Boeing, Boeing, gone!

When a restaurant cuts costs to improve profit margins, diners may receive tougher-than-usual steaks. When a business like Boeing cuts costs, the consequences can be far more dire.

I used to think of aerophobia, or fear of flying, as an irrational fear. That was until Boeing started making headlines for all the wrong reasons between 2018 and 2019, and now again in 2024. Perhaps there’s nothing more rational than being afraid that your plane might drop out of the sky – particularly if you’re flying on a 737 Max.

If it’s Boeing, I’m not going

In 2018, a brand-new Boeing 737 Max 8 fell out of the sky shortly after taking off from Soekarno–Hatta International Airport in Jakarta, Indonesia, killing all passengers and crew onboard. While Boeing was very quick to point the finger at Lion Air pilots (who were operating the aircraft at the time), an investigation by Indonesia’s National Transportation Safety Committee attributed the crash to the aircraft’s MCAS system pushing the plane into a dive based on data from a faulty angle-of-attack sensor.

It felt like the ink was barely dry on those headlines before Boeing was in the spotlight again, less than six months later. Another 737 Max 8 – this time operated by Ethiopian Airlines – crashed just 6 minutes after takeoff. There were no survivors. Evidence collected from the crash site indicated that the aircraft was set up to dive, resembling the configuration of the failed Lion Air that had crashed in 2018. Ethiopian Transport Minister Dagmawit Moges made a statement that the crew “meticulously followed the procedures repeatedly issued by the manufacturer but were unable to regain control of the aircraft.”

Despite the evident issues with the 737 Max, the US Federal Aviation Administration (FAA) hesitated to ground the aircraft until after the occurrence of the second crash. By the time the FAA finally issued the grounding order, 51 other regulatory authorities had independently grounded the plane. As of March 18, 2019, all 387 aircraft in service had been grounded.

On November 18, 2020, the FAA officially lifted the 20-month-long grounding, marking the lengthiest suspension in the history of a US airliner. The series of accidents and subsequent grounding inflicted a substantial financial toll on Boeing, resulting in an estimated $20 billion in fines, compensation, and legal expenses, along with additional indirect losses exceeding $60 billion due to the cancellation of 1,200 orders. Commercial flights for the Max resumed in the U.S. in December 2020, and by January 2021, the aircraft had received recertification in Europe and Canada.

Earlier this month, the FAA once again issued a grounding order for the 737 Max (this time for the 737 Max 9) after an Alaska Airlines flight suffered a mid-flight blowout of a plug filling an unused emergency exit. This opened a hole in the side of the aircraft, which led to rapid decompression of the cabin and necessitated an emergency landing. Fortunately no lives were lost in this incident, although passenger retellings of the experience are believably horrifying. Multiple witnesses who were onboard the aircraft at the time describe small loose items such as headrest covers being sucked out of the cabin through the hole, while one anecdote describes a shirt being pulled off a child while his mother held on to him.

A runway to trouble

Once upon a time, The Boeing Company was the first and last name in passenger aeroplanes,
inspiring the popular phrase “If it’s not Boeing, I’m not going” among pilots. Founded in Seattle in 1916 by aviation pioneer William Edward Boeing, the business quickly established a reputation for unquestionable engineering precision and a steadfast commitment to passenger safety. This legacy of trust, reliability and American-built quality stood fast and practically unshakeable for just over a century.

So what went wrong with the 737 Max?

Some would argue that the trouble started in the M&A space. In 1997, Boeing orchestrated a momentous acquisition, assimilating its long-standing competitor McDonnell Douglas in what stood as the nation’s tenth-largest merger at that time. Despite maintaining the Boeing name, the merged entity not only adopted McDonnell Douglas’s brand but also absorbed its cultural and strategic blueprint.

This transformative period unfolded as a clash of corporate cultures, pitting Boeing’s traditionally pioneering engineers against the more financially-focused decision-makers from McDonnell Douglas. Unexpectedly, the smaller company emerged triumphant in shaping the post-merger trajectory. The consequence was a notable departure from Boeing’s historical commitment to groundbreaking engineering, ushering in what critics labelled as a more cut-throat (and cut-cost) culture.

This cultural shift prioritised cost containment and exhibited a preference for enhancing existing models over investing in wholesale innovation. The aftermath saw Boeing veering away from its historical penchant for groundbreaking engineering, reflecting a strategic pivot influenced by McDonnell Douglas’s business philosophy.

Prioritising shareholder value, once a marginal concern, became increasingly paramount. Many employees faced challenges adapting to this shift, perceiving it as a transformation in priorities where investors took precedence over passengers. The original passion for exceptional aircraft gave way to a new focus on affordability.

Competitive pressure

The decades-long rivalry between Boeing and its European competitor Airbus has played a crucial role in fostering innovation and elevating industry benchmarks. This competition has spurred the creation of more fuel-efficient aircraft, advanced safety features, and upgraded passenger experiences, ultimately contributing to the overall improvement of the global aviation sector. Unfortunately, this competition may also have been at the heart of Boeing’s missteps with the 737 Max.

Under pressure to deliver a new aircraft that could compete with Airbus’ A320 Neo, Boeing decided to fast-track the design process by making alterations to their existing 737 design, which had been the core of their fleet since 1968. The 737 Max was fitted with bigger engines, which increased the risk of the aircraft stalling at a certain angle. To counteract this risk, the Manoeuvring Characteristics Augmentation System (MCAS) was built in – the same system that would later send two 737 Max aircraft into uncontrollable nosedives.

In their haste to do whatever they could to keep up with Airbus, Boeing made a series of bad decisions that not only went against the engineering-first ethos that the company was built on, but ultimately led to the deaths of hundreds of people and a reputational freefall that I’m not quite sure they will recover from.

Today’s share price, tomorrow’s problem

There’s a lot that businesses can learn from Boeing’s ongoing saga with the 737 Max, and many questions that we can ask. For starters, would it have made a difference to Boeing’s reputation if they had admitted that there was a problem with the 737 Max and grounded it themselves instead of waiting for a grounding order from the FAA (and therefore allowing a second crash to happen)? And why did they decide to keep making and selling “fixed”’ 737 Max models after the grounding order was lifted, instead of cancelling the entire project and starting something new?

The answer to these questions goes back to the clash in company culture that I highlighted earlier in this article. Before their merger with McDonnell Douglas, Boeing was an engineering business run by engineers. Their belief was that quality came first and profits followed, and for many decades, this was exactly the case. Boeing stayed ahead of its competitors through innovation and adherence to the highest possible standards of safety and reliability. Their stock market performance was a reflection of their stellar reputation in their field.

The story of the 737 Max is a cautionary tale about what happens when share price obsession takes root in a business that has a direct impact on human safety. We can argue all day about the role of the FAA and why adequate oversight was lacking. Yes, oversight and regulation are important when it comes to businesses that impact on our safety. But ultimately, the buck stops with the management team that turns a blind eye to concern and decides that profit and share price performance are more important than diligence.

To highlight this, consider that when Dennis Muilenburg was removed as Boeing’s CEO in 2019, he got $62.2 million in stock and pension awards. To truly put that number in perspective, each of the families of the 346 people who lost their lives in the 737 Max crashes got roughly $1.45 million from Boeing’s victim compensation fund.

And yet, despite everything, the share price gave a stronger reaction to the onset of COVID lockdowns than any of the disasters mentioned above. Even if we can’t put a price on the lives of our loved ones, it seems that the market can (and does).

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.