Tolstoy wasn’t quite right when he said each unhappy family was unhappy in its own way. Boeing’s accelerating rate of customer-profit harming and passenger-inconveniencing product defects represents an unusually pure and unadulterated form of executive looting of a company. However, this pattern of behavior is common in Corporate America in its less extreme form.
Boeing’s unusual position as a “must have” player in a duopoly making perceived-to-be essential products where no way, no how can any other company take up Boeing’s production in less than decades means the malfeasance can continue. And worse, as an important editorial in Aviation Week explains, Boeing’s top brass shows no intention of changing their self-serving ways.
Most here know the broad outlines of the Boeing story. The company was founded in the early days of aviation, an industry built by inventors and engineers like Howard Hughes. To truncate a very long history, Boeing emerged a winner after a long period of industry consolidation. A company and industry-defining bet was the decision to bet on a new, untested concept: a large capacity, long-distance passenger plane, with only an order from Pan Am as a vote of confidence (important but no where new enough to assure the viability of the investment). But the 747 became an enormous success. It not only helped propel Boeing to its current dominant position but reshaped the industry by lowering the cost to passengers of long-haul travel, greatly expanding the market. Oddly, or perhaps in keeping with America’s warped priorities, Wikipedia’s extensive entry on Boeing makes nary a mention of the key role of the 747 to Boeing and commercial aviation. 1
Most readers also likely know of the key event that has brought Boeing to its current beleagured state, its 1997 acquisition of McDonnell Douglas. Despite Boeing being the larger company, McDonnell Douglas came out on top managerially. McDonnell Douglas was finance driven, not product driven, and quickly started remaking the company in its image. It moved the headquarters and key operations out of Seattle, in large measure to get rid of perceived to be too costly engineers. It became an outsourcing enthusiast, eventually including outsourcing parts to China. The results, starting with the 787, were not good. From a 2011 Reuters account:
The parked planes are 787-8 Dreamliners, the world’s first commercial aircraft with a body and wings made largely of lightweight carbon-composite materials instead of aluminum. Someday these sleek, fuel-efficient machines — already painted in the liveries of their airline customers — may change the face of air travel and plane-making.
But not today.
The program that produced these unfinished 787s is nearly three years behind schedule and, by some estimates, at least several billion dollars over budget. Dreamliner flight tests were halted in November after an electrical fire aboard a test plane….
About 45 miles away in south Seattle, members of Boeing’s work force gathered at a union hall for a monthly lodge meeting, a holiday party and a chance to lament the seismic shift in plane-making strategy they say the Dreamliner represents.
The 787 is not merely a historic feat of engineering. The program also marks Boeing’s departure from its own time-honored manufacturing practices.
Instead of drawing primarily from its traditional pool of aircraft engineers, mechanics and laborers that runs generations deep in the Puget Sound region around Seattle, Boeing leads an international team of suppliers and engineers from the United States, Japan, Italy, Australia, France and elsewhere, who make components that Boeing workers in the United States put together.
“Do you see the stupidity in that?” said James Williams, an imposing 43-year-old who has been employed by Boeing for 15 years, mostly working in factory safety.
Williams, whose father worked at Boeing for more than three decades, is just one of many in the company who blame the repeated Dreamliner delays on a splintered engineering strategy and a complex supply chain of about 50 partners…
Whatever the advantages, Boeing’s outsourcing is emblematic of corporate practices that have sent large chunks of U.S. industry overseas and to other states, battered communities and vaulted the U.S. jobless rate to nearly 10 percent, economists say.
Yet the biggest victim may be the culture that underpins the aerospace behemoth. Here in Boeing country, where children follow parents into the aviation business, outsourcing is plain heresy.
“It was like the family,” said Williams, whose wife, Sarah, and three children joined him for the holiday party. “Can you outsource Mom? Can you outsource Dad?”
While this story indicates that Boeing would bring a bit of its outsourced manufacture back in house, there would be no fundamental rethink, merely an effort to fine tune. And yours truly has strong suspicions as to why Boeing would not consider a more serious rollback of its troubled outsourcing strategy. It’s not as if this were due to competitive cost pressures (more on that soon). As one colleague pointed out, it was not as if Boeing’s big competitor, Airbus, was a lean and mean company (although aerocraft profits are to a degree a function of how many planes of a particular model you sell; there appear to be meaningful scale factors at that level). Not only does Airbus have to contend with an allegedly well-paid and hard to fire work force, but production of its components is divvied among countries in its consortium, creating a supply chain not optimized for cost. Yet Boeing acted as if it needed to squeeze on costs to compete with Airbus?
Upper management ego was probably a factor; as we see on an almost daily basis, big dogs double down rather than be seen as admitting error. But featly to Wall Street was likely an even bigger factor. I know executives in other industries who have said the case for their company to outsource was not strong. They could have achieved the same margins at lower risk by improving manufacturing processes, such as their implementation of just-in-time. But their stock was sure to rise if they started outsourcing.
To simplify the history for the purpose of getting to the choices Boeing faces now, another critical set of decisions involved the 737. It has been a widly successful model, the first aircraft ever to get over 10,000 orders after its third redesign, the so-called Next Generation. But it is also a 1967 design that Boeing has kept tweaking to keep up with market demands and competitive pressure. As a CNN story explains, by 2012, even with its considerable success, the 737 was already looking long in tooth in 2012 and Boeing was feeling the hot breath of the Airbus 320 on its neck. But rather than design a new plane, Boeing decided to wring more life out of the 737. The MCAS debacle came straight out of this choice. From CNN:
The Boeing 737 Max was announced in 2011, the fourth generation of the aircraft.
“Boeing needed to combat what Airbus were doing with the A320neo, a version of the plane with a new engine that was quite substantially more fuel efficient,” says Simons.
To do so, however, the company ran into a problem it had encountered before: the new, much bigger engines it wanted for the 737 Max wouldn’t fit under the plane’s low wings – an issue Airbus didn’t have, because the A320 was already a much taller plane than the 737.
The solution was to add some length to the front landing gear and mount the engines further forward and higher on the wings, giving them the clearance they needed.
But, as Boeing later found out in simulators, this altered the plane’s aerodynamics, making it tilt up dangerously in certain situations.
To counter the problem, the company devised a safety system called MCAS, which would immediately push the 737’s nose down if it tilted too high.
Because MCAS was designed to make the 737 Max fly just like previous 737s, and because Boeing believed that it would come into action only in extreme flying circumstances, it was kept almost secret.
Boeing decided against including it in the brief lesson that pilots already certified for previous 737s needed to take to fly the 737 Max.
There’s more to the “kept almost secret” part, like not including the existence of MCAS in pilot manuals and telling faithful 737 buyer Southwest Airlines what it wanted to hear, that pilots would not need additional simulator training to fly the MCAS. But you get the idea.
You would think after a disaster like that, Boeing would be humbled and stick to its knitting, as in worry about making better planes. But noes!
Jan 5, Boeing 737 has a panel rip off midair
Jan 13, Boeing 737 cockpit window cracks
Jan 17, Boeing 737 strands Blinken
Jan 19, Boeing 747 cargo plane burns up
Jan 20, Boeing plane in Atlanta lost a wheel
Jan 25, Boeing to pause production for a “quality focus day”
— ib (@Indian_Bronson) January 24, 2024
the wheel of a Delta Boeing 757 just flew off while it was preparing to take off at Hartsfield–Jackson Atlanta International Airport. The wheel then rolled down the runway…
could have been catastrophic if it happened a few seconds later
video from 1/20 (VASAviation) pic.twitter.com/mO7Fvzysmx
— Gregg Re (@gregg_re) January 23, 2024
AirLive describes a new Boeing incident: A Virgin Atlantic Boeing 787-9 returned to London Heathrow with the Ram air turbine deployed. From the story. And remember, last week Lever News reported Airlines Filed 1,800 Reports Warning Regulators About Boeing’s 737 Max. And yes, sport fans, this was after the 737 Max was grounded for 20 months as Boeing had to ‘splain to regulators all over the world why its MCAS fixes were not another ticking time bomb.
One would think the flatlining of Boeing’s stock would focus the minds of its top management and board. But CEOs and their hangers-on often manage to get “Heads I win, tails you lose” pay deals, so it’s doubtful their comp has been dinged as much as it ought to be.
Two new stories look at how Boeing can pull itself out of its nosedive. A Financial Times account is fairly anodyne, framing its story around what happens to various Boeing dependents, like suppliers and long-standing customers that have tuned their operations around the Boeing product. What it does not contemplate is what happens if Boeing debacles get worse. The airline industry is correctly obsessed with safety. Customers will not fly if they think their plane might fall out of the sky. But the industry has very high barriers to entry, and no incumbent or aspirant who could meaningfully replace Boeing’s capacity in anything less than a decade even if customers rebelled. From the Financial Times:
At stake is not just Boeing’s standing as a leader in aviation. The company’s mis-steps have prompted some industry experts to ask if there has been a decisive shift of power towards Airbus in the duopoly that governs aerospace….
“It is absolutely critical that we have a strong Boeing and that we have a strong Airbus and that the two of them at least compete with each other, not just for orders, but also . . . in terms of technological developments,” says Michael O’Leary, chief executive of Ryanair, one of Boeing’s biggest customers.
That depends on Boeing turning things around. If it cannot, there would be consequences for the aerospace supply chain and for airline customers.
New entrants have tried to break into the industry but with mixed success. Comac, China’s state-backed aerospace champion whose first single-aisle C919 commercial flight took to the skies last year, has begun to emerge as the first real threat in decades….
When the C919 made its inaugural flight in 2023 it marked a breakthrough in China’s aims for technological self-sufficiency. But the aircraft is highly reliant on western suppliers for critical components, including communication and navigation systems, engines, landing gears, wheels and brakes…
But the Comac aircraft is not without problems, he [O’Leary] argues, calling it “a glorified A320”. O’Leary adds: “So the more aircraft Comac produces, you’re drawing off the same engine suppliers, the same avionics suppliers . . . it’s an A320 in all but name.”
Despite widespread scepticism that Comac can be a viable competitor anytime soon, technological development by China — including advancements in sectors including computer chips and electric vehicles — has caused some consternation in the west…
AerCap’s [Aengus] Kelly points to the enormous technological challenges that go with building aircraft and engines. He predicts it will take Comac “another 20-30 years to match what Boeing and Airbus currently do”.
Brazil’s Embraer is not seen as likely to be able to make up for a big fall in Boeing orders, not due to a lack of technical chops, but the cautionary example of Canada’s Bombadier, which nearly went bankrupt after trying to move into the big leagues.
Yet despite the widespread recognition of the importance to the airline industry and the US of Boeing turning itself around, an important op-ed in Aviation News explains that Boeing management has no intention of changing its grifting ways, and none of the few players that could pressure them look inclined to act. From Aviation News:
Can anything save Boeing from its management?…
The safety concerns and manufacturing errors plaguing the company’s jetliner unit are just part of the problem. The production ramp-up has been a series of disappointments that will only worsen as regulators and customers scrutinize manufacturing and inspection processes.
The company is also quickly losing market share. CEO Dave Calhoun’s November 2022 announcement that there would be no new Boeing jetliner this decade had a predictable result: a record 1,300 Airbus A321neo orders in 2023. Boeing will be very lucky to retain 40% of the market by decade’s end. Given relentless cost-cutting and the demographics of the engineering workforce, it will be quite difficult for the company to create a new jetliner in the 2030s.
The situation may be worse on the defense side. Billions of dollars have been lost due to poor execution and ill-advised fixed-price contracts—over $2 billion in 2022 alone…..
For years, Boeing management was accused of focusing on money rather than products, performance or people. Between 2014 and 2018, it gave away $53 billion in dividends and buybacks…
As 2023 ended, the company’s strategy department was abolished. Unit strategy functions were also reduced. The company no longer wants a plan for company-wide new technology development, new product development or, most crucial, restoring the links between the people who design and build aircraft and the people who manage the company. There are also no plans to promote technical people to senior management positions. Stephanie Pope’s recent appointment as chief operating officer means another finance person has been made Calhoun’s heir apparent.
The future, if it can be called that, is simply to run the company for cash—deliver legacy jets, try to make existing defense programs profitable, and resume converting cash flow into shareholder returns. Management may also try to sell off parts of the company—or perhaps all of it. The implications of this for the U.S. aerospace industry, defense industrial base and even the broader economy are potentially enormous.
In other words, Boeing management is liquidating the company. It’s such a huge player with a customer base that will find it hard to go anywhere that this will be a long and personally profitable ride. Shame for all those hangers on, though.
We described in 2005 in the Conference Board Review how the corporate fixation on short-term profits was resulting in dis-investment, which was a socially acceptable way to say liquidating. It has been masked in many cases by acquisitions, so the parent entity looks bigger even as its constituent parts are shrinking. Boeing is becoming a very big and consequential version of what happens when this practice continues unimpeded.
Oh, and maybe Tolstoy was not wrong. These looting managements are fundamentally similar and are no doubt happy with their lucre.
1 Due to the before Internet v. after Internet era, Lambert, who helpfully went looking, was unable to find an online version of the four-part (!!!!) New Yorker story on the birth of the 747. He did find some later stories on product competition among the then-majors:
The full download looks like the book derived from the article
Also on the DC-10, McDonnell-Douglas widebody
Lambert notes” Precursor of 737 engineering and decision making?”