Please help answer the following 3 questions after reading the text below.

Case# 17

1.Would the project compensate the shareholders of Boeing for the risks and use of their capital?

2.Were there other considerations that might mitigate the economic analysis? For instance, to what extent might organizational and strategic considerations influence the board?

3.If Boeing did not undertake the 7E7, would it be conceding leadership of the commercial-aircraft business to Airbus?

The Boeing 7E7

We still have a lot to get done as we move toward authority to offer the 7E7 to our customers. The team is making great progressunderstanding what our customer wants, developing an airplane that meets their needs, and defining a case that will demonstrate the value of the program.

Michael Bair, Boeing Senior Vice President1

In early 2003, Boeing announced plans to design and sell a new, "super-efficient" jet dubbed the 7E7, subsequently called the "Dreamliner." However, news over the next six months depressed the market for aircrafts, which were already in sharp con- traction. The United States went to war against Iraq, spasms of global terrorism offered shocking headlines, and a deadly illness called SARS resulted in global travel warnings. For those and other reasons, airline profits were the worst seen in a generation. This seemed like an incredible environment in which to launch a major new airframe project. Nevertheless, on June 16, 2003, at the prestigious Paris Air Show, Michael Bair, the leader of the 7E7 project, announced that Boeing was making "excellent progress on the development of the 7E7 and continues to be on track to seek authority to offer the airplane."2 In order to proceed with the project, Bair sought a firm commitment from Boeing's board of directors in early 2004. If the board approved the plan, he could start collecting orders from airlines and expect passengers to start flying on the new jets in 2008. Between now and his recommendation to the board, he would need to perform a valuation of the 7E7 project and gain the support of Boeing's CEO, Philip Condit, and the other senior man- agers. Would the financial analysis show that this project would be profitable for Boeing's shareholders?

Origins of the 7E7 Project

Boeing had not introduced a new commercial aircraft since it rolled out the highly successful 777 in 1994. Later in the 1990s, however, Boeing announced and then can- celled two new commercial-aircraft programs. The most prominent of those was the "Sonic Cruiser," which promised to fly 15% to 20% faster than any commercial air- craft and bragged of a sleek and futuristic design. Unfortunately, after two years of developing the Sonic Cruiser, Boeing's potential customers were sending the message that passengers were not willing to pay a premium price for a faster ride. Boeing was now long overdue to develop a product that would pull it out of its financial slump, as well as help it regain the commercial-aircraft sales that the company had lost over the years to Airbus, its chief rival.

With the 7E7, an Airbus executive argued that Boeing seemed to be promising a "salesperson's dream and engineer's nightmare."3 The 7E7, while carrying between 200 and 250 passengers, would be capable of both short, domestic flights as well as long, international hauls. It would use 20% less fuel than existing planes of its projected size and be 10% cheaper to operate than Airbus's A330-200. At a time when major airlines were struggling to turn a profit, less fuel, cheaper operating costs, and long or short distance flexibility would be a very attractive package at the right price.

Skeptics of the 7E7 were not in short supply and suggested that the name "Dreamliner" was appropriate. To make the plane more fuel efficient, the 7E7 would be the first commercial aircraft built primarily with carbon-reinforced material, which was both stronger and lighter than the traditional aluminum. In addition, Boeing promised greater fuel efficiency by using a more efficient engine. Boeing claimed that the use of composites would also reduce its manufacturing costs. The goal would be to design a plane with fewer components that could be assembled in 3 days as opposed to the cur- rent 20 days that it took to rivet together the Boeing 767. The use of composite materials, however, had its risks. Composite materials were suspected as a contributory cause to a 2001 plane crash in New York and, therefore, would have to overcome regulatory scrutiny. Boeing would also have to change its production methods radically. The last time Boeing made a major production change was in 1997 in an effort to cut costs. However, because the process was not smooth, it resulted in two production lines being shut down for 30 days and hundreds of missed airline deliveries.

The ability to produce a short and long distance aircraft would also have to over- come engineering obstructions. Analysts argued that building a plane that would do short hops in Asia and long trans-Atlantic flights would require two versions of the plane with different wingspans.4 Boeing engineers considered the possibility of snap on wing extensions. The question was whether this would be too costly, as well as being technically feasible.

Finally, there was the matter of Boeing's board. Two of the most powerful members of the 11-person board, Harry Stonecipher and John McDonnell, were rumored to have raised serious concerns regarding the cost of the 7E7. While the cost of developing the 7E7 project could be as high as $10 billion, there was an imminent veto threat if that number did not shrink by billions. More specifically the board wanted to keep 7E7 development costs down to only 40% of what it took to develop the 777. An additional pressure from the board was to keep the 7E7 per-copy costs to only 60% of the 777 costs. In response, Philip Condit, Boeing's CEO and chair, was quoted as saying that "Boeing has a responsibility to develop jetliners for less."5 He knew, however, that if Boeing did not take bold risks in the commercial-aircraft industry that their days as a serious competitor to Airbus were numbered.

Commercial-Aircraft Industry

In 2002, two companies, Boeing and Airbus, dominated the large plane (100