Boeing Wrestles With How Far to Push the Innovation Envelope

As its archrival proved with its failed Airbus A380 project, imitative, incremental innovation is a losing strategy, but assessing the market need for a new midrange aircraft involves a thorny set of questions.

Boeing was right.

About 20 years ago, the Chicago-based jet manufacturer and European archrival Airbus made divergent bets on the future of commercial aviation. Figuring airlines would want more of the same, Airbus developed a larger version of Boeing's then-popular 747 jumbo jet. With the A380, Airbus aimed to grab a bigger share of existing demand for huge planes to ferry large numbers of passengers between major hub airports.

Boeing, by contrast, chose to expand the market by creating new opportunities for customers. Instead of doubling down on jumbos, it designed a smaller, lighter plane capable of point-to-point flying between secondary cities around the globe. The highly efficient 787 Dreamliner enabled carriers to fly hundreds of new routes.

Airlines lined up for 787s, while demand for jumbo jets declined. Orders for 747s shriveled, and the A380 never got off the ground. Airbus finally admitted its mistake last week, discontinuing the airborne white elephant.

Boeing's win carries an important lesson: Imitative, incremental innovation is a losing strategy. Real innovators create new demand. They figure out where the market is headed, not where it is today. In fact, they lead markets to new territory, fulfilling needs customers weren't even aware of. Did anybody crave a smartphone or a social media presence before Apple and Facebook showed them the possibilities?

Boeing did the same thing with the 787, showing customers how valuable a new type of aircraft could be. The question now is whether it will heed the lesson of its own success.

For years, Boeing has been mulling whether to develop another new aircraft. This one, dubbed the new middle-market aircraft, or "NMA," would fill a gap between today's longest-range single-aisle jets and the smallest twin-aisle planes. Boeing has promised to decide this year whether to proceed with the NMA or rely on periodic updates of its 737 single-aisle jet.

Sticking with updates seems safer. New models of proven planes are cheaper, with few of the birthing pains that marred the Dreamliner's debut. Production delays, cost overruns, and early-flight glitches are inevitable byproducts of bringing a new jet to market. Developing an NMA could cost Boeing $15 billion, with no guarantee the plane would land on time or on budget.

Upgrades of existing planes also can be easier to sell. Customers are comfortable with the familiar; upgrades cost less to integrate into existing fleets, and are more likely to be delivered on time. To sell an NMA, Boeing would have to challenge customers to think bigger, and imagine benefits they haven't yet experienced.

Such a sales pitch can encounter skepticism, but in this case, many customers already see the potential for a new middle-market aircraft with longer range and lower costs than existing options. Boeing has acknowledged that some carriers are clamoring for an NMA.

Delta, for example, has shown interest in the NMA for use on transcontinental routes. Others say it could open up midrange routes across the North Atlantic and within Asia.

"It's a lot of trans-Atlantic, it's a lot in Asia, it's a lot in the Middle East," says Aviation Analyst Richard Aboulafia, a Vice President at Teal Group in Fairfax, Va., who pegs the likelihood that Boeing will build an NMA at "65%." Aboulafia points out that a new plane could bolster Boeing's position against Airbus' A321neo, which is winning orders in the single-aisle market.

A new midrange aircraft also could create an entirely new customer group for Boeing—long-distance budget airlines. Discounters have largely failed to crack markets such as U.S.-to-Europe because existing aircraft can't fly those routes profitably at prices low enough to win customers away from full-service carriers. With lighter materials, more efficient engines, and a range of about 4,000-5,000 nautical miles, an NMA could reduce costs to a level that makes intercontinental discounting profitable.

Yet Boeing has sometimes sounded a bit gun-shy on major innovations. In the midst of the Dreamliner’s difficult debut, then-CEO Jim McNerney promised no more “moonshot” development projects. Aboulafia says executives also may worry that an NMA would cannibalize sales of other Boeing jets. Current CEO Dennis Muilenburg, for his part, has sounded notes of optimism and caution on the NMA.

“It's clear that there's a market need, but we're working through the details of the business case. And as we said, we're going to be very disciplined on how we do that,” Muilenburg told analysts on Boeing’s quarterly earnings call last month.

In other words, Boeing wants to make sure it can turn a profit manufacturing NMAs at a price airlines are willing to pay. That's an appropriate inquiry, and just because a new plane was the right strategy for the long-range twin-aisle market 20 years ago doesn't necessarily mean an NMA is the right move in the middle market today.

In making this historically important decision, Boeing leaders should focus on a goal of delivering significant new benefits to customers while creating new sources of demand. If that goal is best served by upgrading today's 737, then Boeing should upgrade. But if a new plane is the surest route to that goal, Boeing should build it, notwithstanding painful memories of Dreamliner delays or worries about siphoning off sales of 737s or 787s.

After all, if airlines want an NMA, somebody will figure out how to make a profit selling it to them—and cannibalize those other Boeing jets. That somebody could be Boeing…or it could be Airbus, which just got a hard lesson in the shortcomings of incremental innovation.

Written by: Joe Cahill, Columnist for On Business.