What factors contributed to Boeing’s decline?
Boeing, a trailblazer of the jet age and a linchpin of American economic prosperity, has veered off course. Restoring momentum will necessitate a formidable effort to regain the confidence of travelers, airlines, regulators, investors, and its own workforce. This year, a fuselage panel detached from one of its aircraft during flight. The Starliner space capsule has left two astronauts adrift in orbit. The largest labor union has suspended aircraft manufacturing, exacerbating the financial outflow. The company is set to enter a guilty plea in connection with two deadly incidents, while its credit rating hovers precariously near junk status.
Numerous potential culprits emerge in this scenario: a culture prioritizing financial engineering over aerospace engineering, an outsourcing strategy that relocated work to lower-cost factories or suppliers, a relentless pursuit of production targets at the expense of safety, and a leadership that remains disconnected from the workforce. Regardless of the underlying factors, Boeing has arrived at a juncture where there is a palpable concern: Is Boeing at risk of failure? What might the conclusion resemble in a scenario featuring a national symbol?
The decline in public confidence following the crashes prompted regulators, responding to legislative pressure, to intensify their scrutiny of Boeing, thereby delaying deliveries and the approval of new aircraft models. Kelly Ortberg, who assumed the role of chief executive at Boeing just three months prior, conveyed to investors and employees last week: “The trust in our company has eroded.” Boeing opted not to provide a statement, instead directing attention to Ortberg’s remarks made earlier this week. “Restoring Boeing to its previous stature will require time, yet with appropriate emphasis and a revitalized culture, we have the potential to reclaim our position as an iconic enterprise and leader in the aerospace sector,” he stated. In a memorandum addressed to employees, Ortberg emphasized the necessity for the company to mend its fractured culture, downsize its operations, and enhance its execution capabilities.
In an effort to address its financial shortfall, Ortberg has initiated a significant reduction of 17,000 positions and plans to divest up to $25 billion in equity or debt instruments. Boeing is considering divesting certain segments of its space operations. The newly appointed CEO has, nonetheless, been unable to secure an agreement with the 33,000 machinists who initiated a strike six weeks prior, demanding increased wages and enhanced benefits. The ongoing strike is draining $1 billion each month from Boeing’s dwindling reserves. The escalating challenges faced by the aircraft manufacturer can largely be attributed to the 737 MAX, the most recent iteration of its long-established narrow-body flagship.
The emphasis on cutting training expenses aligned with design errors that culminated in the tragic crash of Lion Air Flight 610, which occurred six years ago this month. Boeing’s reluctance to acknowledge its errors and promptly tackle the aircraft’s safety issues paved the way for a second crash mere months later in Ethiopia, eroding decades of trust the company had cultivated with regulators, airlines, and the flying public. Following the initial crash of the 737 MAX on October 29, 2018, in Indonesia, Boeing minimized concerns regarding its defective flight-control system, attributing the incident instead to errors made by the airline’s pilots and maintenance personnel.
According to a settlement with securities regulators, former CEO Dennis Muilenburg instructed his communications team to eliminate references from a draft press release regarding efforts to address a new cockpit feature that contributed to a catastrophic nosedive of the aircraft. The press release asserted that the MAX was “as safe as any airplane that has ever flown the skies.” Boeing and Muilenburg reached a settlement in the case, neither admitting nor denying any wrongdoing. The discourse surrounding Boeing reflects a contentious examination of whether an excessive focus on financial metrics has precipitated a decline in corporate culture. Critics argue that the decline commenced in the 1990s, coinciding with Boeing’s adoption of management practices prevalent at its supplier General Electric, notably a heightened emphasis on short-term profitability.
The 1997 merger with rival McDonnell Douglas solidified Boeing’s shift from an engineering-centric ethos to a model characterized by increased corporate centralization. The relocation of its headquarters from the manufacturing hub in Seattle to Chicago in 2001, followed by a subsequent move to Virginia in 2022, serves as a clear illustration of this transition. The heightened focus on financial metrics yielded beneficial outcomes for the aerospace sector, which historically tended to underinvest in the actual requirements of airlines. The L-1011 TriStar was admired by engineers, yet it arrived too late and possessed a range that was insufficient, ultimately leading to Lockheed Martin’s exit from the commercial-airliner sector in the 1980s.
However, within the evolving culture at Boeing, certain engineers reportedly developed a reluctance to voice safety concerns to management or encountered excessive pressure, according to current and former employees. Prior to the inaugural MAX accident, concerns emerged regarding the flight-control system, MCAS, with apprehensions that it could necessitate expensive simulator training for airlines, thereby diminishing the aircraft’s attractiveness to potential buyers. Boeing has announced initiatives aimed at fostering a culture where employees feel empowered to voice their concerns.
Federal prosecutors presented an email they contended indicated that a Boeing employee faced financial pressures that led to attempts to mislead the Federal Aviation Administration regarding the necessity of simulator training for pilots operating the MAX. The correspondence revealed the employee’s concern about being held accountable as the individual “who cost Boeing tens of millions of dollars!” Muilenburg seemed apprehensive that regulatory inquiries following the initial incident could disrupt the company’s cash flow. “We must ensure that the FAA’s focus on pilot manuals does not evolve into a compliance issue that hampers immediate deliveries,” the CEO remarked in an email revealed during shareholder litigation.
Upon assuming the role of CEO in 2020, David Calhoun articulated a commitment to fostering trust and returning to fundamental principles. “We will engage in somewhat reduced visioning and diminish our long-term planning efforts,” Calhoun informed reporters at that moment. “Our focus will be on rebuilding trust among ourselves, with our customers, and with our regulator, ensuring transparency at every stage of the process.” An increasing number of quality and execution issues have emerged within its commercial aircraft, defense, and space programs. Boeing executives have repeatedly underscored their commitment to prioritizing safety, engineering, and quality. The firm has not recorded an annual profit since 2018.
The January incident involving Alaska Airlines underscored the persistence of unresolved issues within Boeing’s operations. Investigations conducted by government entities have disclosed that front-line workers continue to endure production pressures, while aircraft exhibiting issues persist in advancing through the assembly line and exiting the factory. David Boulter, the FAA’s safety chief, emphasized that a crucial aspect of addressing Boeing’s challenges lies in ensuring that all employees can voice their concerns and be acknowledged—an approach that has significantly contributed to safety improvements within the airline industry. “Certainly, that’s where we’ve observed the greatest success with the airlines,” Boulter remarked during an industry event in Las Vegas this month. “Organizations that cultivate robust safety cultures tend to achieve exemplary safety records.”
The aircraft manufacturer experienced a decline of approximately 20% in its stock-market valuation after the Ethiopian Airlines disaster in March 2019, which resulted in the suspension of the worldwide 737 MAX fleet. Nonetheless, this development did not entirely negate the substantial rally observed over the preceding three months, which had propelled the shares to an unprecedented peak of $446. In December 2019, when the company was compelled to halt aircraft production temporarily, the stock remained resilient. The decline occurred primarily at the onset of the Covid-19 pandemic in 2020, when production came to a halt and the recertification of the MAX faced additional postponements.
Investors have come to terms with the reality that Boeing’s future earnings are likely to be significantly diminished. The valuation of the shares stands at $155. The ongoing strike has prompted all three major ratings agencies to caution that Boeing’s debt may face a downgrade to the “speculative” category. Wall Street analysts estimate that ramping up production to over 50 MAXs and 10 Dreamliners monthly could yield more than $10 billion annually; however, achieving this target is becoming increasingly difficult. On Wednesday, Chief Financial Officer Brian West informed analysts that Boeing’s operations are projected to deplete cash reserves in 2025. Despite the robustness of its long-term business case, companies with investment-grade ratings do not experience significant cash outflows.
In the latter half of the decade, executives will be compelled to make substantial investments in the development of a new, innovative narrow-body aircraft to succeed the MAX. Failing to act accordingly would probably signify a retreat from direct competition with the European contender Airbus. More than ten years have elapsed since Boeing commenced deliveries of the 787 Dreamliner, its most recent “clean-sheet” commercial design, which is not derived from any prior model. However, rampant outsourcing plagued that program with numerous challenges.
To revive a genuine narrative of achievement, Boeing should reflect on the 1990s, a period when a team spearheaded by veteran engineer—and future CEO of Ford Motor—Alan Mulally, developed the 777 in partnership with airline clients and introduced innovative computer-aided design tools. Certain analysts contend that a viable strategy would involve dismantling the company, enabling each division to concentrate more effectively on its core competencies, akin to the approach taken by GE. Boeing’s defense, space, and security division, accounting for 31% of total revenue, might be better off sidelining space initiatives that cannot compete with Elon Musk’s SpaceX. In other areas, however, progress in aerodynamics, materials science, and manufacturing techniques frequently intersects between the defense and commercial sectors.
The defense sector further provides Boeing with entry to profitable Pentagon contracts, bolstering the perception in Washington that the firm is “too big to fail.” Faced with a staggering $58 billion in debt, including $12.5 billion maturing in 2025 and 2026, the path forward is fraught with challenges. Boeing seems poised to release approximately $10 billion in new equity, out of a potential $25 billion it could access. Typically, equity investors are apprehensive about the prospect of dilution. Currently, there is a strong push for executives to fully capitalize on cash-raising opportunities to enhance their strategic flexibility. As the clock ticks down on the impending crisis, it appears that the priorities of producers and financial overseers may be converging at last.
