Friday, July 26, 2019

Boeing's Corporate Suicide

Boeing believed that development of the 787 Dreamliner was a "bet the company decision". As things turned out, after a rocky start, it was a bet that will probably pay off. But the company took another "bet the company" decision that looks like it may not pay off, and it may well take the company with it. Below the fold, the details.

The 737 has been in airline service since 1968. Thirteen years ago, Boeing was predicting that they would develop an all-new replacement:
Boeing's next big project will be to come up with a replacement for the 737; the new plane is expected to draw on Dreamliner technology.
Instead, after struggling to deliver the 787, Boeing proceeded to bet the company again by deciding in 2011 to delay the all-new 737 replacement until the 2030s, and announced yet another stretch on the then 47-year-old 737, the 737 MAX. At the time it probably wasn't obvious that this was a "bet the company" decision.

On September 24th 2011 the Seattle Times's Dominic Gates reported that Boeing celebrates 787 delivery as program’s costs top $32 billion:
Boeing is set to deliver the first 787 Dreamliner to All Nippon Airways (ANA) of Japan on Sunday in Everett, but it’s far from the end of the journey for a jet that has reshaped the company.

To reach this milestone, the company has spent a staggering amount: A conservative estimate by The Seattle Times puts Boeing’s total investment on the program so far at more than $32 billion.

That massive sum, half spent on development costs and half on manufacturing the jets already built, means profitability for the plane won’t come before well into the 2020s — if ever.
Last Wednesday, Chris Isidore reported that Boeing says it might have to shut down 737 Max production:
Boeing CEO Dennis Muilenburg warned investors Wednesday that the company might need to further slow or temporarily halt its 737 Max production.

Boeing has continued to build the 737 Max, its bestselling jet, although at a slower pace. The plane has been grounded since mid-March because of two fatal crashes that killed more than 300 people. Boeing hopes to get approval for the plane to fly again sometime early in the fourth quarter. Muilenburg said any further delays in approval to fly the 737 Max again could jeopardize its production. A further slowdown or temporary shutdown of 737 Max production is "not something we want to do, but an alternative that we have to prepare for," Muilenburg told investors on a conference call. He said the company needs to prepare for that "to make sure we've covered all scenarios."

It is unclear when the 737 Max will be allowed to return to service. Boeing is working on a software fix to a safety system which is believed to have caused the two crashes. But it says it won't be able to present that fix to aviation authorities until September at the earliest, and it hopes to have a certification flight in October.
Fixing the software may not solve the problem. Even if and when the plane is re-certified it is likely that pilots will need to be re-trained to fly it, costing Boeing $1M/plane for Southwest alone. But the reason the software fix is taking forever is explained in Peter Robison's Boeing's 737 Max Software Outsourced to $9-an-Hour Engineers:
Increasingly, the iconic American planemaker and its subcontractors have relied on temporary workers making as little as $9 an hour to develop and test software, often from countries lacking a deep background in aerospace -- notably India.
Rabin, the former software engineer, recalled one manager saying at an all-hands meeting that Boeing didn’t need senior engineers because its products were mature. “I was shocked that in a room full of a couple hundred mostly senior engineers we were being told that we weren’t needed,” said Rabin, who was laid off in 2015.
Boeing's cost-cutting means it lacks the necessary in-house software expertise to develop and QA the fix.

The same day in I Got it, Nothing Matters. Tesla, Boeing, Other Stocks: It’s Like the Whole Market Has Gone Nuts , Wolf Richter reported that:
Instead of spending the resources necessary to design a modern plane from ground up, Boeing kept basing its new models on versions of its many-decades-old 737 airframe that wasn’t designed at all for what it is being used for today. This was a decision Boeing made to save some money and pump up its share price.

But here we go: From 2013 through Q1 2019, Boeing has blown a mind-boggling $43 billion on share buybacks
Suppose instead of buying back stock, Boeing had invested in its future. Even assuming an entirely new replacement for the 737 series was as expensive as the 787 (the first of a new airframe technology), they could have delivered the first 737 replacement ($32B), and be almost 70% through developing another entirely new airframe ($11B/$16B). But executive bonuses and stock options mattered more than the future of the company's cash cow product. Instead:
Blowing these $43 billion on share buybacks has caused Boeing to have a “total equity” of a negative $5 billion. In other words, it has $5 billion more in liabilities than in assets. This company is out of wriggle room. If it can’t borrow enough money to make payroll, it’s over.
Short-termism is a cancer that is eating US corporations, but the guys who took the decisions will suffer no consequences for killing the company, they'll retire rich.


Fazal Majid said...

There is also this cutting report on why the Dreamliner was so expensive:

David. said...

Excellent link, Fazal! Thank you. Note the date - February 2001. From the introduction:

"The most important issue of all is whether or not a company can continue to operate if it relies primarily on out-sourcing the majority of the work that it once did in-house. The experiences of the former Douglas Aircraft Company would suggest that, in the context of the aerospace industry at least, it cannot! In the more general context, it should be obvious that a company cannot control its own destiny if it creates less than 10 percent of the products it sells.

One purpose of this paper is to explain why selective out-sourcing can be beneficial to all concerned, and why out-sourcing as a supplement to sales activities may be justified but needs to be recognized, on average, as an added cost, not a cost reduction."

David. said...

The New York Times has a major investigation into Boeing's capture of the FAA by Natalie Kitroeff, David Gelles and Jack Nicas entitled The Roots of Boeing’s 737 Max Crisis: A Regulator Relaxes Its Oversight:

"The regulator had been passing off routine tasks to manufacturers for years, with the goal of freeing up specialists to focus on the most important safety concerns. But on the Max, the regulator handed nearly complete control to Boeing, leaving some key agency officials in the dark about important systems like MCAS, according to the current and former employees.
Turnover at the agency left two relatively inexperienced engineers overseeing Boeing’s early work on the system.

The F.A.A. eventually handed over responsibility for approval of MCAS to the manufacturer. After that, Boeing didn’t have to share the details of the system with the two agency engineers. They weren’t aware of its intricacies, according to two people with knowledge of the matter.

Late in the development of the Max, Boeing decided to expand the use of MCAS, to ensure the plane flew smoothly. The new, riskier version relied on a single sensor and could push down the nose of the plane by a much larger amount.

Boeing did not submit a formal review of MCAS after the overhaul. It wasn’t required by F.A.A. rules."

The FAA was completely captured:

"At crucial moments in the Max’s development, the agency operated in the background, mainly monitoring Boeing’s progress and checking paperwork. The nation’s largest aerospace manufacturer, Boeing was treated as a client, with F.A.A. officials making decisions based on the company’s deadlines and budget.

It has long been a cozy relationship. Top agency officials have shuffled between the government and the industry.

During the Max certification, senior leaders at the F.A.A. sometimes overruled their own staff members’ recommendations after Boeing pushed back."

Keeping Boeing competitive with Airbus was Job 1 for the FAA, Boeing could deal with the safety issues. Having read this story, there is no way other countries aviation regulators could simply accept the FAA's certification of a Boeing aircraft. And no-one should fly a 737 MAX ever again, even if they change the name.

David. said...

The amount Boeing spent inflating executives' wallets was $60B, not $43B. As the BBC reports in Work on production line of Boeing 737 Max ‘not adequately funded’:

"Since 2013, Boeing has paid $17bn (£13.74bn) in dividends to shareholders and has spent a further $43bn buying its own shares - a spending spree that has helped Boeing treble its share price in just five years."

$60B is enough to ship the first of two entirely new airframes.

David. said...

Using Boeing as an example in How Stock Buybacks Undermine Healthy Capitalism, Garvin Jabusch argues that not merely that they weaken companies, but that they are:

"part of how systems collapse: If stock buybacks become so pervasive that, people can see the lack of underlying value in companies, they’ll lose faith in the ability of markets to reflect underlying worth."

David. said...

Lambert Strether's A European Perspective on Boeing’s 737 MAX Debacle: An “Existential Crisis” for a National Champion reports on Der Spiegel's:

"well-reported, long (~10,000 words), and devastating article on the Boeing 737 MAX crashes of Lion Air Flight 610 and Ethiopian Airlines Flight 302: “Boeing’s Crashes Expose Systemic Failings.

Strether focuses on the 4 existential threats:

1) Punitive Damages from Losing in Court
2) Retroactive Loss of Insurance
3) The End of the Boeing-Airbus Duopoly
4) The Collapse of Today’s Regulatory Regime

Both Strether's post and the Der Spiegel report are essential reading.

David. said...

"The Collapse of Today’s Regulatory Regime" predicted by Der Spiegel has started, as Dominic O'Connell reports in Europe will not accept US verdict on 737 Max safety:

"Europe's aviation safety watchdog will not accept a US verdict on whether Boeing's troubled 737 Max is safe.

Instead, the European Aviation Safety Agency (Easa) will run its own tests on the plane before approving a return to commercial flights."

David. said...

Yves Smith has more detail on the "collapse of today's regulatory regime" in FAA Hoist on Its Own Boeing 737 Max Petard: Multiagency Panel to Issue Report Criticizing Agency Approval Process, Call for Certification Changes:

"The FAA evidently lacked perspective on how much trouble it was in after the two international headline-grabbing crashes of the Boeing 737 Max. It established a “multiagency panel” meaning one that included representatives from foreign aviation regulators, last April. A new Wall Street Journal article reports that the findings of this panel, to be released in a few weeks, are expected to lambaste the FAA 737 Max approval process and urge a major redo of how automated aircraft systems get certified."

David. said...

In Boeing 737 Max Safety System Was Vetoed, Engineer Says Natalie Kitroeff, David Gelles and Jack Nicas report that:

"A senior Boeing engineer filed an internal ethics complaint this year saying that during the development of the 737 Max jet the company had rejected a safety system to minimize costs, equipment that he felt could have reduced risks that contributed to two fatal crashes.
During the development of the 737 Max, Mr. Ewbank worked on the cockpit systems that pilots use to monitor and control the airplane. In his complaint to Boeing, he said that managers were urged to study a backup system for calculating the plane’s airspeed. The system, known as synthetic airspeed, draws on several data sources to measure how fast a plane is moving.

Such equipment, Mr. Ewbank said, could detect when the angle-of-attack sensors, which measure the plane’s position in the sky, were malfunctioning and prevent other systems from relying on that faulty information. A version of the system is used on Boeing’s 787 Dreamliner, a new model of plane."

David. said...

Searching for 40-year old lessons for Boeing in the grounding of the DC-10 by Jon Ostrower is an absolute must-read. It is:

"The first in a series on the historical parallels and lessons that unite the groundings of the DC-10 and 737 Max."

It shows that the institutional flaws at Douglas (now part of Boeing) and the FAA that lay behind the fatal DC-10 crash at O'Hare 40 years ago are exactly the same as those behind the 737 MAX crashes, starting from the rush to get an aircraft into the market ahead of a competitor (DC-10 vs. L-1011, 737 MAX vs. A320 Neo).

Eric Hang said...

Thank you for your work on following the 737 Max scandal and much of the articles about it.

David. said...

In Why the Boeing 737 will never take the place of the 757 Patrick Smith argues for his beloved 757:

"Back about 15 years ago, Boeing had a decision to make. Its popular 757 was getting long in the tooth. Orders were drying up and the company would need to develop a replacement. This wouldn’t be easy, because the 757 was, and still is, a very special machine. I may be biased, since I fly it, but you might undoubtedly call it the most versatile jetliner Boeing has ever built. It’s a medium-capacity, high-performing plane able to turn a profit on both short and longer-haul routes — domestic or international, across the Mississippi or across the North Atlantic. And along the way it meets every operational challenge. Short runway? Stiff headwinds? Full payload? No problem. With 180 passengers, the plane can safely depart from a short runway, climb directly to cruise altitude, and fly clear across the country or the ocean. Nothing else can do that. And it’s a great-looking plane to boot.

Essentially three options were on the table. The first was to come up with a plane from scratch — a brand-new jetliner of roughly the 757’s size and capabilities. A second, less expensive option would be to equip the existing airframe with new engines, modern avionics and other upgrades — a 757-X, if you will. Option three would be to abandon the 757 template altogether and, instead, turn to the company’s favorite cash cow, the 737, and somehow push it, squeeze it, force it, into the role of the 757."

Boeing took option three, and the 737 MAX is the result. Even if it were flying, it faces stiff competition for the niche the 757 occupies:

"Indeed the A321LR will be the closest thing out there to a 757. Comfort-wise it’ll be equal, if not superior, with almost the range, almost the capacity, and almost the muscle. Sure, those are a lot of important almosts. Eventually, however, the last 757 will be put to pasture, and when that happens, the lack of a 797 all but assures the A321’s domination of the mid-market niche."

David. said...

Jon Ostrower's Southwest wants a small airplane from Boeing or Airbus and that could reshape aviation has the sound of chickens coming home to roost. Southwest will "address next year, whether the strategy we have deployed for the last 48 years is the strategy we want for the next 48 years". They are evaluating the Airbus 220-300.

David. said...

In Pontifications: Stop hitting the snooze button, Boeing, Scott Hamiltion concludes:

"Shareholder value is all well and good, but it’s time Boeing reinvested in the company and came up with new airplanes. If it doesn’t, as I wrote before, the name may as well be changed to McDonnell Douglas and watch it fade away."

Hamilton notes:

"United’s order for [fifty] A321XLR is the metaphorical 2 x 4.

United’s endorsement of the airplane is a major boost as a former, all-Boeing single-aisle customer. (Ever since Continental and United merged, it’s bought only Boeing for the single-aisle airplanes.)"