SAN FRANCISCO (XFNews) -- From Los Angeles to Hong Kong to Dubai, orders for new jetliners have been rolling into Boeing Co.'s headquarters at a steady clip, making this the aircraft maker's strongest year of demand in nearly two decades.
That's one of the chief reasons that Boeing has seen its long-depressed stock run up 34% this year to its highest level since 2001. But the story of the company's swift ups and downs in taking new-aircraft orders highlights the powerful nature of the aviation industry's volatile business cycles.
To fill all those new orders, Boeing will have to smoothly speed up airplane production, reorienting itself after weathering one of the worst downturns in the history of commercial aviation.
The last time Boeing rushed to meet a swell in demand for new jets, the results were disastrous. In the late 1990s, a shortage of raw materials and parts combined with production problems cost Boeing billions of dollars -- $1.6 billion in the third quarter of 1997 alone.
Today, under the leadership of new Chairman James McNerney, the world's largest aerospace company is quick to assert that its management team is all too familiar with the past -- and insists that history won't repeat itself.
"One of the major differences is the vast majority of the executive leadership around here lived through '97, '98," said Craig Martin, a company spokesman. "They are -- to a person -- determined it will never happen again, and particularly not on their watch."
Now under more pressure than ever from rival Airbus, Boeing has even less room for error.
McNerney wasn't with Boeing during the last production debacle. An aerospace veteran from his time at General Electric Co., however, he has been on Boeing's board since 2001 and has taken pains to tell Wall Street that he's keeping tabs on manufacturing operations and the company's suppliers, whose role building larger and more sophisticated components is more crucial than ever.
As UBS analysts put it in a report issued last month after a meeting with the new chairman, "According to Mr. McNerney, the supply chain is the main thing that can go wrong and derail the cycle for Boeing."
This year, the Chicago-headquartered company has firm orders for at least 800 jets so far, and it's expected to soon finalize a large deal with airlines in China for 737s. That's closing in on the 1988 peak of 877 planes, a figure that includes sales by McDonnell Douglas, which merged with Boeing in 1997.
Now Boeing is on track to log more new-aircraft orders for 2005 than Airbus, a feat not seen in five years.
But the company also must make up for lost time while getting ready for a rush of new work.
Earlier this fall, an almost month-long strike by Boeing's machinists shut down its commercial-airplane assembly lines, delaying deliveries during a crucial time.
That wasn't lost on union negotiators who needed leverage in their efforts to squeeze the best deal possible out of management.
"Our members were aware of that and understand they had a better bargaining position than (they had in) the after-effect of 9/11," said Connie Kelliher, spokeswoman for the International Association of Machinists District 751. "I think people are pretty proud we'll beat Airbus for the first time in five years."
With the strike done with, Boeing now expects to deliver 290 planes in 2005. That will jump to 395 planes next year.
The company says it's taking a methodical approach.
In 1997 and 1998, Boeing set out to ramp up its airplane production by 50% in about 18 months. This time, the company says it will increase airplane production by 35% over two years or more.
Alan Mulally, who runs Boeing's commercial airplanes group, meets each week with executives to assess production plans, because it's an issue the company has been watching for years.
"You are better off in the long term to keep at a very efficient production system and make up airplanes where you can, but not go into a massive crisis production process," said Martin, the company's spokesman.
McNerney, who became CEO and chairman in July, has been emphatic with Wall Street that he wants the company to take no chances this time around, according to Paul Nisbet, aerospace and defense analyst with JSA Research.
"There's next to zero chance they'll have problems like they did in the 90s," Nisbet said.
Sum of the parts
Boeing -- which moved to Chicago from its historical hometown of Seattle -- is no longer the company it was in the late 1990s.
It has enabled itself to rely more on its defense business in times when airliner orders dry up. And its ability to deal smoothly with the aircraft-orders surge will determine how well the commercial side of Boeing can pick up the slack if the defense business slows down. As of the third quarter, commercial-aviation operations accounted for about 40% of revenue.
Boeing is also smaller, having shed tens of thousands of jobs during the airline-industry slump that followed the Sept. 11, 2001 attacks.
In turn, it has become more efficient with costs and it deals with a much smaller pool of suppliers -- 1,200 suppliers now, down from 2,000 in the 1997-1998 time frame. In some cases, a given contractor has taken on the work of what many were previously providing Boeing.
As a template of what Boeing will become, consider that production of its newest plane, the 787 Dreamliner, will involve far fewer workers than in the past. Huge components like the wings will be flown in from Japan to be assembled in Everett, Wash.
Steps like that will reduce the Dreamliner's final assembly time down to three days, shaving 10 days off a 737 -- the most efficient yet. And it will also put more responsibility in the hands of Boeing's suppliers.
Times are good again for commercial aerospace suppliers, according to William Alderman, head of aerospace investment bank Alderman & Co. in South Norwalk, Conn. They face rising prices for metals like titanium and aluminum, which can be hard to recoup from customers that aren't willing to pay extra.
"There's a real problem with material costs," Alderman said. It is, in part, coming from when you ramp up production; the supply chain has chokepoints."
Beyond the shop floors in the Puget Sound and Boeing's Chicago boardroom, risks remain for airlines and aircraft makers alike that are outside anyone's control.
"The industry is so fragile by its macroeconomic design," Alderman said. "It's so sensitive to so many variables, that you could have your best order book in history and wind up in a year or two with a devastatingly low delivery schedule."
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