Last week, the news came out that Boeing is highly likely to develop an entirely new replacement for the 737, rather than re-engineer the existing one. And by highly likely, I quote:
Boeing Chairman and CEO James McNerney told analysts, “We’re going to do a new airplane.”
But what I couldn’t find much of in the newspapers was an analysis of what that means for our region. Is it good news, bad news or something in between? Well, as they say, “nature abhors a vacuum,” and the Prosperity Blog is nothing if not nature’s handmaiden (the “Prosperity Blog is Nature’s Handmaiden” t-shirts should be in next week. And so, here we are, ready to rush into the void to provide you the answers to all your questions on the topic.
A little backstory: Airlines care a lot about fuel efficiency. Fuel costs money, airlines have small profit margins and so the more fuel efficient the better. Now, there are two ways to make a plane more fuel efficient. 1) You pop a fancy new engine on the existing plane. 2) You scrap the entire plane a replace it with an entirely new model. The advantages of the first option are obvious: much cheaper and faster; the disadvantage is that it’s actually much harder than it sounds, because those new fuel efficient engines are a different size and you end up having to change much more about the plane. The advantages of the second option are that you get a much bigger boost, and the chance to incorporate all of the latest technologies and designs; the downside is that it takes longer and is more expensive. And “takes longer” isn’t just a problem of extra money, but also some of your customers might get impatient and buy a competitor’s plane while you work.
Now, obviously, this impacts our region because the 737 is made in Renton. And I’ll go out on a limb and say that it’s made very, very well. Not just because the customer demand is so great, which is always a good indicator of quality, but because they do it so fast, producing more than one a day! But which of the two above options would be better. Here’s four scenarios:
A) A Re-engineered/New Engine on Existing Plane Option is Better: If they’re not building a new plane, they’re much more likely to just rework it on the existing production line, guaranteeing 737 jobs in this region for years to come.
B) A Re-engineered/New Engine on Existing Plane Option is Worse: If they’re going to start re-engineering while continuing production of the existing planes, they’ll need a second line of production, which could be somewhere else.
c) A Full Replacement is Better: If they are going to do something as complicated and risky as a full replacement, why would they do it anywhere else than the place that’s the best at making 737s, thereby minimizing the independent variables?
D) A Full Replacement is Worse: That means they’re definitely going to do a full RFP for the new plane, and we’ve seen with the second line of the 787 that we don’t do well in Boeing’s cost-benefit analysis.*
(*X-Factor: We do a lot better in that analysis when there’s assured labor peace. If the International Association of Machinists signs a long term contract extension in 2012, it’s a whole different ballgame.)
I tend to assume that it’s C, and not just because I’m an optimist and a Puget Sound booster. I think the lessons learned from all of the decisions around the 787 show that it’s pretty hard to replace an expert workforce and the ability to centralize quality control. Now, might there be a hybrid production model that falls somewhere between full production and majority outsourcing? Sure, but I think it’ll be a lot closer to the former than the latter.
There you have it, folks. And feel free to call me in 2020 when you know if I’m right or wrong. But hey, at least you know what will or won’t happen!
The Prosperity Blog 