Skyfall: Boeing’s Flight Path to Disaster and can it Rebound?
At the turn of the century, Boeing was the pinnacle of American innovation, flaunting its marvels from passenger jets to space rockets. But fast forward to today, and Boeing’s glory has plummeted. With two deadly crashes and a fraud admission, how did this aviation giant fall so far? Dive into the story of Boeing’s rise, corporate missteps, and the shocking revelations that turned this titan of the skies into a corporate criminal. You won’t believe the twists and turns that led to its disgraceful downfall.
Why did a company that once symbolized American ingenuity and technological marvels become a corporate criminal? At the turn of the millennium, Boeing launched a grand advertising campaign called “Forever New Frontiers.” This campaign celebrated its pioneering achievements in passenger and fighter jets, space rockets, and satellites. The timing was perfect, as it came a few years after Boeing’s merger with McDonnell Douglas, a smaller rival. At that moment, Boeing was the epitome of success in the rapidly consolidating aerospace industry.
However, the glory didn’t last. On July seventh, the American government announced that Boeing had agreed in principle to plead guilty to fraud related to two tragic crashes involving its 737 Max jets in 2018 and 2019.
This recent disgrace has tarnished Boeing’s once-stellar reputation, turning it into what many see as a corporate criminal. Looking back over the years, it’s evident that Boeing’s enthusiastic embrace of the lean-and-mean trends that once defined American business has backfired.
Let’s start with the merger with McDonnell Douglas in 1997, an event that The Economist praised as one of the greatest industrial upheavals of all time. This merger was part of a broader trend of consolidation that swept through corporate America. The second significant trend was outsourcing. In 2005, Boeing joined many other companies in offloading capital-intensive manufacturing and reducing labor costs by selling off parts of its production line. This move turned Boeing into an assembler of planes rather than a fully integrated manufacturer. The third trend was the focus on showering stockholders with cash through share repurchases and dividends rather than investing in innovation.
Wall Street loved these trends. They made the American economy more efficient and created ripples across the globe. These strategies propelled Boeing’s market value to over two hundred billion dollars in 2019. But like a sugar rush, the initial euphoria didn’t last, and the hangover has been brutal. Boeing’s troubles have wiped out around one hundred billion dollars of shareholder value.
Let’s consider these trends in reverse order. The obsession with short-term shareholder returns might have led Boeing to cut corners on the safety of the 737 Max. This focus on immediate gains can be traced back to the merger with McDonnell Douglas. Even though Boeing was the stronger company, it absorbed the smaller firm’s Wall Street-centric culture, especially the emphasis on generating cash from existing models rather than investing in new ones.
Returning cash to shareholders does have its merits. It gives them the freedom to reinvest where they see better opportunities. But in Boeing’s case, a significant portion of the sixty-one billion dollars in dividends and buybacks from 2014 to 2020 could have been better spent on developing new models or enhancing safety measures. The last time Boeing launched a new fleet-building program was the 787 Dreamliner in 2004. The 737 Max, whose faulty software caused the crashes in Indonesia and Ethiopia, was essentially an upgraded version of an existing model rather than a brand-new aircraft. Consequently, Boeing’s market share in the narrowbody category has plummeted from forty-eight percent to thirty-eight percent in a decade, falling far behind its European rival, Airbus.
Today, even Wall Street wants Boeing to prioritize safety to recover market share lost to Airbus. Yet, despite its ongoing struggles with safety issues, Boeing continues to promise unrealistic levels of free cash flow in the coming years. This persistence in a bean-counter mentality is concerning.
The loss of a fuselage panel on an Alaska Airlines Max aircraft shortly after takeoff in January highlighted another problematic trend: outsourcing. The panel was manufactured by Spirit AeroSystems, a company that used to be part of Boeing but was sold during the outsourcing boom. This decision was part of a broader move to create “asset-light” firms focused on intellectual property. Boeing outsourced much of the Dreamliner’s manufacturing, which led to delays, cost overruns, and supply-chain issues that became glaringly apparent during the COVID-19 pandemic. On July first, Boeing announced it would reacquire Spirit for eight point three billion dollars to bring safety back to the forefront. The pendulum has swung back towards vertical integration.
The megamerger trend has also had mixed results. Acquiring McDonnell Douglas’s expertise in arms manufacturing catapulted Boeing into the top tier of defense contractors. The logic seemed sound. Military budgets are typically stable, providing a counterbalance to the unpredictable commercial aviation market. Innovations in military technology often benefit commercial aircraft. However, sitting at the top table for too long has made Boeing’s defense and space businesses complacent. In recent years, it has lost significant amounts of money on weapons programs. Its rocket launches have lagged behind those of Elon Musk’s SpaceX. After numerous mishaps, Boeing’s Starliner space capsule finally delivered two astronauts to the International Space Station in June. However, the return trip has been delayed.
So, what’s the way forward for Boeing? The current CEO, David Calhoun, has pledged to step down by the end of 2024, but that might not be soon enough. There are pressing decisions to make, such as reviving 737 Max production while rebuilding a culture of safety and addressing potential strikes from unions whose pay contracts expire in September. More importantly, like any convict, Boeing needs rehabilitation. This process must begin with self-reflection. Boeing needs to realize that while efficiency is important, being too lean and mean can come at a steep cost.
With Robert “Kelly” Ortberg set to take the helm, Boeing stands at a crossroads. Ortberg, with his engineering background, brings a fresh perspective that some hope will steer the company back to its former glory. His journey from a young engineer at Texas Instruments to the CEO of Rockwell Collins speaks volumes about his capability and vision. However, the shadow of the 737 Max crisis looms large, a stark reminder that expertise alone does not guarantee success. Ortberg’s leadership will be tested not just by his ability to manage the present crises, but by his vision for a future where Boeing can thrive without compromising its core values.
From this saga, we can derive three important financial lessons. First, an excessive focus on short-term shareholder returns can undermine long-term stability and safety. Second, outsourcing might reduce costs initially but can lead to significant quality and control issues down the line. Third, while mergers can offer strategic advantages, they can also bring cultural challenges that may erode a company’s core values and long-term vision.
Boeing’s story is a cautionary tale about the dangers of prioritizing short-term gains over long-term sustainability. It also serves as a reminder that the trends and strategies that seem advantageous today might not be the best for the future. As Boeing embarks on its journey of rehabilitation, one can’t help but wonder: will it manage to regain its former glory, or will it serve as a perpetual warning to others about the perils of neglecting core principles for quick profits?
References
Boeing’s brutal 2024 keeps getting worse. (2024, March 18). Quartz.
Herkert, J., Borenstein, J., & Miller, K. (2020). The Boeing 737 MAX: Lessons for engineering ethics. Science and engineering ethics, 26, 2957–2974.
Isidore, C. (2024, July 31). Boeing names new CEO after losses more than triple.CNN Business.
Schumpeter. (2024) Once high-flying Boeing is now a corporate criminal.The Economist.
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