The Boeing 7E7
Suggested discussion questions.
1. Please provide a brief description of the Boeing Company.
2. Please provide a brief description of the Commercial-Aircraft industry.
3. Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to
do so?
4. How would you estimate the weighted average cost of capital for Boeing?
5. Based on your analysis, do you think the board of directors should approve the
project?
Answers:
1. Boeing is the world’s largest aerospace company and leading manufacturer of
commercial jetliners and defense, space and security systems. A top U.S. exporter,
the company supports airlines and U.S. and allied government customers in 150
countries. Boeing products and tailored services include commercial and military
aircraft, satellites, weapons, electronic and defense systems, launch systems,
advanced information and communication systems, and performance-based
logistics and training. Boeing has a long tradition of aerospace leadership and
innovation. The company continues to expand its product line and services to
meet emerging customer needs. Its broad range of capabilities includes creating
new, more efficient members of its commercial airplane family; integrating
military platforms, defense systems and the warfighter through network-enabled
solutions; creating advanced technology solutions; and arranging innovative
customer-financing options. With corporate offices in Chicago, Boeing employs
more than 169,000 people across the United States and in more than 65 countries.
This represents one of the most diverse, talented and innovative workforces
anywhere. Our enterprise also leverages the talents of hundreds of thousands more
skilled people working for Boeing suppliers worldwide. Boeing is organized into
two business units: Boeing Commercial Airplanes and Boeing Defense, Space &
Security. Supporting these units are Boeing Capital Corporation, a global provider
of financing solutions; Shared Services Group, which provides a broad range of
services to Boeing worldwide; and Boeing Engineering, Operations &
Technology, which helps develop, acquire, apply and protect innovative
technologies and processes.
2. Since the birth of flight in 1903, air travel has emerged as a crucial means of
transportation for people and products. The hundred-plus years following the
invention of the first aircraft have brought about a revolution in the way people
travel. The airline business is a major industry, relied upon by millions not only
for transportation but also as a way of making a living. Airplanes were around the
first few years of the 20th century, but flying was a risky endeavor not
commonplace until 1925. In this year, the Air Mail Act facilitated the
development of the airline industry by allowing the postmaster to contract with
private airlines to deliver mail. Shortly thereafter, the Air Commerce Act gave the
Secretary of Commerce power to establish airways, certify aircraft, license pilots,
and issue and enforce air traffic regulations. The first commercial airlines
included Pan American, Western Air Express and Ford Transport Service. Within
10 years, many modern-day airlines, such as United and American, had emerged
as major players. In 1938, the Civil Aeronautics Act established the Civil
Aeronautics Board. This board served numerous functions, the two most
significant being determining airlines’ routes of travel and regulating prices for
passenger fares. The CAB based airfares on average costs, so because airlines
couldn’t compete with each other by offering lower fares, they competed by
striving to offer the best quality service. If the CAB found an airline’s service
quality was lacking on a certain route, it would allow other carriers to begin
operating on that route. In this environment, established airlines enjoyed an
advantage over startups, as new carriers found it difficult to break into existing
routes. The Federal Aviation Agency, now known as the Federal Aviation
Administration, was created in 1958 to manage safety operations. In the mid-
1970s, Alfred Kahn, an economist and deregulation advocate, became chairman
of the CAB. Around the same time, a British airline began offering exceptionally
inexpensive transatlantic flights, awakening a desire for U.S.-based airlines to
lower their fares. These influences led to Congress passing the Airline
