Insight: Boeing is fighting multiple battles |

Boeing is fighting multiple battles on competitive, regulatory, political, legal, media, and internal issues across almost all of its product lines. Let’s examine some of the battles the company is currently fighting, and how they might impact the near-term and long-term future of the company. COMPETITIVE BATTLES Boeing and Airbus have been in an effective duopoly in the commercial market for the last 24 years since Boeing acquired McDonnell Douglas. While that is likely to change in the future as COMAC introduces the C919 in China, the current duopoly continues today. The battle Boeing is fighting with Airbus has both product and political elements. On the latter front, Airbus and Boeing have reached a truce with respect to multiple World Trade Organization disputes being settled between the parties. With the WTO disputes off the table, the competition focuses on products and pricing. From a product line-up standpoint, Airbus now has a sustainable advantage in the narrow-body market, with a tremendous lead over Boeing in terms of order backlog, driven by the extremely successful A321neo family, accounting for the bulk of 757 replacements, including all three US majors that are 757 customers. While the 737 MAX backlog has begun to grow again in recent months, it remains well behind the A320neo family. A key concern is how profitable those new MAX orders are amid rumors of exceptionally high discounts to key customers. Advantage Airbus. Airbus also has an advantage at the lower end of the market with the A220, nee Bombardier C Series, in the 110-145 seats range. Boeing was set to counter with a proposed merger with Embraer’s commercial division, but that deal fell through, leaving both companies competing in different ways than they expected. Boeing lacks a small narrow-body competitor against Airbus in a market that will likely reach 2,500-3,000 aircraft over the next two decades. Advantage Airbus It is also likely that smaller aircraft will lead the industry in testing hybrid-electric models and innovative propulsion systems and provide a smaller testbed before taking additional technology risks with the cash cow narrow-body models. Advantage Airbus. Boeing maintains a lead in the wide-body market over Airbus, but since the A350 entered service, its order book has equaled that of the 787 that entered service several years earlier. Unfortunately, quality problems emerged on the 787 that caused a cessation of deliveries last year, compounding a recovery in cash flow after the grounding of the 737 MAX. Today, production rates have not yet increased to previously planned levels due to the impact of the pandemic. Advantage: Boeing, but the gap is narrowing. Boeing still maintains a very strong lead in wide-body freighters, with major recent orders from FedEx and Amazon Prime. In examining the overall wide-body backlog, without freighters, Airbus and Boeing would be essentially tied. However, the 747-8F is coming to an end and the 767F continues in line with the KC-46. However, the growing pool of parked A330s offers a rich source of aircraft that can be converted to freighters. Boeing is fighting a competitive battle with Embraer as well resulting from the break-up of an agreed-upon merger. The sides disagree as to the reason that the transaction failed. Boeing claims that Embraer did not live up to its end of the bargain, and Embraer claims that Boeing breached the contract. The courts will decide who is right if it reaches full litigation. But in the interim, Boeing has a new enemy in Embraer, who will certainly not be friendly and will try to compete with its E2-195 on any potential 737 MAX 7 bids. The competitive dynamics that would have been balanced between Airbus and Boeing are now imbalanced, with Embraer lacking the ability to participate in multi-aircraft procurements in the same way as the duopoly competitors. Advantage: The lawyers Both Airbus and Boeing will soon be fighting a competitive battle with COMAC and its domestically-built C919 aircraft, which will fall short of the current offerings from Airbus and Boeing but be better than their last generation aircraft. For a first effort in that size class, the results will be quite good, and the aircraft should dominate the Chinese domestic market. That will impact both Airbus and Boeing competitively, but we don't expect the export market for the C919 to be very large. Airbus and Boeing both would like the WTO to take action, as the Chinese government has provided virtually unlimited funding to reach their goal of independence in commercial aircraft capabilities. But we all know who wins in trade disputes. Advantage: The lawyers. REGULATORY BATTLES Boeing is fighting multiple battles on the regulatory side as well, both domestically and internationally. The result has been delays to every current Boeing commercial aircraft, including the 737 MAX, 787, and 777X. A regulatory battle has emerged from the 737 MAX development in which some Boeing employees purposefully misled the FAA to reduce training requirements for the MAX. Those efforts enabled the aircraft to be certified with an unsafe flight control system. A single point of failure being installed on the aircraft was a major factor in two crashes and 346 deaths. The FAA essentially failed in its oversight role because of Boeing employee actions. As a result, they have placed the company under extreme scrutiny. Let’s examine some of the fall-out from the lack of trust that has deteriorated Boeing’s relationship with the FAA. First, Boeing still has not had its production certificate for the 737 MAX restored. Until that happens, the FAA remains in charge of the rate at which Boeing can ramp up production, and the FAA needs to sign off on each aircraft produced on an individual basis. This is both time-consuming and more expensive than relying on Boeing’s quality control system. Second, Boeing has been under scrutiny for quality issues on the 787 for some time at the Charleston facility, where all 787 aircraft production was recently consolidated. A recent quality issue Boeing discovered and reported to the FAA led to no airplanes being delivered for 9 months and continuing slow progress as the FAA inspects each aircraft individually. Third, the FAA has now challenged flight test results for the 777X and indicated that additional actions may further delay the program, which is already three years behind schedule. The FAA appears to be examining every detail of the 777X certification, particularly all of its flight control systems. The net result of these regulatory actions includes fewer deliveries, lower cash flow, delayed schedules, and a significant financial burden to Boeing. The loss of trust by the regulator has been costly, and the outlook is not expected to change in the near term. The FAA itself is under pressure to maintain the international system of certification reciprocity outlined in the Chicago Convention of 1944 under which aircraft certified by one agency are routinely approved without full certification efforts, based on inter-agency trust. The 737 MAX tragedies and grounding nearly broke the system after the two preventable MAX crashes. The MAX, with larger and heavier engines, placed further forward on the wing, handles differently than the 737 NG it replaces. The aircraft is stable but has slightly different handling than its predecessor, which typically requires additional training. The MCAS system that was intended to simulate the handing of the prior model to avoid additional training costs for customers (and not pay $1 million per aircraft penalties to Southwest) was poorly engineered and relied on a single point of failure. A fallout of the regulatory failure is the threat from EASA, Transport Canada, and other regulatory agencies NOT to accept the certification of the MAX, and to change the international regulatory environment. To avoid those charges, the FAA is including inputs from international regulators in its review of the MAX and likely is associated with other Boeing models like the 777X. The FAA needs to ensure it leaves no stone unturned to maintain the status-quo with international regulators and must again prove its credibility by having nothing fall through the cracks. As a result, Boeing is facing increased regulatory scrutiny and the expense associated therewith. The saddest part of the 737 MAX story is that the airplane is quite stable, but simply handles differently than the prior model. With training about the differences, the MCAS system would have been entirely unnecessary. But when marketing and finance overrule engineering, the consequences can be catastrophic. Advantage: FAA POLITICAL BATTLES Boeing is fighting political battles, sometimes directly and sometimes indirectly. While EASA and Transport Canada have approved the return of the MAX, that approval was subject to some additional changes that will arrive along with the MAX 10 to be retrofit to earlier aircraft. India and China have still not re-approved the MAX for commercial flight. China is a major market for the MAX and the home of an emerging competitor in the COMAC C919. Once the C919 is certified, we expect that every aircraft produced in China could come at the expense of the Boeing order-book, as Airbus has a larger footprint in China, including an A320 family final assembly line in Tianjin. Of course, the overall trade wars with China likely impact their return to service for the MAX. China is seeking to gain additional certification expertise and credibility and has not found a warm welcome from western regulatory authorities. When things move from the technical into the political, illogical things can and will happen. Delay in re-certifying the 737 MAX for flight is one of those elements. But the politics will result in changes, as the FAA and Boeing did promise to address certain issues on the MAX with the introduction of the MAX 10, the largest model of the family. With the MAX 10 now in flight test, the rubber will need to hit the road sooner rather than later. Two issues have been identified that will likely require retrofit to older MAX models. One is the introduction of a third angle of attack sensor that will likely be solved via a “synthetic” sensor. That sensor would do what a pilot would do - check the sensor readings against other information in the cockpit to determine whether the reading does or doesn’t make sense. For example, if one angle of attack sensor is reading a high angle of attack when the aircraft is straight and level and at a constant speed, both a pilot and synthetic sensor would consider that sensor to be in error. EASA required three sensors on the Airbus A320 narrow-body family, with the computer choosing the best two of three. Given the difficulty of adding another sensor to the MAX, the synthetic sensor will be that third sensor in the 2-1 vote as to which sensor is correct. The more difficult challenge may be complaints about the multiple error messages in the cockpit, and the ability for pilots to quickly assess the root cause of a problem. The 737, originally introduced in 1967, is the only Boeing model without an Engine Indicator and Cockpit Alert System (EICAS) that provides pilots critical information in one place. Instead, the MAX uses annunciator panel warning lights and warning tones to indicate to pilots that something is wrong. In the event of an angle of attack warning from a failed sensor, the stick shaker will activate and remain active, continually warning pilots to pull up, and can only be shut off through one of the veritable plethora of circuit breakers above the instrument panel. An interim fix at the request of Transport Canada was to place a red cover to the stick-shaker circuit breaker to enable pilots to quickly shut it down to reduce potential cockpit confusion. The key question is whether the FAA and international regulators, whom it feels obliged to please, to maintain the reciprocity system, will require an EICAS for the MAX. Should they do so, a substantial additional effort will be required. Boeing just announced a two-year period from first flight to entry into service for the MAX 10, a bit more than twice the expected time between first flight and service entry, which indicates some substantive changes may be required. Advantage: International regulators MEDIA BATTLES Boeing is also fighting a battle with the media. The company has not been particularly transparent with the media, which have sought out confidential informants and whistleblowers within the company. The most recent bout between these parties was last week when a leaked FAA memorandum about the 777X indicated further issues to be reviewed that will again delay the program. The Public Relations actions of Boeing in the wake of the MAX crashes did not win friends in the media, who saw through Boeing’s cover-up of its culpability during the aircraft’s certification process once confidential e-mails were released. A war with the press, who love to emphasize bad news, is another battle that Boeing doesn’t need, but is facing. The release of a leaked internal correspondence with the FAA last week is an example of the difficulties Boeing will have in trying to quietly resolve issues in a contentious environment. As they say, "if it bleeds, it leads." Advantage: Media LEGAL BATTLES Boeing is fighting legal battles from the two MAX crashes in addition to damage claims from airlines during the MAX grounding, despite making good headway in settling multiple cases and airline claims. More recently, delays in delivering 787s could result in additional actions, albeit during the pandemic many airlines were happier not receiving the aircraft on time and as a result will not likely take action. The fallout from the MAX crisis will likely continue for some time and likely result in equitable settlements between the parties, and some trials. Boeing is also facing legal actions related to the KC-46A tanker program, which still does not meet requirements. Disputes with both the Pentagon and a key supplier will need to be resolved. Advantage: Plaintiffs and Law Firms. INTERNAL BATTLES Finally, Boeing is fighting internally within itself. The corporate culture at Boeing changed from an engineering-driven culture to a financially driven culture after the McDonnell-Douglas merger in 1997. A focus on short-term stock prices resulted in $43 billion in stock buybacks that, after the MAX crisis, yielded no benefit to long-term shareholders. With additional losses and the need to borrow to develop new products, Boeing has gaps in its product line that have resulted in a loss of about 10 points of market share in the narrow-body aircraft market. If the old adage that it is 10 times more costly to regain market share than to lose it holds true, Boeing faces an expensive and time-consuming recovery in the duopoly competitive battle. Corporate culture is difficult to change, which as a consultant and former executive I know all too well first-hand. Today, Boeing Commercial Aircraft has only four major programs, each of which has experienced a major failure. That in itself is indicative of a broken corporate culture. The 737 MAX had a safety issue, a cover-up, a grounding, cost 346 lives, and still has a long way to go to full restoration of the production certificate and retrofit of early MAX models to MAX 10 specifications and software. The 787, after initial delays, a massive cost overrun, and a safety-related grounding had turned the corner when quality problems re-emerged causing no aircraft to be delivered for 9 months. Those quality problems, resulting from the international supply chain delivering fuselage sections that did not meet specifications, are still not fully resolved, which is alarming for a mature program. The 777X, after a major fuselage failure during a ground test now faces an additional delay to entry into service as the FAA was not pleased with some recent flight test results and software. Finally, the KC-46A, based on the 767, has been unable to meet USAF performance requirements and faces massive cost overruns and schedule delays that could result in an award to Airbus and Lockheed Martin for a competing tanker to replace some older KC-135 and KC-10 tankers. Had the company performed well, Airbus would not likely have had another opportunity to bid, and could have held the tanker business on a sole-source basis. While Boeing is fighting multiple battles, the most important may be the internal battle for the soul of the company. Fixing quality issues and a return the precision engineering reputation Boeing was once known for should be the highest priority objective for Dave Calhoun as Boeing CEO. Another internal battle is determining the business case for the New Mid-market Aircraft (NMA) or 797. Over the last five years, various concepts have been discussed with customers, but no decision to move forward has been taken. To outsiders, it seems as if an "analysis-paralysis" syndrome exists at Boeing. This has been compounded by analyst perceptions that Boeing has a "weak bench" when executive succession is considered and will need to recruit talent outside of the company to achieve its objectives. While Dave Calhoun has a huge number of battles Boeing is fighting on his agenda, the corporate culture battle may be the most important, as it leads to the resolution of all the other issues. Unfortunately, Status Quo appears to be the winner at, as Calhoun is a ten-year insider who is unlikely to substantially change the culture, which had migrated post-merger to the same attitudes and decision-making processes that resulted in the earlier failure of Douglas in the commercial market. As Yogi Berra said, "it's deja vu all over again." THE BOTTOM LINE While Boeing is fighting multiple battles, there are very few it is well-positioned to win in the near term. The signs are clear that the company is failing on multiple fronts. It needs a win and a champion. Dave Calhoun, so far, has not been the answer during his short tenure, although the jury is out. Boeing needs fundamental change and leadership that will conquer the management by committee approaches at Boeing that haven't worked well and will re-direct the company’s priorities back to the engineering and quality focus that brought it decades of success. Without such change, the company is unlikely to be well-positioned to win many of its battles over the longer term.

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