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At the turn of the century Boeing launched an advertising blitz to show what a marvel of American manufacturing it was. Called “Forever New Frontiers”, it highlighted its pioneering work on some of the 20th century’s biggest breakthroughs, from passenger and fighter jets to space rockets and satellites. Coming a few years after its merger with McDonnell Douglas, a smaller rival, Boeing stood tall in the fast-consolidating aerospace industry.
How far it has fallen since. On July 7th the American government said Boeing had agreed in principle to plead guilty to fraud in connection with two deadly crashes by its 737 MAX jets in 2018 and 2019. This latest frontier, its most disgraceful yet, makes it the corporate equivalent of a criminal. Looking back over the decades, it becomes clear that Boeing’s embrace of what were once the defining trends in American business have come back to haunt it.
First, the tie-up with McDonnell Douglas in 1997 was part of what The Economist then approvingly called “one of the great industrial upheavals of all time”: the hammering together of America’s fragmented defence industry into a few global Goliaths. Since then consolidation has been the name of the game across corporate America. The second trend was outsourcing. In 2005 Boeing joined the rush to offload capital-intensive manufacturing and cut labour costs by selling off parts of its production line, becoming an assembler of planes rather than a vertically integrated manufacturer. Third, like many listed American firms, Boeing showered stockholders with cash via share repurchases and dividends rather than investing in non-financial innovation.
All three trends delighted Wall Street. They made the American economy more efficient and made waves around the world. They helped propel Boeing’s market value to more than $200bn in 2019. But they have gone too far. Boeing’s travails have torched around $100bn of that shareholder value.
Consider them in reverse order. The obsession with short-term shareholder returns, which may have led Boeing to undermine the safety of the 737 MAX by cutting corners, is widely seen as dating back to its landmark deal with McDonnell Douglas. Though Boeing was by far the stronger company, it absorbed the smaller firm’s Wall Street-obsessed culture, particularly when it came to generating cash from legacy planes rather than pouring cash into creating new ones.
To be sure, returning cash to those who supplied it in the first place has merits. It gives shareholders the freedom to redirect investments to where they see better opportunities. But in Boeing’s case some of the $61bn in dividends and buy-backs it doled out between 2014 and 2020 could have been better invested in new models, improvements in safety to protect its future, or both. Its last brand-new fleet-building programme, the 787 Dreamliner, dates all the way back to 2004. The 737 MAX, a short-haul workhorse whose faulty software caused the catastrophic crashes in Indonesia and Ethiopia, was a souped-up existing model rather than an all-new aircraft. In this narrowbody category, Boeing’s market share has plunged from 48% to 38% in a decade, putting it far behind its European arch-rival, Airbus.
These days even Wall Street would rather see Boeing prioritise safety in order, partly, to recover market share lost to Airbus. Yet even as it struggles to overcome safety worries, the company promises free-cashflow generation in the years ahead that looks increasingly delusional. Boeing’s bean-counter mentality remains.
The loss of a fuselage panel on an Alaska Airlines MAX aircraft shortly after take-off in January has drawn unflattering attention to the second trend once embraced by Boeing—outsourcing. The panel (which sealed an unused exit) was manufactured by lossmaking Spirit AeroSystems, which was once part of Boeing but was sold during the outsourcing boom. As the Wall Street Journal reported, that divestment decision was part of a trend to develop “asset-light” firms focused on intellectual property; most notably, Boeing outsourced most of the manufacturing of the Dreamliner. Yet distributing production brought its own headaches. Delays, cost overruns and supply-chain snags became vividly apparent during the covid-19 pandemic. On July 1st Boeing said it would reacquire Spirit for $8.3bn, restoring safety to its central position. The pendulum has swung back towards vertical integration.
The megamerger trend, too, has had chequered results. Buying McDonnell Douglas’s armsmaking prowess vaulted Boeing into the top-tier of defence contractors. The logic appeared sound. Military budgets tend to be reliable counterweights to the vagaries of the civil-aviation market, making earnings more predictable. Government-backed innovations in military technology can also benefit commercial aircraft. Yet sitting too long at the top table appears to have made Boeing’s defence and space businesses fat and lazy. In recent years it has haemorrhaged cash on weapons programmes. Its rocket launches have lagged badly behind those of Elon Musk’s SpaceX. After years of mishaps, in June its Starliner space capsule dropped off two astronauts at the International Space Station. But it has had to delay bringing them home.
Go soon, Calhoun
What to do about all this? For a start, get cracking. Boeing’s hapless boss, David Calhoun, has promised to step down by the end of 2024. That is not soon enough. There are immediate decisions to make, such as how to reinvigorate MAX production while rebuilding a safety culture, and how to deal with unions threatening to strike when their pay contract ends in September. More important, like all convicts, Boeing needs rehabilitation. And like all rehabilitation, this must start with self-reflection: in Boeing’s case, realising that efficiency is all well and good, but being too lean and too mean can come at a grave cost. ■
If you want to write directly to Schumpeter, email him at [email protected]
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