It isn’t culture, profitability or accounting. It’s the nature of the business.
It’s popular to pile onto America’s commercial plane maker Boeing these days, after a string of accidents and incidents involving the company’s volume leader 737 product. Retired employees and current insiders report that Boeing’s corporate culture has changed from an engineering focus to an accounting focus, but the reality is that all good engineering is inextricably linked to cost control.
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Episode Transcript:
You can make a good case for the notion that America’s most important manufacturing enterprise is Boeing. Few have been so successful. In the 1950s, an airline could buy an airliner from Boeing, Douglas, Convair, Lockheed, or Martin — and that was in America alone.
Today, it’s just Boeing and as part of a global duopoly that utterly dominates the globe’s large airliner market, you would think that no company could possibly be easier to manage to consistent profitability.
And yet, the Internet is now filled with earnest articles about a crisis at the company, and what needs to be done to solve it. The Forbes article is titled, “Boeing is haunted by two decades of outsourcing.” The New York Times titled its piece, “What should Boeing do to fix its long-standing problems?” And industry stalwart Aviation Week has run an op-ed entitled, “Can Boeing’s misguided leaders be stopped?”
With two software-induced 737 crashes, plus the recent door plug incident, the critics have plenty to chew over. Even the non-engineering people are asking some pointed questions. Boeing’s share price has been flat post-Covid, despite a huge surge in global demand. The company shut down production of the 757, with no modern replacement in the pipeline. The 747 program has finally died of old age, and 767 has withered to a military tanker operation.
That leaves the technically outstanding 787, and the half-century old, but modernized, 737 program.
The Dreamliner is a technological masterpiece, but its heavily outsourced production methodology, and the inevitable impact of Covid, has meant that the aircraft is only now contributing to solid Boeing profitability — although program accounting makes it difficult to measure program performance early in a production run.
But the grounding of the 737 fleet during the MCAS fiasco definitely hurt the bottom line. I’ve commented in the past about how FAA type rating regulations played into the choice by Boeing to use software to modify the aircraft’s flight characteristics, but none of these issues appear related to the actions of Boeing’s upper management.
If there is a criticism of the way the company is run, it’s that it appears to be operating for cash, generating high returns for shareholders in the near term, at the expense of investment in future new product. And this is the real heart of the problem — not just for Boeing, but for the industry as a whole. It can take the better part of a decade for a new aircraft project to reach profitable production, and few equity investors today are happy about a major cash-draining project that won’t deliver on the bottom line within a typical investor’s time horizon for holding the stock.
And in an era where there is a chronic shortage of new airliners, it is definitely more profitable to build more of what you’re already building rather than innovate. But Wall Street is notoriously fickle, and when the backlogs are burned through — and they will be — airlines will do more than just kick the tires when sourcing new aircraft. And it’s very difficult to catch up in a given market segment once an airframer falls behind.
On the other hand, it’s possible to do everything right, and invest in a great program, only to find that by the time the airliner’s ready for delivery, the market rationale for it has evaporated completely.
This is what happened to the magnificent A380.
So, who is responsible for the mess at Boeing? Well, nobody. Everybody is doing the right thing, based on the requirements that they face in real time. Senior management needs to appease shareholders. Engineering teams need to deliver more airframes, within well understood quality, safety and cost constraints. Airlines want newer, more capable and fuel-efficient aircraft, and they want them as fast as possible.
All three of these things are conflicting. Basically, it’s a crazy industry.
Building airliners is a little like playing poker: you can do absolutely everything right, and still lose your shirt.
