June 19, 1983
 
The big gamble
 
 Photo
In 1978 Tex Boullioun, left, president of the Boeing Commercial Airplane Co., agreed to Eastern Airlines President Frank Borman's request for a larger, more fuel-efficient jetliner. Their handshake deal launched Boeing on a crash multi-billion-dollar development program characteristic of this "sporting business that rivals Las Vegas."
BOEING loses millions of dollars on every new 757 it sells.

But someday-if fate cooperates, if the wager pays off, if enough of the twin-engined jetliners are sold-the 757 will become hugely profitable. Or at least that's Boeing's hope.

It's all part of what Sanford McDonnell, chairman of McDonnell Douglas, has called a "sporting business that rivals Las Vegas."

More than one airplane manufacturer has been driven from the jetliner field by the commercial failure of a jetliner which was a technological success. Lockheed bowed out of the business two years ago after losing $2.5 billion on its L-1011, a popular wide-body jetliner similar to the DC-10.

In fact, of all the jetliners ever made in Europe or the United States, only two, the Boeing 707 and 727, are said certainly to have made a profit. The DC-9 and 747 may yet become profitable. The DC-8, the DC-10, the L-1011, even the 737...all these airplanes, and more, have lost money for their manufacturers.

So when Boeing elects to risk $1.5 billion or more to build a new airplane, it does so warily and with great forethought.

The 1978 decision to build the 757 was not reached easily or quickly. It involved sophisticated forecasts of international politics and economics and the advancing state of technology.

But the world airline industry is volatile, and unexpected developments can destroy the best-laid plans. An airplane concept that is promising one year may be pointless the next, ruined by the changing needs of the industry. There's a saying in the airplane-manufacturing industry: "Long-range forecasting is the day after tomorrow."

Still, Boeing predicts both the 757 and its companion, the 767, will be moneymakers. Design and manufacturing costs have been contained and the long-term market for the planes is large, company officials say.

Boeing's confidence is not universally shared. The 767 is competing directly with a similar airplane, the Airbus A-310, and the slightly smaller 757 is judged by many to be too similar to the 767 in passenger capacity.

What's more, the market for airplanes is small. Only about 300 airlines in the world buy jetliners, and some place only modest orders.

The 757 is praised by its customers and suppliers and undoubtedly is a technological marvel, but critics contend that Boeing misread the crystal ball and built the wrong airplane-a fine airplane, but the wrong fine airplane.

Carl Munson, Boeing's vice president for strategic planning, said the company built the 757 and 767 because it couldn't afford to sit still while the world changed.

"You either are continually modernizing your product line or you're going backwards," he said. "you have to spend and improve just to stay in the same place from a marketing perspective."

The company, which has built two-thirds of the jetliners in the Western world, updates existing airplanes as much as possible before launching new ones, Munson said. But that only works for so long.

When the time comes to launch a brand-new airplane, as Boeing did in 1978 with both the 757 and 767, the company must gaze into the future and take huge a gamble-take what Boeing Chairman T.A. Wilson has called "A hell of a risk decision."

TEN YEARS AGO, Boeing was searching for a new project.

Hopes had centered on a supersonic transport, but Congress cut off federal funds for the SST in March 1971. Boeing, racked by depression in the airline industry and early troubles with its 747 program, was forced to reduce Puget Sound employment from 101,000 in 1968 to 38,000 at the beginning of 1972.

What was next?

The company was strongly attracted to the concept of a joint venture with overseas aerospace interests.

E.H. "Tex" Boullioun, then president of the Boeing Commercial Airplane Co., began negotiating with potential overseas partners who might share some of the responsibilities the Seattle company traditionally had assumed on a new-airplane project. Such an arrangement would reduce Boeing's risks and costs.

It was an attractive idea because it could lend to a new airplane an international flavor which could help sales overseas, and would skirt anti-trust laws which prohibit too much collaboration between U.S. firms.

"It was my belief," Boullioun said, "that it was in the best interests of the United States to combine with the Europeans nations in the technology of airplanes, as long as we always put out 50 percent of an airplane, both in weight an d in dollars.

Boeing wasn't the only company thinking about internationalism. Britain's Rolls Royce was making engines for Lockheed L-1011s, and the inherently international Airbus Industrie first flew its 240-passenger A-300 late in 1972.

That same year, Boeing struck a 50-50 deal with Aeritalia, Italy's government-owned aircraft manufacturer, to build a quiet, short-haul airplane. IT was dubbed the 7X7.

Italian engineers were dispatched to Seattle to receive instruction. Italy paid Boeing, which was strapped for cash.

But Boeing lost interest and unilaterally withdrew from the partnership, leaving behind a badly upset Italy.

"As we were developing this quiet airplane, we came into the 1973 period and the Yom Kippur War and fuel prices went from 9 cents a gallon to 35 and 36 cents a gallon real quick," said John Swihart, who played a role in Boeing's airplane-development plans throughout the 1970s.

"As soon as that happened, there was a great change in emphasis, because you needed fuel efficiency more than you needed the quiet-noise aspect."

Boeing's focus shifted to new designs stressing fuel efficiency, but the name 7X7 stuck.

It wasn't any single airplane or idea. The concept kept changing. Sometimes it had four engines, sometimes three, sometimes two. Sometimes it was a short-haul plane, sometimes medium-haul. Sometimes the engines were mounted on top of the wings, sometimes below.

Wilson was quoted in mid-1973 on why "X" was in the name: "The design boys wanted a specific number. I said no: A number would imply we know what the hell we're going to build and we don't So the 7X7 is whatever we're going to do next."

Gradually, the 7X7 designs focused on wide-body configurations with two passenger aisles, but it wasn't even determined whether the airplane would have two engines or three.

Nothing was unusual about Boeing trying to intrigue airlines with numerous and ever-changing concepts. For every new airplane model Boeing builds, literally hundreds of designs never escape the drawing boards. The company has fleets of planes that never flew, and fine balsa models of discarded dreams adorn the offices of many Boeing executives.

Boeing and its competitors even try to "sell" designs they know they wouldn't build. "You're trying to show the customer that, by golly, you've still got good ideas," a Boeing sales executive explained.

EVEN WHILE the 7X7 design was being offered around in various twin-aisle guises, Boeing began to talk in 1974 about a second new airplane. It would have a single aisle and less capacity than the 7X7.

All-new designs are extremely costly, however, so the second airplane Boeing had in mind would be a substantially modified 727.

It was to be called the 727-300 and would feature a stretched body, refined wings, modestly improved engines and new landing gear. "It was all of the technology that we could put in in a cost-effective manner," said Duane Jackson, a lead designer on the projects.

Boeing had United Airlines in mind as the first, or "launch' customer, for the 727-300, and United was interested. Braniff said it could use the plane by 1977, too.

But customer interest, though essential to creation of a new airplane, is not enough to ensure it will be built. Showing a design, even negotiating a possible deal, is a far cry from agreeing to take the gamble.

In the case of the 727-300, however, Boeing was ready to go. And it seemed, at least to Boeing, that United was ready to buy 50 of the planes for a bout $600 million.

Boeing announced that the program was officially going ahead with United as the first customer. But then the press release was abruptly withdrawn, because on Aug. 28, 1975, United announced it was not buying the 727-300.

Edward Carlson, United chairman, praised the plane and blamed bad economic conditions and the lack of "reasonable (tax) incentives" for halting the purchase.

But Edward Beamish, the airline's senior vice president for corporate planning, today recalls that United really was "not all that close" to launching the 727-300. "We decided it wasn't a good investment " because it didn't offer enough of a n improvement in fuel efficiency, he said.

"It was a matter of disappointment," remembers Jackson, the Boeing designer.

Jackson and a small group of designers spent the remainder of 1975 trying to breathe life back into the 727-300 by finding design changes that might cut the cost of the airplane enough to attract United.

But every time the designers eliminated some costly innovation, they also reduced the airplane's value to the airline. "We spent four or five months understanding that there wasn't another alternative that would satisfy," Jackson said.

The 727-300 was dead, another plane that never flew.

Nevertheless, Boeing remained committed to the idea of two new airplanes, a double-aisle 7X7 and a single-aisle 727-like airplane.

In January 1976, the 7N7 was born from the ashes of the 727-300. It was to retain many key body sections and concepts of the 727, but would have broad innovations, too.

Eventually, after 339 rejected designs, the 7N7 was destined to become the twin-aisle 767.

SINGLE-AISLE and double-aisle airplanes each have virtues, and Boeing wanted to build a new one of each type.

A wide body has a spacious feeling and the second aisle allows easier passenger movement, especially when food carts are blocking one aisle. A wide body also can carry an appreciable amount of cargo.

A single-aisle airplane has a narrower body which slices through the atmosphere more easily and hence is substantially more fuel-efficient to fly. But it carries much less cargo than a wide-body, and passengers may feel cramped on long flights.

Boeing saw the 7X7 with tow aisles and the 7N7 with one aisle. The 7X7 would be all-new, but the 7N7 was to be a derivative of the single-aisle 727, though much more updated than the 727-300 idea United had rejected.

Although the 7N7 would retain many of the 727's body sections, thus saving vast sums on tooling and production experience, it also would employ advanced technology where it really counted — especially in the engines and wing.

One reason Boeing wanted to build to w new airplanes at once was to hedge its bets.

If it had known exactly what kind of airplane would be needed in the 1980's a single plane would have been enough. "Frankly," Boeing vice president Kent Holtby once explained, "our ability to forecast is so lousy that the only way you can survive is to cover all your bets."

Munson, Boeing's strategic planner, said launching both the 757 and 767 amounted to using a shotgun to hit a target. A rifle wouldn't do because Boeing had to fire the shot years in advance, and didn't know where the bulls-eye would be.

The company began moving forward on the 757 on two fronts, domestic and foreign.

Within the U.S., it looked to Easter Airlines as a possible launch customer for the narrow-body airplane. Outside the country its attention focused on Great Britain and its multiple attractions in the form of three government-owned industries.

One of them, British Airways, wanted a 757-like airplane for its many short-haul routes in Europe. It was a large international airline and an attractive launch customer, and if Boeing could get both it and Eastern to buy the 757 in substantial numbers, the company could put the airplane into production.

Another industry, Rolls Royce, was a jet-engine manufacturer that was hungry for a strong connection with a U.S. airplane manufacturer. Boeing was its first choice, for Rolls saw in Boeing's planes a large and enduring market for its engines-which sell for about $3 million each and require periodic replacement.

The third industry, which then was a group of companies but now is a single entity known as British Aerospace, was a potential risk-sharking partner in the manufacture of the 757. It was especially attractive because it had the capability to design and produce a high-technology wing.

Producing state-of-the-art wings is such a challenge that neither France now West Germany was eager to take on the challenge of making wings for the A-310 (the earlier A-300 Airbus uses a British-made wing, as does the Concorde supersonic transport).

Boeing makes all its own wings. But in the case of the 757 it was willing, even eager, to break tradition. The wing was an expensive challenge, and Boeing would have been happy to let the British take it on.

Bringing British Aerospace's substantial resources onto the Boeing team also probably would deny them to the Airbus A-310, a threat to Boeing's other new program, the 767. Airbus needed Britain to make its wings.

BOEING'S British plan was simple: It wanted a launch order for 757s from British Airways, and it offered the government of Prime Minister James Callaghan, a market for Rolls Toyce engines and a partnership of sorts with Boeing on the 757 airframe.

The arrangement suited Rolls Royce and British Airways.

Sir Kenneth Keith, chairman of Rolls Royce, visited Seattle and said Rolls would go forward with Boeing if tow major airlines would become launch customers for the plane with Rolls Royce engines. The engine deal was "clinched" at the Seattle meeting between Sir Kenneth and Boullioun, said John Hodson, a Rolls Royce vice president.

The British government, which must approve airplane purchases by British Airways, was keenly interested in selling Rolls Royce engines.

"If there was any political pressure, it was that an association with Rolls Royce was necessary to make the purchase," said Roy Watts, deputy chairman of British Airways. "I don't think you'll find it written down anywhere. But if we'd tried to buy the 757 with Pratt & Whitney engines, we would have had a hell of a fight."

But the Boeing plan didn't sit well with British Aerospace.

Boeing's scheme called for a joint venture with British Aerospace to create the 757 airframe, but the Seattle company didn't believe a billion-dollar enterprise could succeed without a definite leader.

As one of Boeing executive put it: "Everybody's equal, but somebody's more equal than the others. Throughout those discussions we felt we'd have a partner, but one partner was going to be in charge, and that was us."

British Aerospace felt is deserved an equal partnership — if not with Boeing, then with Airbus or McDonnell Douglas. Lockheed was talking to the British, too, although rather nebulously.

All but Boeing were talking full partnerships — but Boeing was the world's most successful planemaker, and Rolls Royce and British Airways were pushing for the Boeing connection.

Michael Goldsmith, a top British Aerospace official who negotiated with Boeing, said the Seattle company had been talking partnerships initially, but eventually offered only a subcontracting role. "Boeing offered us to build so many wings at a very snappy price" while Airbus was talking with British Aerospace about a partnership in what eventually would be a whole family of airplanes, Goldsmith said.

For its part, Boeing's enthusiasm for the deal began to dim when it saw British estimates of the cost to build the wing. British Aerospace's figures were far higher than Boeing's estimates.

"One thing we would never do is go to a higher cost," a Boeing official said. "They either, from their cost-estimating techniques or their own efficiency, couldn't approach what we felt the wing ought to cost."

"They'd added a safety factor in their bid," Boullioun added. "I think it was 30 percent banged right on top of it. I told the ministers over there in the industry 'You're a lot better than you think you are. You ought to step up and have some courage and do it'."

Goldsmith said British Aerospace could have gambled by shaving its price if it was to be a partner in the 757 project. But as a subcontractor, it had no incentive to offer more than a cautious price — a price where it was almost certain to make a profit, he said.

Boeing continued talks with the British, but also began looking for a possible U.S. manufacturer to take on the 757 wing.

In late June 1978, Prime Minister Callaghan came to the United States and met separates with Wilson and Boullioun of Boeing, Eastern Airlines President Frank Borman, and McDonnell Douglas President Sanford McDonnell.

He sought and received assurances that the Rolls Royce engine would be used by Eastern Airlines on the 757 and Boeing's top leaders thought their meeting had gone well.

Then, in July, Callaghan met with President Valery Giscard d'Estaing of France and Chancellor Helmut Schmidt of West Germany.

By early August, reports were circulating that Britain would split its allegiance, linking British Aerospace with manufacture of the Airbus A-310 and Rolls Royce and British Airways with the Boeing 757.

That led Boeing to decide to build the 757 wing itself, without any risk-sharing partners at all. It would mean spending more and risking more than the company linked — especially since it had just commenced the 767 program.

In a series of announcements on Aug. 31, 1978, Boeing, Rolls Royce, British Airways and Eastern Airlines revealed that the 757 was going forward, with a total of 40 orders worth more than $1 billion.

The British government announced "approval of two major decisions critical to the future of Britain's aerospace industry" - approval for Rolls Royce to produce the engines for the 757, and the addition of British Aerospace as a risk-sharking, 20 percent partner in the Airbus A-310 program.

There was a catch, however. The governments of France and West Germany both had to give approval for British Aerospace participation in Airbus, and both governments were upset that British Airways was going to purchase the Boeing 757 instead of the Airbus A-310.

Still, approval finally was granted - but only after Britain suggested that British Airways might someday also buy the A-310, if it could be adapted for Rolls Royce engines. France and Britain didn't have a good alternate source of wings, anyway.

Callaghan has since told an interviewer he was pleased by the results of his negotiations, which allowed each of the three British companies to follow its own inclinations. "Rolls Royce was the national asset we had to preserve, which meant establishing it in the U.S. market was the central consideration," he said.

Those political decisions had profound implications for the world of commercial aviation.

For Boeing, the decisions meant the company would have to assume almost all the risk of two new airplane programs simultaneously, while linking the 757 to a British engine for its first years of commercial service.

For McDonnell Douglas, and to a lesser extent for Lockheed, the decision represented another lost opportunity and a sign of declining influence.

For Airbus, the decisions meant new strength, and a new and valuable partner, Britain.

Today Boeing seems confident about the outcome of its competition with Airbus, and Boullioun suggests Britain erred tactically by choosing to help build A-310s instead of 757s.

"We'll build literally two or three times more 757s than they'll every build 310s, because I think the 767 is going to hurt the 310," Boullioun said.

But Airbus seems confident, too. "The way we see it," Goldsmith said, "the A-310 series of aircraft have a very good chance."

WHEN THE 7N7 program started in 1976, Boeing designer Jackson called up Boeing's corporate headquarters and established a new model number. It was 761 - the in-house number for the 7N7.

The first new 7N7 design studied was numbered 761-1. The next was 761-2. And so on.

"We started hundreds of models within that series, " Jackson said. "For example, if we study a short-body concept, we'll call that a 761 dash whatever the next number is."

Boeing thought, and for a time hoped, that the 757 would be a 164-passenger design, which was number 761-262. British Airways and Eastern Airlines were attracted to a larger size because it would reduce per seat operating costs. When Eastern's Frank Borman requested a larger version of the plane, British Airways and Boeing agreed.

By late summer of 1978, the larger 757 had become model 761-280. It looked a good deal like a lengthened 727, with a high T-tail, but had tow big engines under the wings instead of three small engines on the rear of the fuselage.

The details of the 761-280 weren't all worked out, so Boeing, Rolls Royce, Eastern Airlines and British Airways had only an idea of what was being sold and bought when their leaders shook hands on the deal in August 1978. It wouldn't be until March 1979, after details were nailed down, that contracts would be signed.

Even without contracts, Boeing and Rolls Royce began spending millions of dollars on a program to produce the 761-280 in less than four years.

Hodson explained Rolls Royce's willingness to proceed on faith: "When two people like Boullioun and Kenneth Keith have shaken hands, it's only up to the lesser mortals to do the I's and cross the T's. It's going to happen."

But the task was bigger than imagined in 1978, for the 757 refused to sit still.

Model 761-280 kept evolving. The high T-tail eventually was dropped, the nose was flattened and widened, the electronic gear and cockpit were updated radically - and much of this happened late enough in the process that some Eastern Airlines engineers were nervous about Boeing's ability to pull it off in time.

With the changes came ever-higher model numbers. The 757 in production today is model 761-340.

As for 761-280, the airplane which led the handshake agreements back in 1978, it's just another plane that never flew.

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