But the plane fell victim to infighting between Boeing’s bean counters and engineers, who had to gamble on a low-cost—but unrealistic—manufacturing strategy. “We may have gone a little too far, too fast” with the technology and materials and in outsourcing production, Boeing chief executive James McNerney told Condé Nast Portfolio. “The program was more than we could handle.”

The Dreamliner debacle would be bad news in good times, but it is a nightmare for Boeing in this global economic crisis. Boeing has received about 900 advance orders for the Dreamliner, the most of any new plane, at about $200 million apiece. But with air traffic down from last year, carriers have begun to cancel orders. “I’d have concerns about every customer right now,” says Richard Aboulafia, a vice president at Teal Group Corp., a consulting firm that follows the aerospace and defense industries. Aboulafia estimates that between 30 and 70 percent of all orders for jets industrywide will be at least deferred, if not canceled. In his worst-case scenario, 630 orders would be postponed or dropped outright, a potential loss of $126 billion in revenue.

Already this year, a Russian carrier, a Dubai leasing company, and a Hong Kong businessman have called off purchases of 32 Dreamliners, worth more than $6 billion altogether. Australia’s Qantas Airways Ltd., which ordered 65 Boeing 787s, may cancel 15 of them. And Japan’s All Nippon Airways Co., which ordered 50 in 2004, is facing such heavy losses with the collapse of trans-Pacific air travel that Moody’s Investors Service has put a negative outlook on its long-term debt. That, in turn, could hamper the airline’s efforts to obtain funding to buy the jets.

Airlines could seek as much as $4 billion in compensation for losses linked to delays, and Boeing is not expected to make any money on the first 100 or so Dreamliners it delivers. Some carriers, weary of waiting for the Dreamliner, bought or leased planes from Boeing’s biggest rival, Airbus SAS, a European consortium. “We’re pretty fed up,” says the chief executive of one major carrier that ordered 15 Dreamliners. “We’ve gotten no clarity from Boeing.”

Perhaps worst of all, Boeing has forfeited a significant revenue stream—from Dreamliners that would have been delivered and paid for—that could have propped up the company through the downturn. Boeing’s cash reserves plummeted during 2008 from $7 billion to $3 billion, which will make it difficult to develop new planes.

While conceding that the next few years will be tough, CEO McNerney dismisses the notion that the Dreamliner’s moment has passed. Because of the long lead time from conception to delivery, he says, it’s not unusual for a new plane to bump up against a recession. And since Boeing can make fewer than 100 Dreamliners a year, the company would have a five-year backlog even if half of the 900 orders were canceled. “The fact is that 95 percent of the pipeline for the Dreamliner would have been exposed to this financial crisis even if we delivered on time,” says McNerney. 

The Dreamliner’s problems have exacerbated the broader decline of Boeing, once one of the world’s most admired manufacturers. In the past year, Boeing’s stock price has lost about 60 percent of its value, more than the Dow Jones industrial average. In trying to fix the 787, Boeing shifted engineers away from other projects, causing a lag in developing freighters and other passenger planes. Boeing’s revenue dropped 8 percent, and its operating income fell 32 percent from 2007 to 2008. The latest results offer no comfort.  In early April, Boeing reduced expectations by 38 cents a share for first-quarter earnings, which will be announced April 22, and said production of the 777 will be trimmed from seven to five aircraft per month starting in June 2010. In response, a number of top analysts downgraded Boeing’s stock and Standard & Poor’s Rating Services began a review of the company’s debt for a possible downgrade. And after dominating jet manufacturing for de­cades, in 2008 Boeing fell behind Airbus in orders and shipments by more than 100 planes.

Boeing’s military unit, which generated 50 percent of the company’s revenue last year but lost top managers to the Dreamliner, is struggling as well. The Pentagon recently passed over Boeing’s bids for about $40 billion in defense contracts for navigation satellites, aerial refueling tankers, and unmanned Navy spy planes, an unprecedented losing streak for the company.

Boeing also stumbled by adopting a Dreamliner-like outsourcing strategy on a $20 million Homeland Security contract to create a 28-mile “virtual fence” along the Mexican border, with infrared cameras, ground sensors, radar, unmanned planes, and databanks to guard against illegal immigration. When Boeing delivered the equipment in 2007, hardly any of the pieces, bought from dozens of subcontractors, fit together. After much trial and error, a scaled-down version was switched on this year.

Boeing’s slide can be traced to the company’s ill-fated $13 billion purchase of McDonnell Douglas Corp. Under chairman John McDonnell and chief executive Harry Stonecipher, McDonnell Douglas starved its design and engineering operations and became little more than a sales organization, barely surviving on offshoots of its aging DC-9 and DC-10 models. The 1997 acquisition infected Boeing’s forward-thinking culture, emphasizing cost-cutting at the expense of innovation.

McDonnell and Stonecipher, both of whom joined Boeing’s board, successfully argued for improving profit margins on existing lines instead of introducing new commercial jets. Boeing cut its annual research-and-development budget for commercial aviation from more than 4.5 percent of airplane sales in 1997 to slightly more than 3 percent in 2003. At the same time, Airbus’ R&D budget topped 8 percent of sales.

But by 2003, Alan Mulally, who headed Boeing’s commercial-airplane division, was convinced that Boeing needed a fresh plane. Inspired by Toyota’s combination of technological prowess and lean efficiency, Mulally had spearheaded development of the 777 in the early 1990s, transforming Boeing into a world-class manufacturer. Now he believed that to preserve its eroding market-share leadership, Boeing had to produce a jet that would capture the imagination of the airlines and the attention of Wall Street. Originally called the 7E7, Mulally’s baby was renamed in a public contest that drew 500,000 online voters. By a large majority, they dubbed it the Dreamliner.