Boeing faces Dreamliner compensation woes

Summary: NEARLY a decade ago All Nippon Airways (ANA) brushed

aside doubts about Boeings as of the time, yet unbuilt 787 Dreamliner
and placed the biggest launch order for a new jet in the planemakers
history: 50 aircraft. Today, Japan is the worlds largest market for the 787.
ANA and its domestic rival Japan Airlines (JAL) between them fly half of
the 49 Dreamliners in service. As they have now discovered, that makes them the guinea-pigs in a complex
aviation experiment.
The decisions this week by regulators in Japan, America and elsewhere to ground the 787 follows a string of
safety problems, including two fuel leaks and an electrical fire aboard a domestic flight that required an
emergency landing. There is particular worry about the potential for the planes lithium-ion batteries to catch
fire. The news hit Boeings shares and ANAs. But their executives will not be the only ones losing sleep.

Japanese firms make about 35% of the Dreamliner, under a novel system of global outsourcing that cost it
years of production delays. Mitsubishi Heavy Industries built one of the worlds largest furnaces to produce
carbon-fibre reinforced plastic for the aircraft. Fuji Heavy Industries is the sole supplier of the Dreamliners
centre wing box, connecting its wings to the fuselage. Shares in both also took a beating on Wednesday, on
fears of big delays in the planned ramp-up of 787 production.

Fallout: Boeing is braced for compensation claims from airlines that have been forced to ground their
Dreamliners following the safety scare over the aircrafts batteries.

The demands could be made by several of the eight carriers that were operating the 787 until regulators
ordered a global grounding of the technologically-advanced Dreamliner on Thursday. It came as Japanese
and US regulators concluded an initial inspection of the All Nippon Airways 787 that was forced to make an
emergency landing in western Japan on Wednesday because of the failure of one of its lithium-ion batteries.

This failure, together with a battery fire on a Japan Airlines Dreamliner on January 7, prompted regulators
to order carriers to ground their 787s until they show that the batteries are safe.

These airlines are now grappling with significant disruption to their flight schedules due to the grounding.

Qatar Airways, which also has five Dreamliners, is expected to consider the case for compensation. Akbar
Al Baker, the airlines chief executive, said this month before the grounding: When we have to start
grounding planes, then it becomes an issue and then they [Boeing] have to get their cheque book out.

ANA, the largest operator of the 787, with 17 Dreamliners, has not ruled out seeking compensation after
cancelling more than 100 flights affecting thousands of passengers.

Japanese and US regulators who inspected the ANA 787 that suffered the battery failure are taking the
equipment to Tokyo for further examination, which suggests that any final conclusions may take some time
to be reached. Lux Research, a technology advisory firm, on Friday claimed that Boeing chose the wrong
type of lithium-ion battery for the 787, saying that there was a safer version available. Boeing has been using
batteries based on lithium cobalt oxide, but Lux said that those involving lithium iron phosphate were safer.
Boeing said: Safety is our highest priority and to suggest otherwise is inaccurate.

The Federal Aviation Administration, the US regulator, is conducting a review of the 787s innovative
electrical power system, including the batteries, because it has suffered several faults. The system was part
of Boeings broad efforts to save weight on the 787, and therefore boost its fuel efficiency.

A Japanese investigator on Friday said that the burned insides of a battery in the 787 indicated that voltage
exceeding the design limit was applied, according to Reuters. There were similar burn marks in the
Dreamliner that caught fire at Bostons Logan airport on January 7.

On the question of compensation for airlines, Boeing added: We are in ongoing conversations with our
customers those who operate the airplane as well as those who are yet to receive their first 787 to ensure
they understand the progress being made to define the plan to return to flight.

On Friday, US transportation secretary Ray LaHood told reporters that the aircraft would not fly again until
authorities were 110 percent sure of their safety.

Important questions being asked related to this case:

Q: How much does the plane cost?

A: The 787-800 has a list price of $206.8 million, but airlines often negotiate discounts.

Q: How many passengers can fit on the plane?

A: It is designed to carry 210 to 250 passengers.

Q: What's at stake for Boeing?

A: Any more production delays could further upset the airlines that are eager to start flying the
plane and cost Boeing millions of dollars in contractual penalties. If major changes are needed,
the plane might weigh more, cutting its fuel efficiency. Orders could shift to the Airbus A350.

Q: Who makes the batteries?

A: Japanese manufacturer GS Yuasa is responsible for the battery and France's Thales Avionics
Electrical Systems makes the battery charger system.

CASE STUDY ROLE ASSIGNMENTS:

For the following case study, the following students will be given roles and they should prepare to
speak to the class accordingly.

Student 1: Mr. Ogasawara

Student 2: Mr. Matsumoto

Student 3: Mr. Oishi

CASE STUDY: Management styles and Crisis Management

How will this affect BOEING, Airline companies, Suppliers, Passengers, etc?

Management Styles

Student 1: You are the president of Scott Fancher and Associates, the company that produced the design for the 787
planes in question. Your firm negotiated and received $100 million for the entire project of designing of the 787
including, but not limited to, all consultation work, research, technological improvement recommendations, and
design. Your firm has the following contract clause with BOEING:

In order for [Scott Fancher and Associates] to obtain the benefit of a fee from the BOEING Corp.
for services rendered in developing and procuring the design and technological advancement
recommendations for this project, [BOEING Inc.] agrees to limit Scott Fancher and Assoc.s
liability arising from Scott Fancher and Assoc. professional services such that the total liability of
Scott Fancher shall not exceed 10% of total fees for the services rendered on the project.

Presentation: As president of the company, please give a brief summary of what the complications are with the
BOEING 787 and explain how your firm would address concerns regarding the following 5 points:

Liability
Corporate image
Safety
Business relationship with BOEING
Commitment to Quality and Professionalism

______________________________________________________________________________________________

Student 2: You are the president of ANA airlines, an aviation corporation specializing in the airline industry. Present
to the class how you would address the following points:

Commitment to airline safety

Customer Service
Compensation to passengers (if any)
Compensation from involved parties (Explain all involved parties)
Future actions

______________________________________________________________________________________________

Student 3: You are the president of BOEING and need to immediately respond to criticism that your company
prioritizes profits over safety. Explain to the class what steps your company has taken and will take to alleviate any
and all concerns regarding the following points:

Commitment to safety and customer satisfaction

Pledge to work with all agencies to investigate and rectify issues
Take responsibility and work with customers to strengthen corporate relationships
Impact on future orders and deliveries

Here are your companys official commitment:

Integrity

We will always take the high road by practicing the highest ethical standards, and by honoring our commitments. We will
take personal responsibility for our actions, and treat everyone fairly and with trust and respect.

Quality

We will strive for continuous quality improvement in all that we do, so that we will rank among the world's premier
industrial firms in customer, employee and community satisfaction.

Crisis Management:

Discuss as a group other players (companies, individuals,etc) who might have experienced any
impact from the BOEING 787 issues. What impact might they experience? Think of how the
management of these various companies would act or plans they would implement.