(Bloomberg) — Back in October, Boeing Co. Chief Executive Officer Dave Calhoun sought to rally employees reeling from a manufacturing setback, this time involving wrongly drilled holes in a crucial aircraft section — yet another blow to a company that once enjoyed a sterling reputation for building awesome flying machines. (Bloomberg) — Back in October, Boeing Co.
Chief Executive Officer Dave Calhoun sought to rally employees reeling from a manufacturing setback, this time involving wrongly drilled holes in a crucial aircraft section — yet another blow to a company that once enjoyed a sterling reputation for building awesome flying machines. “I have heard those outside our company wondering if we’ve lost a step. I view it as quite the opposite,” Calhoun wrote in a company memo, going on to tout the “rigor around our quality processes” at the US aircraft manufacturer.
“I am proud of the team, and confident we’ll look back on this time period as when we took the necessary steps that set Boeing on the right course for the future. ” Just days into 2024, that renewed optimism was sucked right out of a gaping hole in the side of a Boeing 737 Max 9. On Jan.
5, the desk-sized cover for an optional door was cleanly ejected from the almost-new aircraft, exposing 177 people on board to the fear of being pulled into the evening sky at 16,000 feet (4,900 meters). Fortunately, no lives were lost, and the jet touched down safely in an emergency landing at Portland, Oregon. Yet as smartphone images and video of the terrifying incident went viral worldwide, Boeing engineers, investors and, above all, the flying public, were reminded of just how far this company has fallen — and the long road to recovery that lies ahead.
Boeing CEO Dave Calhoun. Photographer: Valerie Plesch/Bloomberg Today, Boeing’s name and its troubled 737 Max model are linked to some of the worst aircraft safety and design failures in recent aviation history. Some 346 people lost their lives in the Boeing 737 Max crashes of Lion Air Flight 610 in late 2018 and Ethiopian Airlines Flight 302 less than five months later.
After lengthy civil and criminal probes, Boeing agreed to pay $2. 5 billion in a deferred prosecution agreement related to the two crashes with the Department of Justice in early 2021. Now Boeing is confronted with an investigation by the Federal Aviation Administration and months of congressional and media scrutiny, and the options for Calhoun and his team aren’t alluring.
At this point, according to Boeing insiders, key customers and regulators, only a hard reset focused on safety and a comprehensive rethink of the company’s sourcing, assembly and quality control protocols will open a path toward reputational redemption. It’s a process that will take years, not quarters, and may even require taking a tactical timeout from the company’s rivalry with Airbus SE to get its house in order. Parts of an engine and landing gear lie in a pile at the crash site of Ethiopian Airlines Flight 302 in Bishoftu, Ethiopia.
Photographer: Jemal Countess/Getty Images “They’ve had quality control problems for a long time now, and this is just another manifestation,” said Tim Clark, the president of Emirates, who is one of Boeing’s most important customers. “From the governance point of view, that’s the board downwards, they need to realize the problems that they had. I think there was a plot loss.
” Boeing’s revival hinges to a large degree on returning the company to its engineering-first, pilot-focused, safety-centric ethos that gave rise to such iconic models as the 747 jumbo and the hugely popular 777 widebody — and even the 737 itself, which enjoyed a stellar safety record for five decades before the advent of the Max, say former senior executives as well as customers including Clark. Senior management quickly grasped the gravity of the situation. The board received a first update within hours of the stricken Alaska Air 737 Max landing, Boeing Chairman Larry Kellner said at an all-employee meeting on Jan.
9. As Calhoun gathered senior leadership and technical experts to discuss the issue and necessary next steps, directors kept close watch on the unfolding crisis. The board’s safety committee, created after the Max crashes, has primary responsibility to manage the board’s response, Kellner said.
The group gathered first on the morning after the accident and then again later that day. “It’s a very effective group to oversee this, but this is a full-board issue as well, and we’ll stay committed to it,’’ Kellner told workers at the gathering, according to a transcript of his remarks seen by Bloomberg. The company has said it’s cooperating fully with the investigations.
A National Transportation Safety Board investigator examines the fuselage plug area of the Alaska Airlines 737 Max 9. Source: NTSB/Getty Images Boeing now faces some thorny strategic decisions that will have major ramifications for its investors and customers. The most urgent is the future of its core 737 Max program at a time when some travelers are voicing concern about its safety.
Since the accident, the company has been the butt of online memes and jokes. But Boeing and many airlines have no quick alternative. The 737 Max family is an integral part of global fleets, and the wait list for the alternative, an Airbus A320neo, stretches out several years.
An all-new, single-aisle aircraft is at least a decade away for both Airbus and Boeing. Then there’s Boeing’s relationship with Spirit AeroSystems Holdings Inc. While Boeing performs the final assembly at its facility in Renton, Washington, much of the work on the 737 happens more than 1,400 miles to the east in Wichita, Kansas, where the key supplier is based.
The subcontractor builds 70% of the airframe for the 737 Max, before sending the fuselages on their long train journey to the Northwest. Spirit Aero was spun out of Boeing in 2005 and sold to private equity investors, ending almost 80 years within the US planemaker’s fold. The move was part of Boeing’s drive to become leaner and ultimately more profitable.
But it left the contractor without the protective cover of Boeing’s balance sheet, particularly when the company faced possible extinction events like the pandemic. During its 2020 nadir, Spirit Aero cut 6,800 employees and put salaried workers on a four-day work week to preserve cash. Late last year, Boeing reworked some contracts and provided additional financial aid to support its partner.
Spirit Aero, now run by former Boeing executive Pat Shanahan, declined to comment for this story. “That Spirit divestiture was a huge mistake,” said Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management. “Boeing should have bought it back at any price, even now.
You have to wonder if Boeing leadership is still stuck with their heads in the clouds and planes on the ground. ” Spirit AeroSystems builds about 70% of the Boeing 737 Max airframe. Photographer: David Ryder/Bloomberg Aircraft buyers like Clark have implored Boeing for years to stop worrying about financial metrics like free cash flow, market value, dividends or executive bonuses.
Instead, the customers say, Boeing needs to convince employees, airlines and investors that its No. 1 focus is on producing the best planes. That, in turn, may mean building less, but building properly at all times.
Such a deceleration would, however, be a massive reversal for an industry locked in race for air supremacy. For years, Airbus and Boeing have faced off at air shows and in hotly-contested sales campaigns to bring home those big orders. And with every surge in demand, pressure has only grown to push production rates to ever higher numbers.
“We have to go at the right speed,” Airbus CEO Guillaume Faury told reporters in Paris on Jan. 12, discussing the need for a measured production schedule. “It’s like walking up some stairs, you have to walk up a step at a time.
” Airbus SE assembly hangars at its factory in Toulouse, France. Photographer: Matthieu Rondel/Bloomberg A large part of the 737 Max 9 fleet has now been grounded, with the US government saying any quick return to service is unlikely. Compounding the sense of broader quality lapses is the fact that airlines inspecting their parked planes have found some loose bolts.
The FAA has opened a formal investigation and Congress is demanding answers. Investors have punished the stock, giving Boeing shares their worst clobbering in more than a year on Jan. 8.
The stock is down 16% this year, the worst performer on the Dow Jones Industrial Average. Airbus, by contrast, has gained 6. 7% so far in 2024.
“I think there was a plot loss. ” The near calamity on the Alaska Airlines flight has turned up the heat on senior management. Calhoun fought back tears when he addressed workers at the Jan.
9 meeting where Chairman Kellner also spoke, urging Boeing’s 150,000 employees to double down on safety. While Boeing executives seek to manage the widening crisis from a rapidly assembled war room near Seattle, the board is asking who should be held accountable. “This stuff matters, everything matters, every detail matters,” Calhoun said.
“I know I’m preaching to the choir here. This isn’t a lecture, not by any stretch. It’s a reminder of the seriousness with which we have to approach our work.
” For now at least, Boeing isn’t planning hasty management reshuffles, opting for an all-hands-on-deck approach rather than offering a quick scalp, according to people familiar with the deliberations, discussing confidential business at the company. Still, some people say Boeing’s board has discussed changes to management positions. Among those vulnerable is Stan Deal, who runs the commercial aircraft operations, some of the people say.
Calhoun’s tenure is also unclear, given that Boeing recently appointed Stephanie Pope as its new chief operating officer, in what was widely seen by analysts as a prelude to eventually taking the top job. The company declined to comment. But Kellner spoke highly of Calhoun’s team at the employee meeting: “I just want to say we appreciate all the focus of management and the team as we work to move forward,” he said.
Still, the close call on the Alaska Airlines flight has become an inflection point for Boeing. In no small part, the scare on Flight 1282 represents the starkest display yet of defects at a company that once set the gold standard for manufacturing excellence. Boeing 737 Max aircraft sit outside the manufacturing facility in Renton, Washington.
Photographer: David Ryder/Bloomberg Boeing has disclosed lapses in recent years ranging from rags and tools left in wing fuel tanks to wrongly drilled holes to loose rudder bolts. Together, these point to a common problem: the company’s once-vaunted system for building its prized 737s has been badly damaged by worker turnover, supplier distress and the shortcomings lingering from the breakneck production last decade before the Max tragedies and the Covid freeze. “They have an ongoing quality control issue and it’s systemic and it runs not just through the 737 program,” said Darren Straker, the former head of aircraft accident investigations for the United Arab Emirates and Hong Kong, who most recently worked for Chinese planemaker Comac.
“And it’s largely due to the fact that they subcontract major airframe component manufacturing and quality control to their independent contractors. ” Airbus has gone the other way in recent years, opting to keep more in-house. The reversal came after Faury declared aerostructures to be part of the “core” business, and that keeping them would increase efficiency.
“It is time to re-examine the delegation of authority and assess any associated safety risks,” FAA Administrator Mike Whitaker said in a statement announcing the agency’s increased oversight of Boeing’s operations on Jan. 12. “The grounding of the 737-9 and the multiple production-related issues identified in recent years require us to look at every option to reduce risk.
” The FAA is intensifying its scrutiny after coming under fire in the aftermath of the two Max crashes almost five years ago. For decades, the FAA has deputized employees of Boeing and other large aerospace manufacturers to act on the agency’s behalf in signing off on some aspects of aircraft designs. Now the regulator is considering bringing in a third party to independently oversee Boeing’s inspections and quality control, underscoring its loss of confidence.
“It’s like trying to raise children and putting them in charge, and it has not worked,” said Jim Hall, who chaired the National Transportation Safety Board from 1994 to 2001. “It’s obvious that the normal enforcement steps that have been in place have failed and the flying public is at risk, and we can’t permit that to continue. ” Getting the details right is literally a matter of life and death in the commercial aviation business.
A typical single-aisle aircraft consists of more than 400,000 parts that get assembled in a finely tuned ballet of bolting together the wings, main tube and rear section before kitting out the aircraft with interiors. These days, Boeing manages to churn out about 38 units on a monthly basis, a production rate the company has told suppliers it wants to take to more than 50 by next year. As Boeing started to roll out new versions of its 737 and 777 models last decade, it upended its supplier relationships by demanding hefty discounts — a practice also emulated by Airbus — thinning margins for the subcontractors as a result.
The moves came back to haunt Boeing during the Covid pandemic because they ate away at suppliers’ financial reserves. Spirit, which relies on the 737 for much of its revenue, was doubly squeezed by Boeing’s decision to temporarily halt production. It made deep job cuts and then struggled to restore staff, train workers and retain the mechanics needed to get production back into high gear as demand came surging back.
At the same time that Boeing was reworking its supplier network, executives put greater focus on propping up the share price with the help of dividends and buybacks. Since 2011, the year the 737 Max was officially announced, Boeing has handed some $68 billion to shareholders in the form of dividends and stock buybacks, according to data compiled by Bloomberg, though it suspended the measures as its financial crisis deepened. Airbus, by comparison, has been much more conservative with its balance sheet, giving it greater resources to respond to the pandemic.
“I think there was a plot loss. ” Over the years, Boeing turned to leaders out of the mold of legendary General Electric Co. CEO Jack Welch, and the financial targets and metrics this crop of executives put in place tore away many of Boeing’s traditional practices.
Calhoun, who took over early in 2020, previously worked at GE, before spending half a decade at investment firm Blackstone Inc. “What made it a great company is, it built the greatest airplanes in the world,” said Paul Adams, a former president of aero engine maker Pratt & Whitney. “As a result, people needed their product.
And they had long-term sustainability. When they went to the mode of trying to optimize financially, they lost the DNA that made them a great company. ” Former executives say that under Calhoun, Boeing has dramatically scaled back detailed operating reviews that were commonplace previously and undertook deep dives into engineering, quality, finance and human resources.
Calhoun’s shifting of executive committee gatherings from monthly to quarterly sessions also reflect his informal management style, say others who’ve witnessed his leadership. He has little patience for rehearsed presentations, instead peppering executives with impromptu phone calls, and bypassing them to go straight to engineers, as he did in the Alaska Air accident aftermath, they say. Boeing didn’t make Calhoun available for an interview for this story.
For Boeing, the financial cost of the 737 Max 9 grounding will probably be far outweighed by the longstanding loss of confidence that ripples from it, said one former senior Boeing executive, who also asked not to be identified. While the company digs into the root causes of its quality woes, it needs to focus on empowering employees rather than treating them like an expense, the executive said. “I think there was a plot loss.
” Even before the latest mishap tarnished the 737’s reputation, Boeing was hugely reliant on the single-aisle program to pull the company along. Of the 528 aircraft delivered by Boeing last year, 396 were 737 models, underscoring just how crucial it remains. And cashflow from the 737 keeps the entire company humming along, from widebodies to space programs to defense operations.
Still, analysts say Boeing would be well advised to shift strategy and messaging away from the cash that for years has been Boeing’s siren call to Wall Street — particularly as its failings are being examined under the political microscope. “Boeing has to be careful on pounding the table on free cash while managing a public discussion around safety,” says Ken Herbert, analyst with RBC Capital Markets. “You don’t want to get the politicians involved.
” It may already be too late for that. US Transportation Secretary Pete Buttigieg dashed hopes of a quick return for the Max 9, telling reporters that regulators “won’t be rushed” into clearing the model to fly again. “The only consideration is safety,” Buttigieg said.
“That’s going to dictate everything. ” US Transportation Secretary Pete Buttigieg. Photographer: Annabelle Gordon/Bloomberg Like any organization facing recurrent quality issues, Boeing should resort to a “safety stand down,” whereby the company takes a break to focus on hazards and prevention, said Daniel Adjekum, a former Boeing 737-800 pilot who is an assistant professor of aviation at the University of North Dakota.
“Boeing needs to go back to basics,” Adjekum said. “That should be the overriding goal rather than just trying to outdo your competitors. ” Trouble is, Boeing may not have the luxury of going slow.
Airbus has taken the crown in recent years as the biggest commercial aircraft manufacturer. And the European company has done so without the string of defects bedeviling Boeing, while maintaining a higher rate of output than its rival. It’s not just the bragging rights with Airbus that are putting pressure on Boeing.
Airline customers are clamoring for new aircraft, putting additional strain on the two manufacturers to raise output. Airbus won a record number of orders last year, and both companies are practically sold out for the rest of the decade on their best-selling models. An Alaska Airlines Boeing 737 Max 9 grounded at Los Angeles International Airport on Jan.
8. Photographer: Eric Thayer/Bloomberg For the time being, airlines have nowhere else to shop for planes. Since Boeing purchased McDonnell Douglas in 1997, the competitive landscape for large civil aircraft has been whittled down to just two main players.
That’s left Brazil’s Embraer SA a distant third, specializing in smaller, regional aircraft. Bombardier Inc. tried for years to build a competing single-aisle jet with its C-Series, before financial strain and a lack of buyers forced the Canadians to offload the program to Airbus in 2017.
China has made strides to break into the duopoly, but its C919 model is only now starting to gain some initial commercial traction back at home, while certification in Europe and the US will be years away, if it materializes at all. Until that happens, Boeing is left to contend with its nemesis from Europe. But between the review of what went wrong on the Alaska Airlines flight, the FAA breathing down Boeing’s neck, and the board considering a more wholesale management shakeup, any hope of stepping up production may prove unrealistic for Calhoun — and investors.
“There is no single solution for Boeing,’’ said Chrystal Zhang, an associate professor of aviation at Melbourne’s RMIT University. “It requires a systemic approach. Focusing on itself will eventually enable Boeing to focus on its competitors.
” –With assistance from Mary Schlangenstein, Danny Lee, Leen Al-Rashdan, Angus Whitley, Albertina Torsoli, Eric Johnson, Keith Laing, Jinshan Hong, Charlotte Ryan and Kate Duffy. More stories like this are available on bloomberg. com ©2024 Bloomberg L.
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