In one of the gutsiest gambles in the history of commercial aviation, the Boeing Co. is betting more than $2.5 billion -- over twice its net worth -- on the introduction of three new model jets.
Such a bold takeoff either will thrust the world's largest and most profitable aircraft manufacturer further ahead of its competitors, assuring Boeing's market dominance for another generation of jets, or send it crashing.
Boeing's wager hinges on the judgment that the airlines soon must have -- and will be able to afford -- a new family of economy jets, planes that will have to fly quieter and consume fuel more efficiently. It also depends on several assumptions -- that more people will be flying in the 1980s, that Europeans and Asians will continue to favor American-made aircraft, and that the world will remain politically stable and free of a depression -- none of which Boeing's top managers concede they can count on completely.
So far, though, the bet seems to be paying off. In a series of $1 billion-plus sales such as the industry has rarely seen, United, American and Delta in recent weeks have placed record orders for 80 of Boeing's innovative 767, a medium-range, wide-bodied, 200-passenger plane, the first of the new generation. Eastern and British Airways have ordered a total of 40 of the more-narrow-bodied 757s. A third new model, the 777, remains on standby.
By next spring, when the drizzly winter fog here lifts, the company expects to be soaring well on its way toward blue sky and riches.
Understandably, the mood at Boeing head-quarters has been buoyant. Less so, the mood of Seattle. Local residents have greeted Boeing's new boom somewhat warily, the memory of the bust of 1971 still vivid in many minds. If there is one lesson this city has learned from the pioneering aircraft company, it is that what goes up, inevitably comes down.
"Most people are worried," said Miner Baker, vice president and economist for Seattle First National Bank and a 64-year-old lifelong resident. "They are worried that it won't last."
Baker recalls that, once before, Boeing's executives sounded as optimistic as they do now. That was back in the Sixties, just after Boeing had introduced the 747 jumbo jet and had big plans for the first supersonic transport, the SST. By 1971, with 747 sales slowed to a trickle and the SST program cancelled, Boeing was suffering a severe depression and Seattle's economy was in a shambles.
This time, too, despite Boeing's optimism and the recent rush of orders, there are hints that the flight path ahead for the company may again prove to be a shaky one. The airlines have been slow -- almost reluctant -- to re-equip aging fleets. In the last few years, their earnings have improved, thanks to discounted fares and increased air travel. But in the new competitive era that deregulation of the industry has fostered, no one can be sure whether the earnings will last.
Of course, Boeing does not intend to take the same fall twice. It is expanding its work force slowly, phasing in production to meet the new orders in carefully planned steps. It also remembers 1971 -- in fact, most of the top management team that steered the company down remains in charge today, piloting it back up.
"There's still a lot of scar tissue around here," said Dean D. Thornton, who has charge of the 767 program. "It's still the same people. We're just 10 years older and 10 years smarter."
There are some important differences this time around, company officials say. For instance, many of the facilities for making the new jets are already in place. Boeing plans to add only 3 million square feet of new work space compared to the 8 million it added in gearing up for the 747. Also, far fewer employes will be hired, due to increased automation and improved production control systems. From a swollen 101,000, Boeing slashed its Seattle labor force to 37,300 in 1971. In recent months, the payroll has expanded again -- to 64,500 at latest count. But company officials say the final number will be well under six figures. One advantage, meantime, is that 40 percent of those Boeing has been hiring have worked for the company before and so require less training.
Even so, Boeing's competitors shudder at the magnitude of the risk Boeing is taking. "With our analysis, we are not convinced that a great enough return is possible," said Ray Deffry, director of information for McDonnell-Douglas.
In contrast to Boeing, McDonnell-Douglas, the world's second largest aircraft maker, is playing a cool and cautious game. It has scrapped plans for a jet that would have competed directly with Boeing's 767, and instead is concentrating on marketing derivatives of its current aircraft. The same is true of Lockheed.
Both companies, in fact, have had less success with their commercial aircraft divisions than has Boeing.Both still are trying to recover the start-up costs of their own jumbo jets. At the same time, McDonnell-Douglas and Lockheed are less dependent on commerical jet sales than is Boeing, which draws 80 percent of its business from the commercial jet market. If any company has to gamble on a new jet to stay in business, it's Boeing.
And it is in good position to do so. Boeing already dominates the industry, accounting for about 55 percent of jet sales in the free world. It has about $1.5 billion readily available in cash and other liquid assets. And its backlog of orders is now approaching $10 billion.
According to Boeing's growth strategy, its old line of jets -- the 700 series including the 707, 727, 737 and 747 -- should continue selling well for several years, generating cash for the new line which will be launched in the early Eighties. By then, Boeing strategists figure the airlines will be shopping for more efficient and quieter planes.
And on Friday, Lufthansa Airlines confirmed a purchase of 32 of the 737s, which the airline said was the biggest purchase ever by a European carrier.
In airplanes as in cars, Boeing expects the trend to be toward economy models. Its new jet line represents a fairly modest step forward in technology. The new planes' outside appearances, at least, lack any indication of a revolution in the making. There is nothing about the new models that approaches the awesomeness of a 747 or the thrill of a Concorde.
"The new generation doesn't fly faster or farther or higher, just quieter and cheaper," said Stanley Little, a Boeing vice president.
The most significant innovations will be subtle, as in the tapered shape of the wing, or hidden in the design of the engines and the sophistication of cockpit navigation systems. Boeing claims these improvements add up to a 35 percent gain in fuel efficiency and to landings and takeoffs quiet enough to meet government noise standards that take full effect in 1985.
One other important distinction about the new jets: They will be larger than Boeing's highly successful 135-passenger 727, but smaller than its 450-passenger 747, reflecting Boeing's forecast that air traffic will grow only moderately in the Eighties. The new models also will fill a void in the company's product line. By introducing a medium-sized jet, Boeing -- which often has been called the General Motors of jetliners -- will be able to pride itself on having a plane for every market.
Unfortunately for Boeing, the Europeans have been rushing to fill the same void. Airbus Industrie, a consortium backed by the West Germans, French and Spanish, has announced plans to produce a down-sized version of its successful A300. Called the A310, this twin-jet, wide-bodied, 200-passenger plane will be directly competitive with Boeing's 767. And Airbus is determined to cut into Boeing's market.
Europeans account for 25 percent of world air travel but only 5 percent of aircraft sales, and Airbus was chartered specifically to correct this imbalance. It will be tough to beat -- in Europe because of a buy-European bias on the part of government-owned European airlines, and elsewhere because Airbus is prepared to offer financing tems the Americans can't match.
Once in awhile, too, a European government steps in to help swing a deal, as when the French offered landing rights in Paris to Taiwan or pledged to support Spain's entry into the Common Market, both in return for Airbus commitments.
Boeing officials argue their plane will be technically superior to the European model. They concede, though, that the true performance test will be when the airlines start flying both planes, which is still at least 4 years away.
To offset the terms the Europeans provide, Boeing is offering a few sweeteners of its own. Chief among these are servicing guarantees and free spare parts. The company also has successfully petitioned the Export Import-Bank to arrange easier financing terms for foreign airlines seeking U.S. jets.
In the past, Boeing, like other major corporations, has relied on payments to foreign consultants to help effect a jet sale in some instances. Under pressure from the Securities and Exchange Commission, Boeing revealed that it made more than $53 million in such payments during a seven-year period. According to company officials, some of these payments may have ended up in the hands of unnamed foreign government officials.
Boeing officials say they continue to use consultants abroad, calling this practice a necessary part of doing business. But Washington's fuss over socalled "questionable payments" appearently has crimped Boeing's style.
"The hurt has certainly not been fatal, but it does hurt," said Dean Thornton, vice president of contracts and international operations for Boeing's commercial airplane division.
The heightened threat of foreign competition also has driven Boeing to do something it has never done before -- namely, use foreign subcontractors. About 30 percent of the 767 and 777 will be built in Italy and Japan, in the hope that if the Europeans and Asians help build the jets, they and their friends will buy them more readily.
"We felt that we ought to get some kind of foothold over there," said Thornton. "The market is very international now, and we decided we couldn't sit here in Seattle in isolation."
It hasn't been easy for Boeing to work out an arrangement with its foreign contractors. During several years of negotiations, the companies dickered with the Italians and Japanese over percentages, schedules and terms of payment. Throughout, Boeing officials wanted to ensure they retained control of the program.
"It's not a joint venture," said Thornton, explaining the understanding that was finally reached. "We call them participants, not partners. It's a Boeing program all the way."
The arrangement means a welcomed reduction in Boeing's start-up costs and also relives the need for a wholesale build-up of its own labor force. The Italians and Japanese are assuming the start-up risk of their own operations, as well as the currency exchange risk, since Boeing insisted that all payments be made in dollars.
But to Boeing's dismay, the arrangement has proven to be no guarantee of aircraft sales. Recently, Italy's Alitalia ordered four new jets -- from Airbus.
To break even on the 767, Boeing officials say they have to sell 400 planes in a market they anticipate will want 1,500 in all. The projections for the 757 and 777 are somewhat less. Lots could go wrong in the meantime, but many industry observers think Boeing is doing what it has to do.
"They're forced to take the risk," said John L. McKenzie, a Seattle-based financial analyst with Foster & Marshall. "In their industry, you have to be in there first since there's no place for second."
As for the people of Seattle, many are taking the Boeing bonanza in stride. Since the early Seventies, the city has diversified aggressively, concentrating on expansion of its port facilities, service sector and tourist trade in order to lessen its dependence on Boeing. Ten years ago, aircraft workers accounted for more than 20 percent of Seattle's labor force; today, that is down to 6 percent.