Aviation: At full throttle

Nose to tail, seven aircraft in evolving states of assembly pass through different stations at which various components – floorboards, galleys, interiors, electronics and jet engines – are gradually added. The line they are on moves at 2in a minute, taking them through the factory – from hollow fuselage to ready to fly – in 11 days.

It is quite different from the time when airliners in production were parked stationary while teams of workers came and went until they were completed. Located in a vast factory in Renton, just south-east of Seattle, Boeing’s 737 facility encapsulates the best of what the aircraft-maker can do. The more productive of the two assembly lines for its narrow-bodied workhorse produces nearly one finished aircraft every working day.

So confident is the group with its production line that it plans to raise output further. From fewer than 15 per month a decade ago and an average of 31.5 now, it is aiming for 35 a month from January, then a monthly 38 in 2013 and 42 in 2014. Even that will, to the company’s frustration, leave demand unmet. Jim Albaugh, chief executive of Boeing’s commercial aircraft business, says the backlog amounts to seven years. “We are seeing demand in the marketplace that we can’t satisfy,” he adds.

As America’s biggest exporter, Boeing is in many ways emblematic of US manufacturing. Its brand is an icon of quality craftsmanship around the world, its workforce an exemplar of the high-skilled, high-technology, high-wage labour that is widely seen as crucial to the US’s industrial future. Reviving manufacturing is a central plank of Barack Obama’s vision of “winning the future” that he outlined in this year’s State of the Union address. On a recent tour of the industrial Midwest, the president spoke of his desire again to see “our best and our brightest commit themselves to making things”.

The aircraft-maker is one of the US’s most politically important companies. Based in Chicago – Mr Obama’s adoptive home town – its chief executive, Jim McNerney, is a key business ally of the administration, heading the president’s export council. In that role, he has been charged with leading industry’s side of a campaign to double exports in five years – an effort that the White House projects will create 2m US jobs.

Boeing’s productivity improvements resonate widely among US manufacturers, which have emerged from the recession leaner and more efficient than ever. Yet the company – whose frequent design and production woes on its new 787 Dreamliner have pushed that aircraft more than three years behind schedule – also exemplifies the challenges of working with a global supply chain and competing against international rivals.

Competition with Airbus, Boeing’s main global rival, is a proxy for US versus European might. Boeing fell behind Airbus in 2003 in terms of commercial aircraft deliveries but is poised to retake the top spot again next year. The two regions’ trade representatives have been fighting a years-long war in the World Trade Organisation over what each side claims are illegal subsidies to the other’s aircraft-maker.

It is apt that Boeing has often seemed a synonym for America Inc, since its story is in many ways the tale of US manufacturing in general. The 737 assembly line is a good example: for decades, America’s industrial companies have been implementing more efficient techniques based on those introduced by Japanese competitors. “Our production increases have come from lean improvements,” says Beverly Wyse, general manager of the 737 programme.

While such adaptations have steadily pushed up US productivity, in the past couple of years the process has accelerated. As they saw or anticipated their order books shrinking in the global recession, US manufacturers shed some 2.3m jobs. Since demand started to return last year, however, they have largely preferred to squeeze more out of their existing workforce than to hire back armies of staff.

This presents a challenge for Mr Obama, particularly in the Midwest rustbelt swing states such as Ohio and Indiana that have suffered disproportionately from the loss of blue-collar jobs, and on which he is counting in order to be re-elected next year.

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Boeing cut some 4,500 jobs in its commercial aircraft division in 2009 in response to the downturn, while keeping production flat. It expects to hire back a similar number over the next few years, but that corresponds to the big production increases it has planned. The arithmetic reflects an expectation that the productivity growth Boeing has squeezed from its workers – 4 per cent annually over the past four years – will continue.

That sort of gain indicates the public policy dilemma that US manufacturing presents. On one hand, the US wants to promote the most competitive practices, enabling its companies to lead the world. On the other, enhanced competitiveness also means companies can increase output with fewer workers. “Efficiency coupled with technology has meant that US manufacturers are much more productive than they used to be, and so demand for people – especially for jobs such as assembly line workers – is much, much lower than in the past,” says Sunil Chopra of Northwestern University’s Kellogg School of Management.

US factory activity continues to pick up, according to a report last week by the Institute for Supply Management that surprised analysts and gave heart to an embattled stock market. Yet while it may have led the recovery so far, the sector has hired back only 240,000 workers in the past 18 months. In part, this is because the economy is still fragile, with rising raw material prices and growing concerns about a renewed slowdown.

But while some big manufacturing companies have used the recession as an opportunity to trim their US workforces and instead create jobs in emerging markets, so as to be nearer the most dynamic sources of demand in the coming decades, Boeing is neither cautious about the future nor building factories abroad. Its assembly plants remain in the US and it believes the aerospace industry is at the brink of a multi-year cycle of strong demand growth.

It projects that airline traffic will grow by 5.1 per cent annually, cargo by 5.6 per cent and passenger numbers by 4.1 per cent until 2030 – faster than the global economy and translating into a market for 33,500 new aircraft by 2030, with a value of more than $4,000bn. Much of the new demand will come from emerging markets, meaning exports will make up an increasingly large share of revenues – another trend that speaks to the wider US manufacturing sector, which has thrived on ever-greater sales to Asia, Latin America, eastern Europe and the Middle East.

At the same time, globalisation has thrown up competitors increasingly able to challenge large US industrial companies not only on price but on quality. Boeing, which has long enjoyed a virtual duopoly in commercial aircraft, admits it will have to get used to competing not just with Airbus but also with budding rivals from China, Russia and elsewhere.

For now, with its order book bursting, Boeing is confident enough of its market position to have outlined aggressive production increases across all its main commercial aircraft programmes. Those envisage it producing 770 passenger and freighter aircraft a year by 2014, up from last year’s 462 and its previous annual record of 561 aircraft in 1999.

Meeting those targets could be Boeing’s sternest test – a test that its assembly plants may be in good shape to pass but one that could spell trouble for its supply chain. As the main aircraft manufacturers share largely the same supply base and rivals are also undertaking increases across the board, unprecedented pressure could descend on component providers.

The increasing importance of global supply chain management – highlighted by the disruptions caused this year by the Japanese earthquake and tsunami – is another way in which Boeing’s experience reflects that of US industrial companies more generally. While many manufacturers have long sourced from and produced in factories elsewhere, recent years have brought a move to shorten and simplify supply chains – keeping output in the same region as the supplier base, to limit logistics problems and the effect of currency fluctuations.

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The aircraft manufacturer has had its fair share of supply chain problems. Most obviously, the 787 Dreamliner, a fuel-efficient wide-bodied jetwhose fuselage makes unprecedented use of composite materials, was plagued by difficulties related to outsourced design, engineering and production issues that left workers in the US scrambling to rework parts they had been sent from around the world.

Those problems have caused seven separate delays to the 787 programme. The errors have not only been embarrassing and damaging to the company’s reputation but also costly, since Boeing has had to negotiate late-delivery penalties with airline customers. The first 787 is finally due to be delivered in August or September, but Boeing has said it does not expect the Dreamliner to boost its profit margins for several years.

While the 787’s woes related mainly to overambition in outsourcing the design of a completely new model, the challenges of the next few years could bring more to mind Boeing’s experience in 1997-98, when an attempt to raise the 737’s production rates was thwarted by parts and labour shortages. Boeing’s factory was forced to halt production for a month, a stoppage from which the aircraft-maker took more than a year to recover.

This time around, the production increases come as Boeing is also getting to grips with the production of two new aircraft – the 787 and the 747-8, a stretched version of its jumbo jet. With a budget squeeze at the Pentagon putting pressure on its military unit – which accounts for about half of its revenues – it can ill-afford mistakes in commercial production.

The aircraft-maker says it has heeded lessons from past missteps. “If you go back to 1998, there are a lot of scars in the Boeing company when we tried to go up with 50 per cent rate increases,” says Mr Albaugh. “We got in trouble because we hadn’t verified the supply chain was ready. We violated some of our industrial engineering rules. We have learnt from that.”

It coped with several problems on the 787 programme by bringing production in-house. It has sketched out its production plans much earlier than usual, so as to give suppliers a long-term look at where they will need to step up their investment to meet Boeing’s demand for parts. Boeing has also improved its monitoring of suppliers – a measure that paid off after the Japanese quake, when it was able within a day or two to get a good sense of which had been affected.

Nevertheless, many in the industry are braced for problems. “In the next 12-18 months, we will start to see cracks in the supply chain,” says Phil Toy at AlixPartners, a consultancy. “Each aircraft has hundreds of thousands of parts, and you only need a shortage of one of those to cause more delivery delays.”

Additional reporting by Mark Odell