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May 20, 2024
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Boeing often appears as a candidate when asked about the worst-managed companies in the world, given its inability to get out of its way in recent years.  When airlines are discussed, Southwest Airlines, once touted under Herb Kelleher as the best-managed airline in the world, has fallen so low that it is now included in worst-managed lists. Two decades ago, having either of these companies on a worst-managed list was unthinkable – but times and events have impacted these two companies in the worst way.

Southwest’s inclusion on the list stems from its undying loyalty to the Boeing 737 and its strategy of operating a single aircraft type. Ireland’s Ryanair, another major 737 operator, has a few Airbus aircraft from an acquisition. Their CEO has been publicly critical of Boeing and is known for hard-nosed negotiations. Southwest has not publicly criticized Boeing despite being the largest and best historic customer for the 737 through multiple generations of the aircraft.

Our question for today is which company has the worst management – Boeing or Southwest?

The Case for Boeing

The case for Boeing is quite simple – the company can’t seem to build aircraft without problems, and their issues now extend to older models with a good track record.

Reports emerged this week that several 777Fs are parked without engines at Everett. While this is a GE issue, it is expensive from a cash flow standpoint and likely couldn’t come at a worse time for the company.

The 737 MAX has been disaster after disaster, culminating in the January 2024 door blowout that the NTSB suspects was caused by uninstalled bolts, bringing poor quality control at Boeing into focus.  The FAA is limiting Boeing’s production output, and during the first quarter of this year, newly built MAX models have been in the teens rather than their planned rate of 38 per month.  The FAA quality review and certification efforts on the MAX 7 and MAX 10 have no timetable. They may or may not occur before a May 2026 deadline for an EICAS system, which would require significant cockpit changes.

The 787 has recently experienced quality issues. The aircraft has been in service for over a decade, and one would think that Boeing would have a mature and stable production process after that period of time.

Similarly, the 767 tanker sees a clean production line but design issues with systems that still don’t meet requirements, including the all-important vision system for a refueling tanker.  Perhaps using cameras rather than direct vision, showing a two-dimensional image on a screen rather than seeing a three-dimensional perspective through a window, means an ill-fated design that may never work as well as older systems.

The forthcoming 777X is five years late, and we wonder how long carriers like Emirates will wait for airplanes that may or may not make it into production within a reasonable time frame.

Boeing’s management has been focused on Wall Street and what is needed to move the stock price upward.  The company used more than $43 billion in stock buybacks to fund two new aircraft development programs, which netted the company no value other than temporarily higher stock prices before the bottom fell out.

Boeing has been tilting at windmills for some time now, and while it takes a long time to exhaust the good name, reputation, and goodwill from years of engineering excellence, that time has come.  The management changes that began in 1997 introduced the now-debunked Jack Welch school of managing for shareholder value, which ignored fundamentals on products, safety, customers, suppliers, and passengers on the altar of cost-cutting and shareholder returns.

In addition, Boeing’s management is arrogant and acts like they have done a great job. Boeing is, in my opinion, the worst-managed company in aerospace and perhaps in any industry.

Is Boeing beyond repair?  Not quite yet, but it is getting close.  It takes a long time to turn around a major aerospace OEM.  The longer Boeing waits for meaningful cultural change, the more complex a turnaround becomes.

The Case for Southwest

Southwest began flying from smaller markets, using smaller 737 models that matched the demand pattern of those markets with quick turnarounds to generate higher utilization rates than its competitors. The Boeing 737-300, followed by the 737-700, became the airline’s backbone. When Boeing introduced the 737 MAX, the MAX 7 was the model best suited for Southwest’s route system and was ordered in large quantities.

This model has 390 orders from Southwest, Allegiant, and WestJet. For their route structures, which connect smaller cities rather than major hubs, they need smaller aircraft than the 737 MAX 8. Having 175 seats on the MAX 8 rather than 143 on the 737-700 is sufficient to turn profitable routes with the -700 into unprofitable routes with the MAX 8.

Today, Southwest and WestJet are airlines with aircraft capacities misaligned with their routes and needs. Southwest has too many MAX 8 aircraft in its fleet, leading to lower load factors and higher costs from using too large aircraft on many routes. Internally, they talk about being “out of gauge.”

Southwest’s failure to diversify its fleet (which goes back a long time) after the two 737 MAX crashes and grounding is telling. The writing was clearly on the wall about the MAX 7, and pilots weren’t happy either.  Southwest chose to believe and trust in Boeing, which has repeatedly delayed the MAX 7 program to the point that it is five years behind schedule. Having trusted Boeing multiple times, Southwest faces a lack of clarity on when the right-sized aircraft they need most will arrive.

But there are also complications. Boeing has a special exemption that expires in May 2026 regarding the absence of a crew alerting system on the MAX 7 and MAX 10.

With no certification timetable from the FAA, regulatory action could be delayed until after the May 2026 deadline for the exemption for an EICAS system. In this case, is there a probability that Boeing might scrap the MAX 7 program? Boeing’s CEO has spoken to this effect before regarding the MAX 10. The MAX 10 has more orders and internal priority over the MAX 7 within Boeing, even though doing so may further damage Boeing’s best 737 customer.

Southwest was one of the airlines pushing for the MAX to have the same flying characteristics as the 737NG, which was a driving force behind Boeing’s design of the MCAS system. Southwest’s contract with Boeing guaranteed a $1 million per aircraft penalty. The result is a substantial payment to Southwest due to Boeing’s failure to live up to its promises, taken as discounts from aircraft purchases.

Southwest’s long-standing relationship with Boeing was based on mutual trust.  However, the airline’s management was astute to include the simulator training guarantee in their contract.  Some inkling of Boeing’s ability to deliver on their promise had crept into their thinking.  But with delay after delay and problem after problem with Boeing, why wouldn’t Southwest turn to the Airbus A220 or Embraer E195-E2 to fill their need for a right-sized lift?

The single fleet type strategy deeply imprints Southwest Airlines’ culture.  While the founders may have been rolling over in their graves had Southwest chosen another type, it could have provided the balance between supply and demand that Southwest needs to remain profitable.

Stubbornly sticking to strategies no longer relevant, like a single fleet type at Southwest or managing shareholder value at Boeing, exemplifies the problem. The “if it ain’t broke, don’t fix it” mentality that both management teams embraced underestimated the risks and massive costs of correcting the effects of hanging on to concepts that have become obsolete.

The Bottom Line

Boeing failed to recognize that not investing in its products but rather maximizing returns to shareholders by cutting corners, increasing dividends, and stock buybacks was killing the company’s future. That strategy at McDonnell-Douglas commercial aircraft failed until 1997, when it merged with Boeing.

Similarly, Southwest failed to recognize the risks of putting its future into a single aircraft type, especially when it evolved from an older design, resulting in a mishmash of old and new technologies. The MAX remains the only large commercial aircraft without a crew alerting system, an essential safety element. Boeing went one step too far with the 737 MAX, and Boeing customers, rather than call for a new aircraft to leapfrog Airbus, readily agreed to jump on board.

Who is worse, the company that couldn’t deliver on its promises or the company that believed them when all evidence was to the contrary?  We give the nod as worst managed to Boeing, with second place to Southwest for believing Boeing to be credible.

author avatar
Ernest Arvai
President AirInsight Group LLC

1 thought on “Southwest and Boeing: The cost of loyalty

  1. Great analysis.
    It is amazing to see that top management can for many years focus on short term return, without any action from their board and total ignorance of the obvious.

    This is incompetent capitalism at the highest level, all lead by simple greed.
    Current and former managers should be prosecuted.

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