(FORTUNE Magazine) – When Boeing publicly unveiled an artist's rendering of the Sonic Cruiser 21 months ago, the company bragged that its new plane "will change the way the world flies." Capable of transporting 225 passengers at close to the speed of sound, the Sonic Cruiser is the first original jetliner design in 50 years. It looks like nothing else in the skies today. Protruding behind the cockpit are two small wings, known as canards. A large delta wing in the rear replaces the usual swept-back appendages. A pair of powerful engines is mounted in back too, and completing the Star Trek look are two vertical fins that are used in place of the conventional tail and rudder. If anything could lift air travel from mass to class, this was going to be it.

But the Sonic Cruiser won't be taking off after all. The problem is, no one seems to want to buy the plane. Not a single airline has stepped up to say that the time saved by flying so fast is worth the higher price, greater fuel costs, and schedule disruption. So Boeing is backing away from the project, laying the blame on a weak market and shifting customer preferences. An official announcement is expected as soon as year-end.

In place of the Sonic Cruiser, Boeing likely will offer a far more conventional plane, one that will cost less to build, require fewer changes in service procedures, and burn up to 20% less fuel. Like every other commercial jetliner (except the money-losing SST), the new model will be a linear descendant of the B-47 that first flew after World War II. In other words, it won't have rocket-ship styling or sound-barrier speed, but it will be much more marketabble in today's awful business conditions. Boeing blandly calls it the "super-efficient airplane."

In interviews in mid-November, top Boeing executives insisted they were still trying to make up their minds about which plane to build. "The process of getting to a new airplane is a tortuous road," says chairman and CEO Phil Condit. "By the end of the year we will have arrived at a decision about where we think we ought to go." In fact, the decision has already been made. While Condit and others believe that some airline travelers are willing to pay a premium for better service--an argument for the Sonic Cruiser--they concede that airlines have never been in such bad shape financially. It is clear that customers will opt for the more economical plane. "With the slowing global economy and the terrorist overhang, the airlines clearly need to simplify their fleet," says Alan Mulally, the head of Boeing's Commercial Airplanes. "Their cost structure just leads them to something that will improve operating efficiency."

Scrapping, or at least delaying, the Sonic Cruiser may be a no-brainer from a business standpoint, but it could turn out to be a public-relations disaster. After all, it was Boeing that created heightened expectations for the plane in the first place, then failed to dampen them when it became clear that the plane was simply unsalable. Worse, the Sonic Cruiser will go down as yet another failed airplane for a company that has had its share of them lately--notably the Joint Strike Fighter and the 747X superjumbo--raising suspicions that Boeing has lost both its courage and its touch. And perhaps most significant, it will be a huge boost for archrival Airbus, which has been raining on the Sonic Cruiser's parade from the start.

The questions surrounding the ambitious project aren't likely to die along with the airplane. Was the Sonic Cruiser ever seriously intended for production, or was it partly a paper plane aimed at keeping Airbus off balance? If it was for real, why didn't Boeing grasp its shortcomings more quickly? And why has the company kept the project alive for the past several months when it was clear that the futuristic plane was on life support?

The delay is especially odd given Condit's efforts to inject business discipline into commercial aviation and insulate the rest of the company from that sector's ups and downs. Since taking over in 1996, the down-to-earth Condit has strengthened Boeing's investments in military aircraft, missile systems, and space-related businesses like the space shuttle. In 2001 he moved Boeing's corporate headquarters to Chicago to get it out from the shadow of the plane-building business in Seattle. The upshot is that in 2003, commercial planes will account for less than half of Boeing's revenue, vs. 75% in 1996.

The downturn in air travel is taking its toll on the company nonetheless, and most analysts don't expect an immediate upturn. Used to building up to 48 airplanes a month, Boeing is now assembling fewer than 24. So after record profits in the past two years, Boeing's per-share earnings are expected to fall more than 20% for 2002 and another 20%-plus in 2003. Even a war with Iraq won't help Boeing's sales of big-ticket defense systems, says Condit.

Despite initial cheers from aviation experts, the Sonic Cruiser turned out to be the wrong plane at the wrong time. World air traffic has fallen nearly 11% in the past two years, and the airlines are expected to lose nearly $10 billion in 2002 after dropping $12 billion in 2001. Airlines everywhere are in disarray as the future of air travel turns into a tug of war between traditional, full-service, hub-and-spoke carriers and upstart, no-frills, point-to-point airlines. "Airlines have no choice but to reinvent themselves," says Nicole Piasecki, Boeing's vice president for strategy.

The Sonic Cruiser might have only added to the industry's problems. Its shape, speed, and cost would require air carriers to do everything from rewriting their schedules to overhauling their maintenance and service procedures. At the same time they would be forced to sell more full-priced fares to pay higher operating costs at a time when business and leisure travelers want bargain rates. For all its glamour, the plane just never seemed to make much business sense. Says equity analyst Nicolas Owens of Morningstar: "I think if Boeing built this thing, it would have become its Vietnam."

Even its birth was star-crossed. Boeing announced plans for the plane on March 29, 2001, the same day that it acknowledged canceling development of a larger version of the venerable 747, known as the 747X, which was to compete with Airbus's super-jumbo A380--a plane that will carry 25% more passengers than the 747 and is scheduled for delivery to airlines in 2005. The timing immediately suggested to some that the Sonic Cruiser news was released as much to take the sting out of the 747X failure as to launch a genuinely viable program. In the months to come Boeing would admit that it had announced the plane up to two years earlier than planned because it was ready to show the plane to customers and knew the news would leak out.

As theater, though, the announcement was a smash. Shaped like an arrow, the Sonic Cruiser was going to be plenty fast--up to Mach 0.98, or about 650 miles per hour. That would make it 15% to 20% faster than every other airliner in service except the Concorde SST, which flies at Mach 2. In both mission and appearance, it was about as far from the chunky, double-deck A380 as any plane could be, and it made a forceful statement about Boeing's product philosophy: Smaller planes flying point to point--that is, from one city to another--would be more valuable than giant carriers busing passengers between congested hubs.

Airline executives rushed to endorse the new plane. CEO Don Carty of American Airlines was quoted as saying, "We obviously see a use for that airplane. It can radically change our business productivity." An ebullient Richard Branson of Virgin Atlantic declared he wanted to order as many as six of the first planes. Airbus, meanwhile, publicly disparaged the project in what would turn out to be a long-running critique. Senior vice president John Leahy said his company had already looked at a similar concept and found that it would cost too much more to operate than a conventional plane. He was right, of course, but it would be months before Boeing's customers--faced with shrinking numbers of air travelers--would reach a similar conclusion.

Boeing had been planning the plane for years. As early as 1995 a working group--consisting of researchers in materials, design, engineering, and manufacturing--began exploring new flying concepts. Initially known as the Airplane Creation Process Strategy team, it was renamed 20XX and charged with finding advanced technologies to design and build airplanes. Four years later a team of about a dozen engineers began work on a new airplane concept, and by fall 2000 they had developed a design that looked very much like the Sonic Cruiser. The new plane was code-named Project Glacier.

Early in 2001, Alan Mulally traveled around the world talking to international air carriers about what new planes Boeing should add to its product line. He mentioned several options, including the 747X. But Mulally really got the airlines' attention when he said Boeing could develop a plane that flew as fast as Mach 0.98 and wouldn't consume any more fuel than an existing airliner. The plane would allow full-fare-paying business travelers, for whom time is more important than money, to cut an hour off a six-hour flight to Europe or two hours from a trip to Asia. At the same time it would enable airlines to squeeze extra daily flights out of their fleet. If the Sonic Cruiser shaved two hours from a 13-hour flight from New York to Tokyo, it could be turned around and flown home the same day, thus making a roundtrip in 24 hours.

Through spring 2001, Boeing continued to feed anticipation of the new airplane. General Electric, Pratt & Whitney, and Rolls-Royce got to work on the new-generation engines that would be required to propel it. At the Paris Air Show in June, a Boeing supplier predicted that more than 500 Sonic Cruisers could be sold in the next ten to 15 years. Mulally did him one better. He declared that with all of the short- and long-range derivatives, Sonic Cruiser sales could reach several thousand airplanes in the next two decades. Airbus's Leahy, meanwhile, gave Boeing another public poke by declaring that the new plane would be neither as fast nor as efficient as Boeing claimed.

By the summer Boeing completed what would be the first of four rounds of meetings with potential airline customers, which were clamoring for a new plane. Engineers tinkered with the initial design. Having discarded the traditional airliner shape, all but unchanged for five decades, they conducted studies to determine the best location for the landing gear and engine air inlets to limit the chances of damage from foreign objects. They also discovered that the position of the canards would hinder the location of loading ramps and made plans to move them.

Meanwhile, weak economic conditions around the world had already begun to depress airline travel, and after Sept. 11 it collapsed entirely. Almost overnight airlines doubled the number of planes put in mothballs, from 1,000 to nearly 2,000--more than 12% of the world's fleet. Mulally announced that as many as 30,000 Boeing employees at Commercial Airplanes might lose their jobs by the end of 2002 because of canceled or rescheduled orders.

Yet Boeing pushed ahead with the Sonic Cruiser. It completed the first round of wind tunnel tests and released new details about the materials--carbon fiber composites and titanium--that would be used in place of aluminum to reduce weight and thus fuel consumption.

By the end of 2001 the first signs of doubt about the project began to creep into Boeing's public statements. Executives acknowledged the existence of another new airplane, code-named Project Yellowstone, that was being developed alongside Sonic Cruiser. It would be the same size--about 225 seats--and would also be built of lightweight composites. But since it would fly at only Mach 0.8 to 0.9, it would burn up to 20% less fuel and make less noise. Originally designed simply to demonstrate the effect of Sonic Cruiser technology on a conventional design, it would quickly assume a life of its own. Yellowstone was the ultimate low-cost spread, designed to be cheap rather than fast.

In February development of both planes was consolidated under one man, Walt Gillette, a veteran aerodynamic engineer. Gillette, 61, had been involved in every new Boeing airliner since the 747, including the ill-fated 747X program, and he was very conscious of the possibility of failure. He keeps a chart in his office to remind visitors that new-airliner programs sank manufacturers like de Havilland and Lockheed. By contrast Boeing had successfully developed ten planes in a row going back to 1958, and he was determined to keep the streak intact. "Going ten for 11," said Gillette, "isn't acceptable."

In February and March, Boeing conducted a second round of private meetings with nearly two dozen customers. They got their first look at Project Yellowstone, now called the super-efficient airplane, just as they were beginning to have second thoughts about the Sonic Cruiser. It was now clear that the Sonic Cruiser would throw flight schedules into disarray. Planes leaving Asia for London would arrive at Heathrow several hours before the 5 a.m. curfew was lifted. Passengers flying overnight from New York to Europe would get an hour less sleep on what was already a short flight. Meanwhile a report asserted that Boeing was being forced to assume premium ticket prices to offset the higher cost of operating the Sonic Cruiser. An unnamed airline executive was quoted as being skeptical that the time savings offered by the plane would be worth the extra cost.

By April, Boeing was still having problems developing its business case for the Sonic Cruiser; strategist Piasecki said one might not be completed for another nine months. After more than a year of work the company still hadn't figured out how much value the airlines would place on extra speed.

At the Farnborough Air Show in England in July, yellow caution flags began flying all over the Boeing chalet. With the third round of customer meetings completed, a Boeing executive admitted that potential buyers were confused about whether they wanted the plane and that Boeing wouldn't proceed unless the project "makes sense." Other executives conceded that there had been less interest in the Sonic Cruiser since Sept. 11, and that greater attention was being paid to alternative designs. Gillette raised the possibility that the super-efficient plane might be launched together with the Sonic Cruiser "if sufficient market interest continues." It wasn't much of a vote of confidence.

In fact the market wasn't much interested in spending money on anything--old or new--at that point. Boeing disclosed that because of rescheduled or canceled orders, it now expected to deliver no more than 285 new airplanes in 2003, down from the 527 that went to customers in 2000. Since government-subsidized Airbus was scheduled to deliver 300 planes, it would pass Boeing for the first time and attain the position of industry leader.

One by one, potential customers began nervously backpedaling. Singapore Airlines' chief, who once foresaw "very big demand" for the Sonic Cruiser, reportedly shook his head when its name was mentioned. A Cathay Pacific executive said a cheaper plane "may be a better road to go down." Branson ignored the Sonic Cruiser entirely and declared that the Airbus A380 was the wave the future. There were other concerns besides cost. A Japan Airlines executive worried about ground safety because one of those short fins might interfere with a passenger jetway.

In response Boeing did a little backpedaling of its own. Gillette publicly revealed that Boeing had been working on the superefficient airplane before the Sonic Cruiser but hadn't told customers about it until the second round of meetings. He insisted that the Sonic Cruiser was still his first priority but said that the most important thing was to build the right plane. "We have never gotten it wrong," he said. "I do not intend to get it wrong on the last airplane I get to do." Airbus was waiting to pounce. Chairman Noel Foregard needled Boeing: "We think airlines expect cheap and clean airplanes, and now our competitor is saying the same."

By autumn Boeing began to sound as if the decision on the Sonic Cruiser had been taken out of its hands. Gillette said Boeing would do what the marketplace wanted because "the market was in charge." CEO Condit declared that the Sonic Cruiser and the super-efficient airplane were in a horse race and that the company would pick one or the other. Boeing was sounding less like the pioneering company that had pushed ahead with the 747 on the basis of a single order and more like Procter & Gamble test-marketing a new detergent.

Despite all the bad news, Gillette continued development work back in Seattle. He completed a second round of wind tunnel tests and a fourth round of customer meetings. Boeing ran more analyses to determine how airlines could best utilize the faster plane in their service networks, but the results were only preliminary and required more study. The numbers continued to elude its analysts. CFO Michael Sears conceded, "We're having a problem with the business case." At the end of October, Boeing invited customers to Seattle to discuss the plane for a fifth time, this time in a group meeting. Some Boeing executives were already talking about the plane in the past tense. "If we hear interest in a more efficient airplane, it doesn't mean there will never be a Sonic Cruiser," said one.

The decision to halt development of the Sonic Cruiser, which could come on the eve of the 100th anniversary of the first manned flight, would mark another important date in the history of the Jet Age. Henceforth progress will be measured in tiny steps rather than giant leaps. Instead of higher and faster, the mantra for the future will be leaner and cheaper. A big part of the change will be driven by Boeing, where Condit believes that enhancing shareholder value takes precedence over exploring the wild blue yonder. Says analyst Richard Aboulafia of Teal Group consultants in Washington, D.C.: "The good old days of betting the company on a new airplane have been torpedoed by the capital markets. Airlines today don't want anything but commodities, and everything is replacement technology."

For Boeing, canceling the project is clearly the right business decision but will deal another blow to company morale. Employees were badly shaken when hijackers turned four Boeing airplanes into weapons and flew them into the World Trade Center and the Pentagon. Retirement funds have been hard hit by Boeing stock, down nearly 40% from its year's high. Both inside and outside the company, many will conclude that by failing to produce the Sonic Cruiser, the company has abandoned its historical mission to build "the next great flying machine."

Having failed to build its radical new plane, Boeing now must scramble to remain competitive. With Airbus preoccupied with getting its A380 ready for delivery, Boeing has a chance to pile up orders for the super-efficient airplane and tighten its grip on the point-to-point airliner market. But to capitalize on that opportunity, it will have to move more quickly than it has in the recent past. The airliner business may only be a two-horse race, but Boeing is running second for the first time in its history--and the Sonic Cruiser has cost it lots of precious time.

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