Signs of turbulence at Boeing existed long before the 737 Max tragedies
If the company is serious about reclaiming its position as the world’s leading jetbuilder, it needs to change its approach.
We don’t have to travel very far back to find a Boeing Co. that is different than the one we see today.
The old Boeing was regularly cited in business books as a well-managed company. Despite occasional strikes, it had remarkably good labor relations; its products were in many ways the best; it was a decent corporate citizen.
And now the company is reporting enormous write-offs to cover the cost of ventures gone wrong, and its latest product remains grounded across the world because of safety concerns. This is not your momma’s Boeing.
The crashes of two 737 Max jetliners last spring are just the wing-tip of Boeing’s problems. The company is taking charges on its books against the expected cost of the grounding of the 737 Max fleet, but the lawsuits over the crashes and charges from the airlines for being unable to fly their new planes have only just begun. Boeing is at just the beginning of a flight path that looks turbulent, at best.
Above all, the crashes don’t appear to be the result of pilot error. They appear to have been caused by a faulty system, the result, in part, of the company scrimping on safety and engineering.
The reasons for this are more complex than a few bad decisions, and neither are they entirely of recent vintage. This is a problem that has been coming down the runway for some time, like watching a bad landing in slow motion.
Our story more or less begins in 1967, when McDonnell Aircraft absorbed Douglas Aircraft to form McDonnell Douglas. While this seemed to make some business sense — McDonnell was largely a defense contractor; Douglas was a leading commercial airplane builder — as with so many mergers, the two parts were not completely compatible.
Amid the hysteria of the Cold War, defense contracting was a lucrative business and the U.S. Department of Defense and Congress weren’t known for driving hard bargains. Although the merger seemed appropriate at the time, the senior partner in the resulting McDonnell Douglas had no feel for the commercial aerospace business, which was competitive. Nor did it approve great risks, which meant that turning the DC-10 into the MD-11 produced a largely similar plane that not enough people wanted to buy.
And then came Airbus, the wind of $18 billion in European government subsidies beneath its wings. (This raises a number of questions: How do you justify free trade when you can apparently buy a comparative advantage, and why do so many people get their knickers in a twist because a political entity wants to preserve a vital industry? In what fairy-tale version of the world does everybody play fair?)
Airbus chased Lockheed out of the commercial aircraft business, and squeezed McDonnell Douglas nearly dry. And still MacDac, as it was known in the trade, lumbered along. It took baby steps toward launching new products, but couldn’t seem to carve enough market share to keep its commercial business aloft. Its last CEO, Harry Stonecipher, once told me he had made the company profitable without actually selling any airliners. Normally, not selling your product is not seen as a long-term strategy for success.
In 1996, McDonnell became Miss Congeniality in a four-way competition for the Joint Strike Fighter competition, with Boeing and Lockheed Martin the two finalists. With the thawing of the Cold War, among the thoroughbreds of aerospace, McDonnell Douglas was a horse with no game.
Boeing had just acquired Rockwell’s space and defense business, and things were looking up. The company launched the 777 with both fanfare and success; Boeing had survived both Airbus and its own need to streamline its manufacturing process.
In 1997, Boeing acquired the still ambulatory corpse of McDonnell Douglas for about $12 billion in stock. That gave the company the added expense of maintaining the aging fleet of McDonnell Douglas jetliners still in the air, and produced little more in the way of sales (outside of defense). The last product with any Douglas roots, the MD-95/Boeing 717, ceased production after only 156 jets were sold. In contrast, the Boeing 777, developed about the same time, has sold more than 1,500 jets and still is flying.
All of that might have been OK, but the real wrong turn Boeing took was in putting McDonnell Douglas people in charge of way too many programs. Why would you put people who had run a company into failure in charge of a company that was eminently successful?
Like a lot of American firms in the 1990s, McDonnell Douglas discovered the philosophy of participatory management, which had helped many Japanese firms succeed. Listen to the workers; trust them; empower them — and they’ll figure out what needs to be done.
McDonnell Douglas’ version was called the Total Quality Management System, or TQMS. A lot of McDonnell employees said it stood for “time to quit and move to Seattle.”
But MacDac’s lack of success in anything other than its stock price at the time didn’t stop the company’s veterans from taking over operations in various parts of Boeing. As one Boeing midlevel manager said of his early retirement after getting a McDonnell supervisor inserted above him, “It was the worst six months of my life.”
So, for example, McDonnell managers were put in charge of Boeing’s bid on the Joint Strike Fighter. Hello? These are the folks who just lost that competition. This is like firing Pete Carroll so you can hire Tyrone Willingham. Lockheed Martin ended up winning the contract.
As several others have put it, McDonnell Douglas acquired Boeing with Boeing’s money.
Even that sort of misstep could have been overcome, but for one thing — the triumph of the bean counters.
Accountants are important, crucial for business success. If you don’t properly manage the costs of your business, it’s likely to fail. But even if you know the cost of everything (and the value of nothing), that won’t be enough.
Developing commercial aircraft is expensive, which cuts into profit margins in the short term. Whereas old Boeing really had bet the company in the past, first on the 707 and then on the 747, new Boeing had succumbed to the siren song of shareholder value.
Going back to the 1990s, Wall Street had begun to put pressure on Boeing to produce higher profit margins. At about the same time, it became standard practice to reward upper management with stock options, by which if the company’s share price surpassed a certain level (the strike price), the executive could exercise the option and buy the stock at a discount.
This was intended to reward aggressive behavior and was designed to align management’s interest with that of shareholders. And it sometimes achieved that. But mostly it appeared to make firms more risk-averse. And when you run out of new ideas, when your technology hits a plateau and your market has matured, the only way to continue boosting profits is to cut costs. And like so many once great American firms, that’s what Boeing started to do.
Consider the difference between the 777 and the 787.
It cost $10 billion to develop the 777. It had a lot of new technology, and Boeing subcontracted more than the usual amount of work.
However, it also had a miraculous design-build team approach, in which engineers and machinists worked together to sort out problems ahead of time. As a consequence, the 777 was on-time, on-budget, a hit with airlines and passengers, and one of the safest planes in the sky.
Apparently, that approach was scrapped for the 787. Altogether, the 787 cost $32 billion to develop. Boeing parted out so much work to suppliers that even company executives conceded they had given away too much (including the wings, long heralded as one of the company’s core competencies).
The basic development cost was perhaps $15 billion. It is indeed a groundbreaking jet – lighter, more fuel efficient and very nice to fly.
But then you add $16 billion to fix the first 40 jets, plus $1 billion to buy a troubled plant from a supplier in South Carolina, all in hopes of straightening it out. It since has become the site of the second 787 line, with mixed results.
Mixed results generally describes the whole 787 program. It turns out that the supply-chain management problems of having so many subcontractors did not save the company any money. At the time, Boeing management blamed a strike by the Machinists union, but as was noted a little while later, you can’t blame a three-year delay in delivering the jet on a three-month strike.
And still Boeing was (and is) trying to save money in questionable ways. Projects are farmed out to teams that haven’t done this kind of work before, leaving behind experienced (and more highly paid engineers) who might have a chance of doing the job better. As one Boeing machinist lamented decades ago, before things had gone quite so sour, “Why don’t we get to bid on these jobs? Everyone else does.”
Which brings us to the 737 Max, the latest iteration of the world’s bestselling jetliner. And the evidence keeps mounting that Boeing did the heretofore unthinkable — cut corners on safety to save money. The stall avoidance system apparently lacked a backup, malfunctioned and caused two jets to crash, killing more than 300 people. On top of which, Boeing persuaded an underfunded, undermanned FAA to let the company certify its own work.
Of course, this completely failed to save the company any money. The Max fleet remains grounded; the brand and the model are tarnished. Boeing lost $2.9 billion last quarter, and announced it was taking a $4.9 billion charge to cover the cost of the groundings.
Management may not have thought they were trading safety for profit. But nearly every current and former Boeing employee I have talked with pretty much tells the same story — more pressure to cut costs, and less emphasis on quality.
One current production manager cited a litany of issues at the company: “the heightened accent on profits and appeasement of the shareholders, disdaining the traditional ‘suspenders and belt’ backup safeguards, outsourcing, and a concerted sea change from nerdlicks to bean counters.”
How will Boeing address this? CEO Dennis Muilenburg got demoted from chairman, but that’s pretty much a slap on the wrist. Boeing’s board shouldn’t inspire a lot of confidence — a lot of old white guys, plus Caroline Kennedy and Nikki Haley, the lackluster former South Carolina governor and briefly Trump’s ambassador to the United Nations. The experience of the board seems to be mostly financial, military and political — just one former airline exec and no one with any manufacturing background.
Some folks have said Muilenburg should resign; probably some board members should go, too. Anybody who’s on the board’s Aerospace Safety Committee should probably be locked in a grounded 737 Max and forced to subsist on pretzels and warm apple juice.
If Boeing is serious about rebuilding its brand and reclaiming its position as the world’s leading jetbuilder, it needs to change its approach. If your product isn’t safe, nobody will buy it, nobody will want to fly it, and you will be out of business. If this weren’t true, DeHavilland would be making a new version of the Comet (which too often came apart in midair).
One would have thought this was obvious. But when shareholder value and executive bonuses take precedence over safety, perhaps it needs to be reiterated.