BUSINESS CASE

How Boeing Got Better

When we think about innovation and technological progress, we tend to focus on the big, dramatic changes: cars replacing horses and buggies, electric lightbulbs replacing gaslights, computers replacing adding machines and typewriters. A lot of progress, however, is incremental and almost invisible to most people—yet such unglamorous change can have huge effects over time. Consider, for example, the progress of jet travel, as illustrated by the history of Boeing Corporation.

The Boeing 707, introduced in 1957, was the first commercially successful jetliner, and for a number of years it ruled the skies. When the Beatles made their famous 1964 arrival in America, it was a 707 that brought them there. So what did the 707 look like? What’s striking about it, from a modern perspective, is how ordinary it appears. Basically, it looks like a jet airliner. If you walked past one today, and nobody told you it was an antique, you probably wouldn’t notice; 50-year old jets aren’t nearly as different on the outside from their contemporary descendants.

Furthermore, the visible performance of modern jets, like the Boeing 777 or the even more advanced 787, isn’t that much better than that of the old 707. They only fly slightly faster; once you take extra security and flight delays into account, traveling from London to New York probably takes more time now than in 1964. It’s nice to have a selection of movies (although there may not be anything you want to watch), and business-class travelers now get flatbed seats that make sleeping easier. Still, all of this seems fairly marginal.

Yet Boeing’s modern jets (and those of its main competitor, Airbus) are vastly more efficient than jets half a century ago—so much so that average air fares, adjusted for inflation, are only about a third what they were in 1960. What changed?

The answer is, things passengers can’t see. Most important, there has been a drastic improvement in fuel efficiency, with modern planes using less than a third as much fuel per passenger-mile than their ancestors. Behind this improvement, in turn, lie fundamental changes in engine design (high-bypass engines that direct most of their intake around the combustion chamber rather than through it), small but important improvements in aerodynamics, and the use of new materials to make airframes much lighter.

The moral is that the technological progress that drives growth is much broader and more powerful than meets the eye. Even when things look more or less the same, there is often enormous change beneath the surface.

QUESTIONS FOR THOUGHT

BUSINESS CASE

Slow Steaming

The global economic slump of 2008–2009 took a toll on almost everyone. By 2011, however, the acute crisis was receding in the rearview mirror. Unemployment remained high in wealthy countries, but the world economy as a whole was growing fairly fast, and so were corporate profits.

One industry that wasn’t doing well, however, was shipping. A 2012 report from the Boston Consulting Group declared that executives in the container-shipping industry—which moves the ubiquitous standard-sized boxes of cargo that are transferred between ships and trucks by the giant cranes visible at every major port—“would probably like to forget 2011.” The world’s largest shipping company, the Danish firm Maersk, saw its profits fall more than 30%, even though world trade was growing at a fairly rapid clip and it was carrying more cargo than it did the year before.

Why was 2011 a bad year to be in the shipping business? The answer is that while world trade and hence the overall demand for shipping were rising, there was a surge in oil prices. This was bad news for shippers, for whom the cost of fuel oil is a major expense. As you can see in the figure, profits temporarily increased immediately after the Great Recession when fuel costs were low. But that changed near the end of 2010, as the price of fuel started to rise. And in 2011, as fuel prices spiked at almost $700 per ton, profits fell by more than $1 billion.

One consequence of the oil price shock was a literal slowdown in world trade: shippers turned to slow steaming, in which ships get somewhat better fuel economy by traveling more slowly, typically 17 knots rather than their usual 20. Some carriers even went to super-slow steaming, dropping their speed to 15 knots, although this damaged their engines.

Maersk and other shippers did better in 2012, as oil prices receded somewhat. But the troubles of 2011 were a reminder that there is more than one way to get into economic trouble.

QUESTIONS FOR THOUGHT