We will look back on 2019 and the 737 MAX disaster as a turning point for the aviation industry, as this singular event has introduced forces that will change the structure and focus of the industry for decades to come.
- The loss of a collaborative regulatory system
Since World War II, the aviation industry has worked collaboratively for aviation safety, built on the trust international regulators have placed in each other to properly complete their work and enhance aviation safety. That trust was broken with the 737MAX, where the FAA failed to adequately supervise Boeing’s development of a seriously flawed aircraft, breaking some of the fundamental rules of aviation safety, particularly redundancy for critical flight control systems.
Boeing essentially self-certified the MAX after changes to the regulatory environment by the US Congress, responding to Boeing and other industry lobbyists. By having Boeing engineers report up through the Boeing organization rather than directly to the FAA, the safety net for engineers to report questionable practices had been removed. Unfortunately, Boeing succumbed to schedule expediency and greed, rather than erring on the side of safety, with 346 souls paying the ultimate price.
Even with a criminal investigation underway and an Federal Aviation Administration. more determined than ever to re-assert its authority, it is too little and too late for the international community. The leadership that the United States once held in aviation has now disappeared, thanks to Boeing and the FAA. It is now doubtful that a new FAA certified airplane will be approved through reciprocity by international agencies like EASA, Transport Canada, or CAAC without an independent review in the future instead of the reciprocal “rubber stamp” in the past.
The FAA and Boeing built trust over decades, but have lost it virtually overnight based on the certification debacle of the MAX. Nobody in their right mind would have approved MCAS given its actual performance and sensor configuration, but somehow Boeing convinced the FAA to do so. That trust has backfired internationally and the existing system for cooperation in aviation has been shattered, perhaps permanently.
There has been a strong message delivered by the international regulator community to both Boeing and the FAA, the essence of which is ‘fool me once, shame on you, fool me twice, shame on me.’ Aircraft development will never be the same again, and will be more costly for OEMs, which could hinder innovation.
- The loss of confidence in Boeing and its management team by customers
We still haven’t seen the final determinant of the MAX saga, which is whether passengers will return to the aircraft. Airline economics are such that even the loss of 2-5 seats per airplane could turn profitable routes unprofitable. Add the factor that this is the first major aircraft grounding for safety in the social media age, and the stage is set for a consumer rejection of the MAX. That would mean lower values, lower margins, and the need for Boeing to quickly develop a replacement aircraft faster than planned.
With other headlines this year about the pickle forks and nacelles of the 737NG, quality issues on the 787 and KC-46, further delays and testing problems with the 777X, and the failure of the Starliner to dock with the International Space Station, Boeing can’t seem to deliver a product on time and on budget. When a company is perceived as having lost its fundamental strengths, recovery can be difficult.
Compounding Boeing’s problems, the former CEO, who was fired on December 23rd, exhibited the Boeing culture he helped create – arrogant and with a lack of transparency with the FAA, airline customers, their pilots and flight attendants, suppliers, employees, and airline passengers. Boeing, with all its problems, is in no position to continue to be arrogant, yet the remain so. Their culture has been based on shareholder value, and over the last five years, the company has spent $60 billion on share buybacks and dividends, while ignoring the holes in its product line, vacillating on capital expenditure decisions for a new middle-market airplane, and focusing on cost and timing to a fault, resulting in shoddy workmanship.
Companies are like people, and their cultures can be infected with diseases that must be cured for the company to regain prominence. Boeing was an engineering company prior to the merger with McDonnell Douglas, but later changed to a financially driven culture. The success of the GE shareholder value approach to management, while positive in the near term, is unsustainable long-term. Milking the cash cow is fine, until that cow runs out of milk. Just like Sears, which misunderstood its customers, Boeing is showing symptoms of the early stages of a fatal disease. But given its size and duopoly position, it may take 30-40 years to be fatal. But the initial signs are there, and will require cultural change.
- The rise of China and COMAC
China sees an opportunity in aviation, and the C919 from COMAC is their first foray into large commercial aircraft. The C919, while not a world beater, will be a credible aircraft, with better economics than the Boeing 737NG and Airbus 320ceo families. It will also find a ready market in China, where the government has established aviation as a priority industry for economic development.
While many pundits see COMAC as no threat for another few decades, we believe that it will become more competitive over the next 15 years, as it moves further down the learning curve. With the Chinese treasury behind hem, COMAC will not find itself chasing the capital markets, but rather exploiting new Chinese client states in Africa and Asia thanks to the Belt and Road project. If China builds the airports, and finances the debt for them, it is also likely to put economic pressure to buy Chinese aircraft. By 2035, COMAC will have learned how to build aircraft that are competitive quite well, and Boeing and Airbus will need to leverage technology to leapfrog their new competitor. But be well aware of Chinese advances in R&D, as this is no longer simply a “build to print” industrial power.
Economic protectionism will also contribute to the Chinese wanting to be self-sufficient in aircraft as well as other commodities. Sometimes trade wars can have unforeseen consequences.
- Electrification
The world is moving towards electric cars and now even electric airplanes as rapidly as possible. The key to this will be advances in energy storage – batteries – that can be utilized to power hybrid aircraft.
While a two order of magnitude improvement will be needed for batteries to rival the current productivity of an aircraft, the tremendous input into R&D for energy storage should result in breakthroughs, particularly in power to weight ratios for batteries. Since weight is the enemy in aviation, those breakthroughs will be necessary.
But we all know that cruise flight requires much less power than a take-off. This makes the hybrid airplane feasible, with take-off and acceleration to cruise performed with conventional propulsion, followed by cruise and descent using electric power, and the landing using a combination of both in case of a go-around and thrust reversal.
The first commercial electric aircraft was delivered this year, a deHavilland Canada Beaver float plan with an electric engine from Magnix to Harbour Airlines in Vancouver BC. Short-haul and smaller aircraft are ideal for electrification, and these early steps will provide the inputs and refinements necessary as the industry expands to larger aircraft.
The Bottom Line
We’re headed for a new era in aviation, starting in 2020, that is the turning point for US industry leadership. The international regulatory environment will never be the same, with increase influence from Europe, Canada and China. Boeing needs to address its fundamentals if it is to avoid a slow decline, while China’s long-term strategy and patience appears to be working in its favor. Finally, the electrification of transportation presents an opportunity that is up for grabs, and provides an environment ripe for innovation. We can’t wait to see what the next decade brings.
