The Dreamliner Dream Turns Sour. What are the Implications for the Global Air Travel Industry?

February 11, 2013

Boeing 787 Dreamliner

by Pikay Richardson and Tudor Rickards

On Friday January 18th all Boeing 787s were grounded by the Federal Aviation Authority of the United States, after an emergency landing in Japan had intensified the security and safety concerns of the aircraft. Shares in Boeing took a dive.

The Big Dream Turns Sour

This was a serious blow to the company following earlier problems to the Dreamliner, including, a fire, a battery explosion and a fuel leak. Aviation agencies around the world followed suit and grounded all other 787s. For All Nippon Airways, the airline with the biggest Dreamliner fleet, the brake problem was the third hitch in as many days. Shares dropped by more than 3% after the ban.

The troubles for the Dreamliner began in November 2010, when a fire broke out in an avionics bay during a test flight and forced an emergency landing. By this time, the plane had already had a three-year delay in its delivery deadline, which led to increased costs, order cancellations and much concern in the airline industry. Some airlines that had staked their future operations on the Dreamliner.

Boeing’s reputation is also on the line. The Dreamliner project had generated a great amount of hype for its claims of quality, innovativeness and fuel efficiency. Indeed, the Dreamliner had been touted as the great new business hope for Boeing and for its commercial airline customers. Boeing drew attention to the Dreamliner’s high-tech composite fibre body, which reduces weight and thereby improves fuel efficiency significantly. In commercial aviation, fuel costs constitute a substantial proportion of total costs and any weight-reducing innovation drops straight to the bottom line.

New order books were high, topping 848, with 50 delivered and in service, clocking about 100 flights per day by December 2012. In the event, All Nippon Airways and Japan Airlines, with 24 of the 50 delivered, had their fingers most badly burnt . Not insignificantly, passenger confidence in the aircraft and its use declined.

As observed by Patrick Smith of The Atlantic:

“this is a huge and costly black eye for Boeing and its customers. But it could have a lot been worse. The grounding came pre-emptively before anybody was seriously hurt or killed. It is also helpful that the problem, as we understand it so far, is fixable. Burning batteries are serious, but this isn’t a structural defect which will end up costing billions”

Prospects and Implications

Where does this unfortunate episode leave Boeing’s future business, reputation and leadership in the commercial aviation industry? That depends on how long it takes to fix the problems and in consequence, how long this grounding continues. There may well be wider implications for air travel, aircraft manufacture and innovation in aircraft systems, competition and of strategic leadership in the duopoly of Boeing and Airbus.

Based on the separate analysis and forecast of the future development of aviation and air travel, and in consequence, demand for aircraft, Boeing based its future on mid-sized point-to-point travel that necessitated mid-sized 250-seater type aircrafts.

Airbus, on the other hand, forecast demand for more hub-based travel, requiring bigger aircraft, hence the development of the 550-800-seater double-decker A380. The A380 is increasingly establishing itself. Emirates has ordered 30, and has plans for 90 more. It recently opened a A380-dedicated terminal [6th January 2013]. Implementing either of The competing strategies will result in interesting challenges in the immediate and longer-term.


BAE and EADS in merger talks as Woodford site closes

September 13, 2012

by Tudor Rickards

As someone living close to Woodford aerodrome, the proposed merger of BAE and EADS [announced September 13th, 2012] had more than professional interest for me.

Last rites

Each morning, I drive or walk past the little airfield at Woodford in Cheshire, where BAE systems has conducted part of its aerospace business for many years. From time to time, sleek military aircraft would swoop past above. Transporters, each carrying one wing for the mighty Airbus, would trundle down Woodford Road, which had its plastic road furniture regularly removed and then replaced to permit easier access to the site. Each year, a flying show featuring Britain’s most loved aircraft blocked the roads around the village.

Now, only glimpses are to be seen of the last rites. Construction has been replaced by dismantling of aircraft such as the Nimrod shown in the image above.

Planning permission

Woodford aerodrome is now waiting for planning permission before conversion to new build which would produce private housing and mark the end of such commercial activities. While BAE systems faces the most serious job-losses, the site occupies a slice of aeronautic history going back to 1910. Local residents are still involved in community discussions.

Creating a global giant

At a strategic level, the merger between the two organisations has considerable face appeal. Woodford is probably of little significance in the wider scheme of things.

Dealbook, a New York Times publication, reported the news that the merger of the two biggest European aerospace and defence companies would create a global giant with a combined market value of nearly $50 billion.

“On the face of it this will create one of the largest aerospace and defense organizations on the planet,” said Guy Anderson, a senior defense industry analyst with IHS Jane’s in London, who added that the combination would “change the European defense market beyond recognition.”

Shares of BAE Systems rose 10.8 per cent by the end of trading in London on Wednesday [12th September 2012], while shares of EADS were down 5.6 per cent.

BAE and EADS (for European Aeronautic Defense and Space) have a history of collaboration. They are partners on a number of projects, including the Eurofighter jet. BAE also held a direct interest in the Airbus consortium for many years before selling it back to EADS in 2006.

The deal could give the two companies more lobbying muscle to compete with Boeing and other American military companies. BAE already has a strong presence in the United States, but EADS has had only limited success with American military contracts. Last year, the company lost a coveted $35 billion Air Force contract for aerial refuelling tankers to Boeing.

Regulatory Hurdles

Any deal would face its share of regulatory hurdles. The European Commission would have to approve the merger. The American government might also weigh in on the transaction. BAE’s Sanders unit could especially face scrutiny.

Leadership issues

The merger will bring with it some complex leadership issues. EADS over the years has been involved in many tortuous strategic decisions as the competing pressures from French and German stakeholders played out. Government involvement will now be compounded by British political interests.

Leaders We Deserve will be among the millions of interested parties watching the situation as it develops. Maybe, just maybe, for local residents and BAE employees there is renewed hope for a sensational last-minute change of plans for the Woodford site.