Boeing Deep Dive

Welcome to the 59th Pari Passu Newsletter,

In light of the recent incident on Alaska Airlines flight 1282, we are taking a deep dive into Boeing today. In this post, we will cover the dynamics of the aerospace industry, including innovation, complications, the current environment, and how Boeing is preparing itself for the next decade.

Introduction 

Boeing was founded on July 15, 1916, by William E. Boeing in Seattle, Washington. The company initially focused on the design and manufacturing of seaplanes, which were used for mail delivery and other services. Over the years, Boeing evolved into a multinational aerospace and defense corporation, becoming a key player in the aviation industry and an important global asset. Today, Boeing's business is split into three segments: (1) commercial, (2) defense, and (3) services, with commercial accounting for nearly 40% of its revenues. This summary is structured into three sections: Overview, History, and Contemplating the Future. 

Overview - What Makes This Industry Fly? 

The aviation industry is a marvel of modern engineering and business acumen, and Boeing stands as one of its most iconic pillars. This section aims to provide a comprehensive look at Boeing's role in the aviation sector, focusing on the economics and complexities of aircraft manufacturing—a task often described as the single most challenging industrial task humans do. 

• Developing a new aircraft program is a colossal financial undertaking. Estimates suggest that the cost can range from $15bn to $20bn. 

• While Boeing or its competitor Airbus may list a single-aisle airplane for $110mm to $130mm, the actual transaction often occurs at a significantly discounted rate. Discounts of 40% to 60% are not uncommon in the industry. 

• For mature airplane programs like Airbus’ A320 or Boeing’s 737, the all-in cost to build an airplane can be between $25mm to $35mm. These planes may eventually sell for about $50mm to $55mm. 

• Boeing typically aims for profit margins between 5% and 15% for a commercial airplane. As an airplane program matures, these margins improve, making it a long-term business. 

The complexity of aircraft manufacturing is denser than what most would initially expect. The process that goes behind planning the building of a specific airplane model which tailors the needs of multiple levels of customers plays a part in the value proposition that Boeing and Airbus provide for the world. 

• The process involves coordinating with thousands of suppliers, who themselves have suppliers, creating a supply chain that can be four, five, or even six levels (called “tiers”) deep. This is especially true for raw materials like titanium and specialized metals required for jet engines.

• The manufacturing process is incredibly precise, with tolerances sometimes as stringent as 1/10,000th of an inch. This ensures the highest quality and safety standards. 

• The economic useful life of an airplane is approximately 25 to 30 years. An airplane manufactured today could very well be in service until 2050. 

Lastly, what makes the aviation industry so complex in terms of engineering is the reliability of the design of these aircraft. This kind of “intellectual” barrier to entry provides companies such as Boeing more trust and reliability among the customer base, where they have been players for over 100 years.

• Unlike rockets that wait for perfect weather conditions, airplanes are designed to operate in a wide range of weather conditions, requiring a higher level of robustness.

• Managing the manufacturing process requires an immense amount of institutional knowledge to ensure that it is repeatable, safe, and profitable. Both manufacturing and maintenance also rely on a wide array of personnel, from highly trained engineers to line operators.

Overview - Boeing’s Model & Performance 

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