Why Boeing’s new CEO needs to be an outsider |

During Boeing’s earnings call earlier this week, CEO Dave Calhoun, who had announced he is stepping down by the end of the year, stated that his preference for a replacement would be a Boeing insider. In our view, this would be a serious mistake for the company, which needs to undergo a cultural transformation. The corporate culture that made Boeing successful from the start of the jet age through the 1990s was engineering-driven. That culture changed after the merger with McDonnell-Douglas when former GE employees who were disciples of GE CEO Jack Welch introduced the concept of managing shareholder value. Those concepts, which weaken a company over the long term, occurred at both GE and Boeing and other companies that followed that practice. Weaning the company from managing to shareholder value requires an outsider who could find fault with the prior approach and lead change without the baggage of a long history with the company. This history of Boeing’s downfall begins with the McDonnell-Douglas merger, with Harry Stonecipher becoming President and Phil Condit the CEO at Boeing. Stonecipher, a GE veteran, started the internal transition at Boeing to management to shareholder value, which has become an endemic part of the Boeing culture over the last 27 years. Let’s briefly examine the history of shareholder value at Boeing and how past decisions have impacted the company’s future. Phil Condit took over as CEO in 1997 and installed Stonecipher as President, with considerable internal power to change the company. Condit bought into the shareholder value concept and worked with Stonecipher to bring financial management practices into the Boeing executive suite. The company began to emphasize cost-cutting and outsourcing to improve returns to shareholders. To underscore that management was now financially rather than engineering-driven, CEO Phil Condit moved the corporate headquarters from Seattle to Chicago in 2001, taking senior management away from the company's day-to-day activities. The management team had a revolving door in the early 2000s. Phil Condit resigned in 2003 over an affair with a subordinate, replaced by Stonecipher as CEO, who subsequently resigned in 2005 over an affair with a female executive. CEO affairs were apparently in vogue. Jim McNerney, another GE alum, took over as CEO in 2005. He remained CEO for a decade through 2015. The 787 was developed during that time, and the decision to create the 737 MAX rather than a new aircraft was made. The 787 was three years late and experienced colossal cost overruns because of the complex outsourcing system to build the airplane and the meager development budget of $5 billion designated for the program. Considering that the 787 would be the first commercial aircraft with a composite fuselage, an all-electrical control system, and more advanced aerodynamics, the design entailed multiple risks. Almost each of those risks ran into difficulties during the certification process, dramatically increasing the time and cost associated with the program. The 787 finally entered commercial service three years later than planned and 500% over budget. McNerny also presided over a Partnering for Success program, which effectively demanded a margin cut for suppliers and a 10% price reduction for Boeing. That program was forced on suppliers, nicknamed “pilfering from suppliers,” and worse, by industry participants. That program chilled relationships between Boeing and its partners, who were now the victims of a unilateral price cut, particularly for suppliers that needed to invest in capacity to meet ambitious Boeing production goals. The decision to build the 737 MAX rather than an all-new airplane has returned to haunt Boeing. Airbus developed the A320neo program and surprised Boeing by going after American Airlines, a long-time Boeing/Douglas customer. American was about to agree with Airbus to acquire 400 new aircraft, and their CEO informed Boeing of their intentions. Boeing responded that they would like to counter Airbus's offer and pulled out a design study to re-engine the 737NG that became the 737 MAX. Unfortunately, Boeing was already a year behind Airbus in introducing the MAX at the 2012 Farnborough Air Show but managed to gain orders from most of the existing 737NG operators then. Engineering snags and airlines demanding no simulator training for the new aircraft, combined with pressures for faster certification (and thereby cash flow), caused a fatal flaw. That flaw was the MCAS system, which ensured that the MAX flew identically to the 737NG, pushing down the nose even at a high angle of attack. Unfortunately, that system was designed with a single point of failure, the angle of attack sensor, leading to two fatal crashes in 2018 and 2019 that halted the MAX program. In 2013, the second year of service, the 787 was grounded after two fires caused by the aircraft’s lithium-ion batteries. Since those fires are difficult to manage and control, Boeing was forced to devise a battery case containing a fire and vent the smoke into the atmosphere rather than inside the aircraft. That embarrassed Boeing, as no mainstream commercial plane had been grounded since the DC-10 in 1979. In 2016, Dennis Muilenburg, who had spent 30 years at Boeing, replaced McNerney and continued to stress cost cutting as a first priority. He was blessed early on by the 737 MAX and 787 becoming market successes. During his tenure, Boeing delivered annual shareholder returns of nearly 30%. But that came at the expense of quality and safety. The design and certification process for the 737 MAX was under time and budget pressure, and some employees were under pressure from management to complete tasks before they were safe and double-checked. MCAS was one of those systems developed under pressure, and a fatal flaw subsequently caused 346 deaths. The MAX8 was certified and entered service in 2017. In October 2018, a Lion Air Boeing 737 MAX 8 crashed in Indonesia, followed by an Ethiopian 737 MAX 8 crash the following March. The crashes were caused by a faulty flight control system, MCAS, and international regulators, and the FAA grounded the airplane until June 2021, when it was allowed to return to service. The company lost hundreds of aircraft orders and billions in losses in the wake of the accidents. After disappointing post-crash testimony before Congress, Muilenberg resigned and replaced another ex-GE executive, David Calhoun, a decade-long Boeing board member, who took over in January 2020. Later that year, quality problems emerged with the 787 with fuselage joining tolerances that caused a halt in airplane deliveries from November 2020 to August 2022. Delivering Boeing’s highest-margin airplane off the market during the global pandemic helped mask the $6.3 billion cost of that grounding. Of course, not meeting tolerances was likely a result of poor quality control practices and a failure to measure and control tolerances adequately. Further problems with the 787 emerged in 2023, followed by the Alaska Airlines incident in January 2024, in which a door plug panel was unfastened and came loose in flight, causing an explosive aircraft decompression. The panel came loose because of quality problems with the fuselage supplied by Spirit AeroSystems that required remediation near the panel, the resealing of which fell through the cracks. Following that crisis, David Calhoun indicated that he would resign on or before the end of 2024. Almost all of Boeing’s problems can be traced to cost and speed pressures on employees to complete jobs within unrealistic cost and time guidelines. Continued pressure in the Boeing culture for cost control and rapid task completion, all in the interest of shareholder value, became the cause of multiple problems. Over the years, 32 whistleblowers have documented many of those problems, including a 2009 televised exposé by Qatar’s Al-Jazeera that was prescient in highlighting quality problems at Boeing. When one traces the problems and their root causes, it all comes down to the shareholder value management concepts and the costs and timing pressures that resulted from it. The result is a company facing multiple problems. The 737 MAX cannot ramp-up production for Boeing’s cash cow until Boeing completes a quality plan with measurement metrics that the FAA approves. That plan is due in June and will then be reviewed by the FAA and implemented by Boeing - which could take much of 2024 to complete. The remaining 737 MAX programs, the MAX 10 and MAX 7 are both behind schedule and will likely run out of time for exceptions that permit rapid aircraft certification. While Boeing is hopeful for 2025, this could slip to 2026 and require additional avionics changes to incorporate a crew alerting system. The Boeing 787 has continuing problems with fuselage section joining tolerances, which one would think would have been solved for a mature program in production for over a decade. The issues have been there, or the Boeing production process has regressed under cost-cutting efforts. The planned 777X was initially scheduled to be in service in 2020 and will not be certified until 2025. The delays in producing the aircraft have upset airline customers and contributed to a shortage of aircraft that Airbus is working to fill. The US Air Force's KC-46A tanker continues to be less than fully functional, as the vision system for refueling remains problematic. That program will become a cash drain until it can meet requirements. Fortunately, it is based on the old 767 fuselage, which Boeing still makes as a freighter and is a mature and stable platform. The Bottom Line Virtually every program at Boeing is in trouble, and the company needs to triage the programs bleeding the most. The new CEO must come in with a clear mandate to fix the broken programs once and for all, deliver on promises, and keep customers happy. A leader steeped in the Boeing culture of managing shareholder value cannot accomplish that task. David Calhoun’s stated preference for a Boeing insider to become his successor could be a fatal decision for an iconic American brand.

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