Filling the Gaps at Boeing Part 6 - Insight February 2021

In the five prior Insight reports, we’ve taken a look at Boeing’s lack of decisiveness on the NMA, the quality problems with the 787, the continuing impact of the MAX crisis, the shrinking market for the 777-X, and the problems with the KC-46 Tanker. Each one of Boeing’s programs is currently in a crisis state, with one problem after another emerging to be dealt with by the management team. The fundamental problems stem from three elements - strategy, leadership, and focus. Boeing’s current corporate culture and management team seem to lack all three. Strategy Boeing has no discernible strategy that indicates a return to market leadership, but rather the contrary. The continual re-evaluation of the business case for the NMA, when action should have been taken a couple years ago to move forward or pass, indicates that the leadership team is floundering and may no longer have the confidence that Boeing could pull off the new program on time and on-budget. There is a time and place to be reactive and a time and place to demonstrate leadership. This is the time for the latter, which is noticeably missing. Boeing’s strategy, or lack thereof, has resulted in the company losing the mantle of industry leadership it once held to Airbus. Boeing’s strategy post the company’s merger with McDonnell-Douglas was sound, but was not well executed. The 787, to be delivered in 2008 would have been followed by a 737 replacement in 2013 and a 777 replacement by 2018. Boeing would have had three hi-tech airplanes better than the competition in succession, and expand on its market leadership. Their strategy to introduce completely new technology in building an aircraft with carbon-fiber reinforced plastic structural components was an innovation that airlines loved, and followed with a massive order book. At the same time, however, Boeing decided to also implement a multi-national strategy to produce parts to specification around the world and bolt them together in final assembly, much as Airbus did producing components in multiple countries. That did not work very well at all. The combination of two areas of risk became more than Boeing could handle, with the budget for the new aircraft overrun by 300% and the schedule delayed by 60% -three years late. The 787, an innovative aircraft with tremendous promise, became a financial nightmare that is continuing to this day, with the production line stopped due to quality problems. Because of the cost and schedule overruns, the Board decided not to move ahead with a much- needed 737 replacement, and ended up with the MAX, which was rushed to market to meet Airbus competitive threat at American Airlines. The rush to production resulted in improperly vetted systems, including the MCAS system that was the major factor in two fatal crashes that resulted in the aircraft being grounded, resulting in billions in additional cost. Had the 787 been well managed, the MAX would not have been needed and a new airplane would have forced Airbus to react to Boeing, rather than the other way around. With the failure of the 787, a new aircraft large aircraft to replace the 777 was also out of the question, and a derivative model with new engines and longer wings with folding wingtips was developed instead. That new airplane hit the market at the wrong time with the wrong capabilities, and has seen it order book shrink since it has been offered to airlines. It is rare for a new aircraft order book to move so abruptly in the wrong direction, and questions about the viability of that program against the competing higher technology A350-1000, already in service, have emerged. The strategy for three new airplanes has turned into one program that appears attractive, but has undergone major delays, a safety grounding, and a production halt with deliveries currently halted due to quality issues. Introduced in 2011, ten years later the airplane is still problematic. The other two are re-tread older designs with new engines, one of which turned into a safety and financial disaster, and the other delayed with significant wing and fuselage design issues. Clearly, Boeing’s initial strategy failed, leaving the company with three weak programs, one plagued by quality problems, another a safety and financial disaster and still not cleared to fly in key countries, and the other delayed by three years from its initial schedule with a shrinking market. The three strong programs that would have differentiated Boeing from its primary competitor never materialized. By contrast, Airbus strategy is clear. The company wants to dominate the middle of the market it inherited from Boeing’s lack of action in replacing the 757 and 767, and will surround Boeing’s market entry with the A321neo and A330neo, with pricing appropriate to ruin Boeing’s returns. Boeing is stymied unless it can build a better mousetrap, and each month that goes by without an NMA launch decision tends to indicate that they can’t. Airbus acquired the Bombardier CSeries after Boeing tried to force Bombardier into near bankruptcy through a trade action over their sale of the aircraft to Delta Air Lines. While Boeing lost the case, Bombardier ran out of time and money, and was forced to sell the program to Airbus. Rather than let Airbus have an airplane in a category that Boeing didn’t, the company turned to acquire 80% of Embraer’s commercial aircraft operations. But once the pandemic hit and market valuations changed, Boeing abandoned that acquisition after more than $1 billion in transition costs had already taken place. Boeing broke off the merger, which Embraer still wanted, and there is now bad blood between the Brazilians and Boeing. The strategic question that must be asked is why? Boeing has successfully lived without a viable competitor in the middle of the market since Boeing 757 production was halted in 2004. Did they really need to compete in the 100-130 seats segment? The decision to match Airbus at the low end of the narrow-body market backfired and the company faces an aggressive competitor exploiting both a new aircraft design in the A220 and the inherent advantages of the 22 year younger Airbus A320 design against the 737 MAX, based on 54 year-old technology. Boeing’s traditional lead in the wide-body marketplace has nearly disappeared when the backlog of new orders are considered. The Airbus A330neo is a low-cost alternative against the 787 that trades reliability and price against high technology and efficiency, which they also offer buyers with the A350. As a result, Airbus can offer both technology and low-cost alternatives against the 787, depending on a customer’s needs. The only segment in which Boeing has maintained a strong lead is freighters, a market in which Airbus barely competes today, but plans to grow in the near future. Boeing’s strategic choices have resulted in Airbus taking market leadership and gaining a substantial market share advantage in narrow-body aircraft. Only innovative new products that can beat the competition can change Boeing’s strategic direction. The MAX is not an answer. But the company’s current strategy seems to be to continually re-evaluate the business case for new aircraft before moving forward - an analysis paralysis syndrome we’ve seen with NMA for the last three years. Boeing’s failure to act has cemented the A321 as the replacement for the Boeing 757 in a market that Boeing abandoned that has now become the “hot” segment of the market. Leadership Boeing lacked strong leadership under Dennis Muilenburg, as was illustrated during his testimony before Congress. His predecessors also lacked leadership, as the company’s culture has a consensus process that doesn’t seem to work well. Financial leadership now overrules engineering, and meeting budget requirements became more important than meeting technical, or even safety requirements. The entire 737 MAX debacle resulted from wanting to save costs on training by making the new airplane fly just like the old one. The new one wasn’t unsafe or unstable until the software to emulate the older model was installed to avoid training costs, which after the crashes they needed to do anyway. Getting around things is a good phrase to use when describing Boeing. To get around training, they changes the flight management controls for the MAX that directly caused two crashes. To get around using larger gates, they designed a folding wing for the 777-X that put new stresses on the carbon fiber design and sent them back to the drawing board. To get around replacing the unsafe lithium-ion battery on the 787 with a conventional one, they designed a fire-proof box and exhaust system to keep a thermal runaway from burning the airplane, rather than replacing it with a more conventional and proven battery design. More importantly, to get around a lagging share price through the 787’s development debacle and lower than expected earnings, the company bought back $43 billion in its own shares, which after the MAX grounding, netted them nothing. That would have been more than enough money to fund the NMA, a future small airplane, and a future large airplane combined. Poof – the war chest for a potentially winning strategy disappeared with no lasting benefit. There is a reason that the practice of share buybacks was illegal at one time, and perhaps needs to be again. Now, Boeing needs to take on debt to build aircraft it should have funded from internal resources. A series of GE disciples of Jack Welch on the Board and in the management ranks found out the same lesson GE has - you can milk the cash cow for only so long before the teats go dry. And the stock price today shouldn’t always the single metric that guides strategy. Focus The corporate culture at Boeing has evolved over the years that I have observed the company. Prior to the McDonnell-Douglas merger in 1997, the company was engineering and market driven, with decisions made based on cost and timing estimates from engineering. Boeing had a habit of bringing out new models on-time and on-budget like clockwork. Post merger, however, the culture began to change. Management challenged each financial estimate and required departments to cut those estimates to improve profitability, effectively squeezing each function within the company to perform at lower cost. That works for a while, but the practice became ingrained in the culture and annual planning process. Cutting budgets to eliminate fat is one thing, but continuing financial pressure is another. The culture changed from one of engineering excellence to here’s what we can do for that money -- good enough to get the job done. That was the kiss of death for Boeing’s excellence in engineering. Then came 9-11 and a recession, and during each the most senior and most costly engineers were offered buyouts or early retirement. Unfortunately, these were the folks who knew where the bodies were buried and how to solve serious problems. The less experienced folks threw their hands in the air, resulting in higher-cost do-overs for the tougher engineering problems. At the same time, Boeing decided to put pressure on its supply chain with its Partnering for Success program. This effectively turned into a reduce supplier margins to save money program, and Boeing’s relationship with its supply chain began to deteriorate. When parts aren’t up to specification and things don’t fit, programs like the 787 can come to a grinding halt. Quality and inspections also suffered, as Boeing cut the number of inspectors on the factory floor. The hard looks at quality, combined with tougher productivity goals for employees, resulted in inspectors looking the other way to ensure output remained on target and the kept their jobs. Blowing the whistle, if its slowed down cash flow, became an adventure. Boeing made certain that whistleblowers became examples with consequences they didn’t expect, nor would ever want to experience again.. Blow the whistle and kiss your career at Boeing, and in the industry, goodbye. This remains a problem at Boeing today. When finance runs the show, rather than engineering, operations, or quality control, things are going to slip through the cracks, which lately seem to have become crevasses at Boeing. The corporate culture at Boeing used to be building the best airplanes in the world, and doing everything possible to ensure they remain the best, with an emphasis on safety. Today’s culture is to do the best you can within the constraints management has placed on you, and to keep your mouth shut about problems. Where this culture change has led is obvious. The Bottom Line: Boeing is in a nosedive and needs to pull out, but there is nobody holding the yoke. The current CEO continues to re-evaluate rather than lead. Foregoing investments in tomorrow for short-term results today doesn’t build companies, it destroys them. Boeing is at a major turning point. Leadership needs to develop a new strategy, change the culture to get it implemented, and focus on re-gaining product and market leadership. Otherwise, Boeing will likely fall to number three, behind Airbus and COMAC, by 2040.

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