The Dreamliner saga: What is the value of an inaugural flight?

Since my last post ten days ago all the 787 fleet has been grounded, but interesting facts about operating a 787 continue to emerge. Because airlines make a big deal of introducing the aircraft, they used creative techniques in order to keep the Dreamliner’s flights on schedule. Here is how WSJ describes it:

Launch customer All Nippon Airways Co. provides an example of the lengths to which airlines and Boeing have gone to keep 787 flights operating.

ANA’s inaugural flight from Seattle to Tokyo of one of its Dreamliners last October was delayed by 24 hours because of a faulty electronics cooling pump that has been a persistent problem for operators of the new jet.

With the twin-engine 787 stranded at the gate, ANA and Boeing officials trekked to the company’s nearby facilities to find a spare, according to a person familiar with the move. Boeing has since redesigned the pump.

Boeing spokesman Marc Birtel said the company continuously works with all its customers to keep aircraft in revenue service and said the plane maker worked with ANA to solve the issue with parts from its spares facilities.

United Continental Holdings Inc. has also resorted to creative measures. Worried about the 787’s reliability—which already prompted a delay in the start of service with the jet between Houston and Lagos, Nigeria—United had at least two of its six 787s on standby for the airline’s first trans-Pacific flight from Los Angeles to Tokyo, according to a person familiar with the planning.

The scheduled 787 left as planned, and two of the reserve planes flew back to Houston without passengers, according to the same person and flight-tracking website Flightaware.com.

United spokeswoman Megan McCarthy said repositioning empty aircraft isn’t uncommon, but wasn’t able to say specifically if the extra 787s in Los Angeles were in place to support the Tokyo flight.

Although the evidence is anecdotal, it shows how much airlines value an inaugural flight, in this case, United, Los Angeles to Tokyo. Suppose that with 95% probability an aircraft will have no issues, and there is a 5% chance that a flight-delaying problem will be discovered. Let’s not worry about revenues yet, just try to quantify losses from a potential delay for an inaugural flight and compare it with an ordinary flight.

Suppose for the sake of illustration that if an ordinary flight is delayed for a long time, the airline incurs a cost of $10000. This can happen with 5% probability, so the expected cost is $500. This is an acceptable level of losses. Now, consider an inaugural flight. Obviously, the stakes are higher, so if the flight is delayed the cost will be much greater. But by how much?

Is an event unfolding before our eyes?

In Operations Management, as well as some other fields, researchers like to study how people react to various announcements or events about a company. This is called an “event study”. Typically in such studies, the wisdom of a crowd is captured through the price of a company’s stock to which an event is related. Of course, the company needs to be big enough and traded on an exchange. My colleagues Vinod Singhal and Kevin Hendricks have done a lot of work on these studies. In that sense it is interesting to watch what is happening to Boeing now.

Their newest development, the 787 Dreamliner, has recently shown some quality glitches . Here’s how CNN portrayed the story on Wednesday:

Over the course of Monday and Tuesday, when two announcements about a fire in 787 auxiliary battery, and a fuel valve leak were made, the stock price of Boeing plunged about 5%, which is a lot. More interesting things happened later in the week though.

How do you build a 737?

I’ve written before about the Boeing plant in Renton, WA. Here is a fascinating video about how an airplane is actually built, this one is for Russia’s S7 airlines. The 11 days of final assembly  compressed in 2 minutes (and they do have a conveyor belt for airplanes!)

After a little bit of research, the details on the assembly line:

Length of moving line: 742.5 ft. (226 meters)
Speed of moving line: 2 inches (5 cm) per minute (75 hours to go through the line)

Read on, the performance improvement numbers are fascinating –>

Shipping Apples around the globe!

Today is a big day for Apple, with a launch of the new iPad and possibly Apple TV. It is also a bonanza day for shippers. In anticipation of the launch Apple booked a large chunk of air cargo capacity to bring boxes from China into the States. According to this article the shipping rates over the last week went up by as much as 20% (hat tip to Zach Chahalis for the link).

Apple is certainly enjoying its status of a big boy in a sandbox here. For smaller companies though it means a struggle to get the goods from China. But there is also an opportunity. Since the cargo is flowing mostly into the States (and probably Europe as well), there must be excess capacity for shipping goods in the opposite direction. I wonder if anybody has decided to capitalize on this.

Managing this flow imbalance also presents a challenge for shippers. Of course with $100B in cash Apple probably paid them the return-ticket fare, but still looks like some money could be left on the table if they fly back completely empty.

How do you compete on cost?

Many companies make a point of competing on cost – making stuff cheaper than their competitors. One example would be an airline called Ryanair. Its CEO Michael O’Leary in this BBC interview has some interesting things to say about flying and his vision of what  air-travel should be.

He seems pretty determined to make flying cheaper, but also it seems that Ryanair’s model is actually to build revenues from the ground up. You start with a rock bottom price, say 1 pound for flying standing, but then you add fees for carry on, printed boarding passes, priority boarding, assigned seating, etc. In this respect another company, from a totally different industry, welding equipment manufacturer Lincoln Electric has a totally different approach.