QUESTION

• Write a business case for the Boeing 787 in 1600 words. Justify the
major technological advances required from a business perspective.

• In answering this question you must research the economics of airliners and
the features of the 787.

• It is understood that you will not be able to use the real commercially
sensitive data owned by Boeing. Make the best effort you can from articles in
the aerospace press and Boeing’s public release information

• Emphasis will be on structure, consideration of appropriate issues,
referencing of appropriate materials and quality of argument.

MUST had at least 10 text book Ref.

 SOLUTION

Table of Contents

Airline Industry. 2

Overview.. 2

Chief Characteristics. 2

Understanding the Airline Economy. 3

Where the Money comes from.. 3

Where the Money goes. 3

Break-Even Factors. 3

Seat Configurations & Pricing. 3

Scheduling & Fleet Planning. 4

Boeing. 4

Introduction. 4

Products of Boeing. 4

787 Dreamliner 5

Technological advances. 5

Pioneering Environmentally Progressive Technology. 5

State of the Art Design. 6

Dreamliner Business Verdict 6

Reference List 6

Airline Industry

Overview

History stands witness to the fact that it is very tough to start an airline. Not just that, it is tougher to run an airline profitably. An airline company needs to learn and adapt constantly irrespective of the airline being a startup or an established leader.

Only a few industries other than the airline industry have such a large number of challenging variables. Not just the fact that a significant amount of capital is required, there is also fierce competition among the participants and there is a large dependency on fossil fuels which not only run the risk of depletion but are also subject to price volatility. Some of the other variables include government control, dependency on labour and to a large extent, weather.

Chief Characteristics

From the overview, we just had a glimpse of the airline industry. While we understand that the success of an airline company depends largely upon numerous internal & external factors, we need to review closely the characteristics of the airline industry. What makes it profitable or non-profitable?

Service Industry

The airline industry consists of lots of equipment and facilities. But at the end of the day, we need to understand that fundamentally, it is a service industry. Airlines transport customers, their belongings, cargo, etc. in exchange for money.

Capital Intensive

To start an airline company or to run one, expensive equipment and facilities are needed i.e. a huge capital is required. And the capital, from loans or stocks, requires continuous profitability.

Labour Intensive

Apart from being capital intensive, the airline industry requires a significant amount of labour which includes pilots, ground staff, flight attendants, security, baggage handlers apart from the managers, clerks, etc. The cost of labour, being one of the highest in any industry, eats away nearly a third of the revenues.

Seasonal

We looked at a number of factors affecting an airline company. At the same time, this business has been seasonal, based on historical figures. Such seasonal variations also lead to a significant rise and fall of revenues.

Understanding the Airline Economy

Where the Money comes from

After an airline company is setup with the help of loans and issuance of stocks and other borrowings, once the company is functional, the revenues are mostly generated from passengers. The majority of the revenues come from passengers while the rest is from cargo and other transport services. Drilling further into the revenues, we can observe that among the passenger revenues, a majority comes from domestic travel.

Where the Money goes

The overall costs of an airline company can be segregated into the following:

• Flying Operation : mainly fuel and salaries of pilots & flight attendants
• Maintenance : regular inspection & labour costs, hangar costs
• Aircraft & Traffic Service : mainly salaries of ground staff, baggage handlers, security personnel, gate agents, etc.
• Promotion/Sales : advertisements and travel agent commissions
• Administrative expenses and over-head costs
• Depreciation of the plant & equipment
• Other miscellaneous costs like airport fee and terminal rent

When summarised, labour costs account for a major chunk of the airline costs followed by the fuel costs (Martin Hutchinson 2011).

Ensuring Profitability

Seat Configurations & Pricing

Adding seats to an airplane can potentially increase revenue without having any effect on the costs. But it also depends on what type of customers the aircraft is targeting. In case of economy passengers, they would want to add as many seats at low prices but in case of business passengers, they would have a large section of business class seats. Thus a right mix of customers based on the strategy, need to be satisfied to increase profitability.

When it comes to pricing, the airline has the freedom to set passenger fares and the freight rates based on the supply & demand. This has been made possible since deregulation. The prices are set so as to maximise the revenues. This is done with the help of complex softwares that analyse the demand for a particular flight.

Scheduling & Fleet Planning

Airlines have the freedom to fly on any sector it deems profitable. If it thinks that the demand is high for a particular route then it has a number of flights plying on that route. For air passengers, schedule is also of ample importance. But scheduling has limitations of airplane & crew availability and restrictions of an airport.

An airplane company needs to select the right kind of aircrafts to ensure success, financially. There are aircrafts available in the market that cater to different capacities. A lot of factors go into buying a new aircraft like required capacity, fuel efficiency, maintenance costs and trained personnel. Additionally international flights need long range aircrafts.

Boeing

Introduction

Boeing, founded by William E. Boeing in 1916, boasts of being an aerospace company which is the largest in the world. It is a world leader not just in the commercial aeroplane manufacturing but also in defense and space systems. Boeing exports airlines, having customers in over 150 countries.

Products of Boeing

The product line of Boeing growing for over 40 years, today, has various airplane families such as the 737, 747, 767 and 777. Development is also underway on new products such as the Boeing 787 Dreamliner, in fact the 787 Dreamliner has already had a successful commercial launch (The Economist 28 January 2012) . This product line of Boeing forms nearly 75% of all commercial aeroplanes in the world, a number amounting to about 12,000. Infact, it is the only company that serves the passengers with airplane capacity from 100 seats going upto 500 seats.

As said earlier, the commercial fleet of Boeing consists of various families of airplanes.

• 737 Family : popular for its reliability, 9300 orders surpassed
• 747 Family : class of its own, advanced technology & fuel efficiency
• 767 Family : includes 4 models and a freighter
• 777 Family : preferred all over the world by passengers, non-stop flying capability from point to point with an upper limit of 17,395 km and a capacity of upto 368 passengers
• 787 Family : 210 to 290 passengers flying upto 15,750 km

787 Dreamliner

To respond to the ever growing number of people with airplanes as their preferred mode of transportation, Boeing launched the 787 Dreamliner which is said to be highly efficient. The fundamental values of the 787 are speed and distance highlighted by the fact that in its short span, it already has the world records (The New York Times 10 January 2012), in its weight class, for the longest flight (19,142 km)  and for the fastest trip circling the globe (42h 26m). Its capability to fly long-distance routes will enable airlines to start new non-stop routes.

Technological advances

Pioneering Environmentally Progressive Technology

Some of the new developments are that on April 17, 2012; a 787 Dreamliner had a successful flight powered partly by biofuels, which are sustainable. With the use of biofuels, there will be reduced carbon emissions doing a world of good in sustaining our environment. The CO₂ emissions were estimated to be around 30% less thereby reducing the carbon footprint of the company. The awesome environmental performance of the 787 can thus be attributed, partly, to the use of biofuels and, partly, to the technological progress leading to greater fuel efficiency. Not just the use of sustainable biofuels, advance research is taking place on the use of other renewable energy sources, eg: solar cells and fuel cells.

Boeing is also in the process of developing solutions for effective management of air traffic, which will lead to better environmental performance in the short-term. Thus Boeing, with the launch of the 787, has been trying relentlessly to reduce its environmental footprint. Its target is to cut greenhouse emissions and hazardous wastes by around 25% and at the same time, increase efficiency and rates of recycling by over 25%.

State of the Art Design

The 787 has simple edge flaps trailing the pivot which gives a very good lift-to-drag characteristic that effectively reduces cost of fuel consumption. Also the edge has fewer parts, thus maintenance costs are reduced and airplane is also lighter.

The 787 Dreamliner owes its excellent performance to a string of new technological developments.  Modern architecture is at the core of the design of the 787. 50% of 787’s primary structure is made up of composite materials and this includes the wings and fuselage (Scott Mayerowitz 2011). The aspect ratio, which is calculated by dividing the square of wing span by wing area, is high, owing to the use of composite materials. This allows the 787 to be among the fastest in its weight class, of commercial airplanes.

Engine inlets, which are acoustically treated, and the use of chevrons help reduce community noise i.e. the noise doesn’t leave the boundaries of the airport.

Aerodynamics, which are extremely advanced; use of composite materials, contributing to the light structure; engines which are efficient and optimum systems, all contribute to reducing the fuel consumption by a significant extent.

The frequency of inspections is less and the maintenance intervals, that are scheduled, are much longer. Composite materials, which have been used extensively, also contribute to the reduction of maintenance costs. Also use of these materials in place of weaker materials, in areas exposed to corrosion & fatigue, reduces the time taken for inspections.

Dreamliner Business Verdict

Less maintenance costs and ensuring that the plane spends more time in its flight rather than in the hangar, have made 787 a very prospect as a commercial airplane. With a high potential for greater revenues, better fuel efficiency and lower maintenance costs, the 787 is a great boon for any airline company.

Reference List

Avjobs, Inc., Airline Economics, viewed 17 May 2012, <http://www.avjobs.com/history/airline-economics.asp>.

Boeing, 2012, About Us, viewed 17 May 2012, <http://www.boeing.com/companyoffices/aboutus/brief.html>.

Boeing, 2012, Media, Boeing ANA Celebrate First 787 Biofuel Flight, viewed 16 May 2012, <http://boeing.mediaroom.com/index.php?s=43&item=2220>.

Boeing, 2012, Media, Boeing Receives Official Certificates for 787 World Records, viewed 16 May 2012, <http://boeing.mediaroom.com/index.php?s=43&item=2148>.

Catherine Rampell, The Economics of Airline Layovers, The New York Times 27 February 2009, viewed 16 May 2012, <http://economix.blogs.nytimes.com/2009/02/27/the-economics-of-airline-layovers/>.

IATA March 2012, Industry Outlook – Financial Forecast, viewed 17 May 2012, < http://www.iata.org/whatwedo/economics/Pages/index.aspx>.

Martin Hutchinson, Why the Economics of the Airline Industry are Hopeless, Monday Morning 8 December 2011, viewed 17 May 2012, <http://moneymorning.com/2011/12/08/why-the-economics-of-the-airline-industry-are-hopeless/>.

Scott Mayerowitz, First Review! On Board the new Boeing 787 Dreamliner, News.com.au 27 October 2011, viewed 17 May 2012, < http://www.news.com.au/travel/news/take-a-ride-inside-the-new-boeing-787-dreamliner/story-e6frfq80-1226178001239>.

The Boeing Company, 787 Dreamliner, viewed 17 May 2012, <http://www.newairplane.com/787/>.

The Economist 28 January 2012, Boeing – Faster, faster, faster, viewed 16 May 2012, <http://www.economist.com/node/21543555>.

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