jets to come.
Dominic Gates: 206-464-2963 or email@example.com
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