The Boeing crisis: will the company make it out alive?
“It was probably the first time in my life I had a feeling of no control over everything. I was in disbelief over the whole situation,” 40-year old Tran, a passenger on-board the January 5 Ontario-bound Alaska Airlines told BBC.
When an unused door of the Boeing 737 Max 9 — the aircraft Tran was on, blew off mid-flight at a height of 16,000 ft, he sat inches away from the gaping hole left behind, battling the resultant powerful decompression, and holding on for dear life even as his shoes got sucked out by the suction.
His phone disappeared from his hand, and Tran had to suffer injuries, including a deep cut on his leg.
The statement could very well be coming from Boeing itself in restrospect, as it currently finds itself being overpowered by probably its worst crisis till date, apparently unable to gain control of the levers as one problem after the other keeps tossing it about in the air — a spectacle of disbelief for both the airline and the world as it watches one of the most enduring American icons flounder and fail with the blood of 346 lives on its hands.
Latest in the series is the facing of potential criminal charges of fraud being contemplated to be slapped by the US department of Justice, according to Reuters, in a rare kind of an action against a company of this big a scale.
Boeing’s reputation shredded
In recent months following the 2018 and 2019 fatal crashes and the January 5 episode, two of its whistleblowers have passed away, including former Boeing employee John Barnett who killed himself due to what his family said was “hostile work environment” at Boeing giving him PTSD.
The company’s reputation has been publicly shredded, with CEO Dave Calhoun facing a blasting from a Senate panel in the presence of families of crash victims, over Boeing’s safety and quality lapses and whistleblower allegations of the company cutting corners.
Investors too, have made their wrath known to Calhoun at a shareholder’s meeting in May, also questioning the CEO’s $33 million pay package.
And these are just the broad developments that have bred multiple sub-plots, all adding to Boeing’s woes.
Unsuprisingly, Calhoun will be stepping down from the post by end of the year.
Many questions come to mind. Most crucial among them- what went wrong? And, how and when will things go back to normal, if that.
Crisis of credibility: Earnings drop, orders muted
Since 2018, when the first of the two back to back fatal crashes took place at a Lion Air flight, killing all 189 on board, Boeing’s market capitalisation has nosedived by more than 30% and its stock price halved and shed close to $200.
Where it was averaging at a daily share price of around $369 in September 2018, it’s only worth $182.01, at the time of this article’s writing.
On April 24 2024, in the company’s latest financial results, the company reported a net loss of $355 million, a core loss per share of $1.13 for EPS.
Revenues were down 8% to $16.6 billion year-over-year (YoY) too, while commercial aeroplane revenue was down 31% YoY at $4.7 billion.
According to Statista, Boeing incurred a cumulative loss of $11,585 million in its net earnings between its three most recently reported financial years of 2021 to 2023, a figure almost equal to the gargantuan $11,941 million lost by Boeing in 2020, the year of the pandemic – when almost no planes were flying in the face of global, mass quarantines.
The company is also finding it difficult to get new orders due to safety concerns. According to an Associated Press report, last month, Boeing received orders for just four new planes, while no orders were placed for its best-selling 737 Max, marking the second straight month with no orders for 737 Max.
When asked by Invezz for comment on this story, Boeing responded by directing Invezz to the company’s Orders & Deliveries monthly database on its website, which confirmed that the company received just one order of 4 planes from a single customer last month.
So far, in 2024, Boeing has received just 142 new gross orders, compared with 1456 in 2023.
Fitch Ratings downgraded Boeing’s rating outlook from ‘stable’ to ‘negative’ in April, and in May, lowered its 2024 forecast for the company’s aircraft deliveries and free cash flow (FCF), amid ongoing developments.
It forecasted between between 350-370 737MAX deliveries and about 65-70 787 deliveries in 2024, below previous expectations of about 400 and 75, respectively, and expected modestly negative FCF during 2024, compared to previous breakeven-to-positive.
Boeing burned through nearly $4 billion in cash in the first quarter and company CFO Brian West said that the figure could be similar or “possibly a little worse” in the second quarter, but that the company would likely return to generating cash in the second half of 2024.
Losses to the US economy
More than just affecting Boeing’s bottom line and share price, the company has been accused of dragging the entire United States’ manufacturing industry down.
On June 21, Wells Fargo mentioned Boeing by name as a catalyst for the disappointing Durable Goods Orders data the bank expected to see on June 27.
We ultimately expect durable goods orders slipped 1.6% in May, but overall orders were likely somewhat held back by aircraft last month. Separately released data from Boeing showed the company secured just 4 new gross orders last month, which is well below the historical average of close to 50 new orders placed in the month of May, and a touch softer than the 7 new orders placed in April.
Boeing’s dismal new sales figures will likely affect the entire country’s Durable Goods Orders for data “a lot”, according to Wells Fargo economist Tim Quinlan, when interviewed by Invezz for comment.
Quinlan added:
The headline will be dented by what was a poor month for new orders at Boeing in May. On average since 2000, there have been 48 new gross orders in May, after accounting for cancellations we estimate there were just 3 net new orders this May. Deliveries look a little better with 24 new deliveries, but that is still below the average since 2000, which is about 41 new deliveries in May.
In its June 28 weekly financial commentary, Wells Fargo said,
Durable goods orders surprised to the upside in May, as new orders rose 0.1%. The unexpected strength came from nondefense aircraft orders falling ‘only’ 2.8%, in contrast to relatively weak orders data from Boeing released earlier in the month.
What went wrong?
Experts have broadly attributed the unravelling of Boeing to an unfamiliar culture of putting profits ahead of safety and design in what ultimately affected the planes’ quality.
Many say, the seeds of this new culture was sown in 1997, when Boeing acquired McDonnell Douglas.
A Fortune magazine article published in the year 2000 described McDonnell Douglas as Boeing’s St.Louis competitor “whose historic caution and conservatism had allowed Boeing to all but blow it out of the jetliner business,” before it bought it out.
After the takeover, several McDonnell executives found themselves in powerful positions in the merged entity, including former McDonnell CEO Harry Stonecipher, who became then Boeing CEO Phil Condit’s no.2.
The Fortune article described Stonecipher thus: “….whose brand of tough-talking, show-me-the-money management strikes many of the Boeing faithful as noxious and shortsighted. His ascendance is flourished as proof that, as the joke around Seattle goes, “McDonnell Douglas bought Boeing with Boeing’s money.” More than one analyst uses the term “reverse takeover”.”
In his bestseller 2004 book ‘Built to Last’, when James Collin drew a comparison between Boeing and McDonnell Douglas, he said, “If in fact there’s a reverse takeover, with the McDonnell ethos permeating Boeing, then Boeing is doomed to mediocrity.”
“There’s one thing that made Boeing really great all the way along. They always understood that they were an engineering-driven company, not a financially driven company. They were always thinking in terms of ‘What could we build?’ not ‘What does it make sense to build?’ If they’re no longer honoring that as their central mission, then over time they’ll just become another company,” he said.
The predictions have not been too far off the mark.
The Federal Aviation Administration (FAA)’s six-week audit of Boeing and Spirit AeroSystems, prompted by the January 5 incident, found multiple instances where the companies allegedly failed to comply with manufacturing quality control requirements.
Added to that, whistleblowers’ alleged a “culture of retaliation” was prevalent at the company, wherein engineers who pointed out loopholes in the manufacturing process were silenced and even threatened.
The approach is also reflected in Boeing’s R&D spendings, when compared to rival Airbus.
From 2017 to 2019, Boeing’s spending on R&D remained more or less constant- hovering around $3,200 million according to Statista, even as Airbus’ spending on its R&D across the three years kept growing.
Once the pandemic hit, both companies cut spending on R&D, but Airbus cut its spending by only about 17% through 2021, while Boeing cut nearly twice as much — 30%.
In the May shareholder meet, Calhoun said Boeing has added more quality controls, including at its suppliers. In response to a shareholder question about safety, Calhoun added that the company was increasing training for new employees and simplifying some of its processes to help avoid defects.
On whistleblowers’ allegations of a culture of retaliation at Boeing for those who raised safety issues, Calhoun added that the company was addressing it with investigations and stricter enforcement of its non-retaliation policy.
“We will measure our progress one airplane at a time,” he said in the prepared remarks.
Why Boeing is likely to remain buoyed?
Even amid unending misgivings about its corporate and financial future, the company cannot be written off just yet. The reason: Boeing may just be too big to fail.
And the reason for its invincibility is not so much its own strength, but the dynamics of the plane manufacturing industry.
Aircraft manufacturing is largely a duopoly, controlled by Boeing and Airbus, and the barriers to entry are sufficiently high. Surely, with safety as the topmost criteria, plane-making is not a business one can embark on in a jiffy.
Both companies have been producing aircraft since the early 20th century and have since then acquired valuable expertise, brand recognition and loyalty, as well as volumes which allows them to benefit from economies of scale.
They have also invested heavily in obtaining regulatory certifications from authorities like Federal Aviation Administration (FAA) and the European Aviation Safety Agency (EASA)- a complex and costly process, to say the least.
A greenshoot in Boeing’s situation which validates the theory that it will stay afloat, is the resumption of wide-body jet deliveries to China that was halted in recent weeks due to a Chinese regulatory review, Reuters said. Boeing had flagged the China delivery delay to investors earlier.
In a proactive measure, Boeing on Monday also said it will buy back Spirit AeroSystems- one of its major suppliers, for safety and quality control. The company had sold off Spirit in 2005 to private equity buyers in what hurt reliability of its supply chain, experts have said. Among other parts, Spirit also makes fuselages for the 737 Max.
Therefore, the current fiasco is unlikely to provide the industry with an inflexion point even though Airbus could gain at Boeing’s expense, but that too, up to a limit.
John Strickland, director at JLS Consulting and a veteran aviation expert told Invezz:
Boeing has lost some ground to Airbus due to the challenges taking management time away from innovation and product development. However, this is not likely to compound due to supply chain challenges affecting both manufacturers and Airbus’ own multi-year order backlog.
Airbus’ 2023 year-end backlog stood at 8,598 aircrafts, according to company data.
Even so, Airbus has remained ahead of Boeing for five straight years when it comes to plane orders and deliveries and has also won over some long-term Boeing customers like Japan Airlines and Korean Air.
On a question about the circumstances opening the field for newer players, Strickland adds:
Whilst I do not see it as an immediate factor, the current challenges could catalyse opportunities in the regional aircraft space where China has big ambitions. However, these may not be clearly evident until well into the next decade and will require a clear focus on quality and after sales support.
So as it appears, Boeing is definitely down, but not yet out. The question is, how and by when will it be able to get back on the track.
Strickland said:
The crisis is reversible but it will take considerable time, running into years. This is not simply an issue of technical processes but of organisational culture, management style and workforce experience. It is a complex mix which has to be worked through painstakingly in the time it takes.
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