Market Overview

The problem with Boeing, Part 1

Not again. Just as we were finishing up this article, yet another part flew off yet another Boeing jet.

Southwest 3695 bound for Houston had to return to Denver shortly after 8 a.m. local time April 7 after an engine cowling detached from the 737-800 prior to takeoff. To give you some idea how much “Boeing Plane Falls Apart” has become a dog-bites-man story, that Sunday’s Denver Post had more coverage of the housing shortage – see our feature story above – than of the incident on the DIA tarmac.

This is the 29th – 29th! – such incident … in 2024! Newsweek, among others, is keeping a running list. We’re all familiar with the first one – January 5, when an Alaska Air 737 Max 9 separated from one of its door plugs. But there were 27 others, and we’re not even counting all the Alaska Air and United Max 9s that were grounded and, upon inspection, were also revealed to have loose bolts. At this rate, Boeing could end up with more losses this year than the Chicago White Sox.

There’s a lot to unpack about the problems involving the airline industry’s biggest vendor, more than space here allows. So, much like a 737, our coverage will come in two parts. Next month, we’ll discuss the path forward – if any – for Boeing as a component of a long-term investment portfolio. Today, though, let’s talk about how Boeing – America’s only long-haul passenger jet manufacturer – got to the point where its future is in doubt.

Once upon a time

Was that overly flippant? Sorry. The jokes write themselves, and maybe we’d be in a mood to tell more of them if this were a story of near-disasters. But when we consider that 346 lives were lost in two separate Max crashes almost immediately after the model’s commercial debut, we suddenly feel more somber. What makes it worse is that those fatalities had nothing to do with the airframe’s integrity – those were control issues. That the Max and its 737 cousins can be faulty in several areas should give us all pause.

It means that there isn’t just a control problem or just a hardware problem. There’s a quality problem that’s bigger than anything that can be fixed with a software patch or a turn of the wrench.

It wasn’t always like this. When William Boeing founded Pacific Aero Products in 1916, it was a fast riser. The entire West Coast tech industry owes a long strand of its DNA to this pioneering company. It moved quickly, pivoted frequently, bought subsidiaries, found synergies and spun off business lines. United Airlines and United Technologies both started life as Boeing divisions.

But no matter how fast things moved at its Seattle headquarters, the shop floor always operated at a safe speed which engendered quality and dependability.

“Boeing was once among the most respected American companies,” James Surowiecki wrote for The Atlantic after the Alaska Air incident. “It helped NASA put a man on the moon. It built the 747, the most famous passenger airplane of all time. The firm’s reputation for safety and excellence was such that people used to say, ‘If it’s not Boeing, I’m not going’ —and actually meant it. So, what went wrong?”

Then came McDonnell Douglas

Answering his own question, Surowiecki concludes, “Boeing’s culture had changed.”

In 1997, Boeing bought rival McDonnell Douglas. Legitimate antitrust issues aside, it looked from the outside like an obvious fit. They both made aircraft and spacecraft for both civilian and military use. As it turned out, though, they had very different ways of doing things. And even though the combined entity’s name was Boeing, McDonnell Douglas management was clearly in the left-hand seat.

“When people say I changed the culture of Boeing, that was the intent, so that it’s run like a business rather than a great engineering firm,” said Harry Stonecipher, the McDonnell Douglas CEO who ran the enlarged company from 2003 to 2005.

Boeing moved its headquarters, first to Chicago, then inside the Washington Beltway. In Surowiecki’s telling, this matched the power shift from the engineers to the accountants. And accountants love to outsource.

If you think flying a jetliner is complicated, try building one. There’s some half a million parts in a 737, and they’re manufactured by more than 600 suppliers. Most of what Boeing does is final assembly. Basically, Boeing has one job: Making sure all the pieces fit together. And that’s exactly what it’s not doing consistently enough.

“Supervising the reliability of the manufacturing and quality-control processes at all of those different suppliers, while ensuring the reliability of Boeing’s own assembly processes, requires a maniacal attention to detail, a willingness to spend freely on reliability and safety, and a culture that tolerates the reporting of mistakes and the investment of serious resources in fixing them,” Surowiecki writes. “That ethos is hard to instill using only financial incentives or the threat of firing. What’s really needed is a culture of perfectionism—and that’s what Boeing seems to have lost over the past 20 or so years.”

Consensus and expert analysis

Surowiecki’s opinion is well-considered, as he is one of America’s premier business journalists. But we shouldn’t take just his word for it. A lot of people blame McDonnell Douglas for Boeing’s decline. As early as 2022, a Netflix documentary, Downfall: The Case Against Boeing, came to the same conclusion.

Of course, “corporate culture” is not a term that works its way into National Transportation Safety Board reports, such as the one on the Alaska Air incident. That report does, however, contain the phrase “human performance”. While the error rate will never go to zero, it can be a lot lower than it is now. Human performance, though, can only be regulated via human accountability. That’s where corporate culture can be a help or a hindrance.

Somewhere between the mid exit door plug’s manufacturing in Indonesia, its acceptance by parts supplier Spirit AeroSystems and its final assembly at Boeing’s Renton, Wash., facility, three bolts came up missing and the NTSB still hasn’t reached a final conclusion of exactly how that happened. One thing we can be certain of is that passengers on that Alaska Air flight were terrified as their cabin depressurized.

We can also be certain that Boeing CEO David Calhoun is stepping down at the end of the year and that Boeing’s share price has been tumbling while the broader market has been trending up. We’ll talk more about all that next month but, in the meantime, you might want to talk with your financial advisor about how best to invest in the Transportation sector of the market.