Streetwise Professor

February 27, 2024

If It’s Boeing, You’re Going . . . to Corporate Hell.

Filed under: Economics,Military — cpirrong @ 11:43 am

There’s an old expression: “If it ain’t Boeing, I ain’t going.” Well, nowadays the only place you are going on a Boeing is to corporate hell.

Of course the severe problems with its civil aviation operation–specifically, the 737 Max and before that the 787 Dreamliner–are the current focus of attention. But Boeing is a full spectrum failure.

The KC-46 tanker program has been a disaster since day 1. The program was delayed for years, and was catastrophically over budget. Problems included a FOD (“foreign object debris”) issue, in which tools and random metal stuff was littered throughout the aircraft–indications that quality control problems are chronic at Boeing, and hence the 737 issues are not surprising. Another problem was faulty cargo locks–which meant that the aircraft could not carry cargo until it was fixed. Then there was a toilet problem. These are not complicated things.

The most mission-critical problem was with the supposedly advanced refueling boom system, which is operated by wire and a crewman located forward in the aircraft viewing the boom through a camera (not dissimilar from a rear view camera now nearly ubiquitous in automobiles) rather than by someone stationed in the tail with eyes on the boom and the approaching aircraft. However, the accuracy of this system leaves much to be desired, and resulted in some mishaps. The tanker can still refuel aircraft, but the accuracy issue has slowed down refueling operations, which is kind of a big deal because it effectively reduces the refueling capacity of the aircraft.

The company has supposedly lost around $5 billion on the program. And the Air Force is now looking to add KC-45 planes–built by Airbus.

Ironically, maybe if the engineers had retained more control of the company the problems that have the bean counters lamenting winning the tanker contract might never have occurred, or at least wouldn’t have been as bad.

The replacement for Air Force One is also way behind schedule and way over budget.

As was the CST-100 Starliner reusable space capsule. It’s satellite programs have also been plagued by problems.

Those who have paid attention as the company spiraled downward recognized that the engineers had lost out to the bean counters. A recent article in The Atlantic tells the sad story in some detail.

This is correct as far as it goes, but begs the question of how this slow motion plane crash could proceed in plain sight without anyone pulling the company out of its dive. The likely underlying cause is a severe lack of competitive discipline.

The civilian passenger aircraft industry is a duopoly. Customers dissatisfied with Boeing in theory have an option to switch to Airbus, but even in the medium term the ability to do so is limited. For one thing, it would take some time for Airbus to expand capacity to accommodate a large switch of Boeing customers. And given the fixed and sunk nature of capacity costs, it was/is willing to do so only given a high degree of confidence that many Boeing customers would switch–which creates something of a chicken-egg problem. Moreover, switching costs are important. Airlines have made investments in everything from maintenance to pilot training that are manufacturer specific. The cost of a substantial switchover from one manufacturer to another involves more than the cost of the aircraft themselves.

Southwest is an extreme example. A key to its low cost operation was utilizing a single basic aircraft type (737). Adding any Airbus planes to its fleet would disrupt its entire operating model.

With respect to military contracting, the situation is even more extreme. Not only did the Boeing-McDonnell Douglas merger bring over the poisonous management documented in The Atlantic piece: it resulted in the combination of the two manufacturers of multi-engine jets adaptable to military use, most notably refueling planes.

Until recently, competition from Airbus for this business has been even more muted than for civilian aircraft due to the inherently political nature of defense procurement, and the understandable desire to keep this production capacity onshore.

All meaning that Boeing has had a lot of room for chronic performance problems because the lack of serious competitive threats mean that those problems don’t translate into the risk of severe top line losses even in the medium, and to some degree the long, terms.

In the late-90s I was offered the Admiral Crowe Chair at the Naval Academy. The Chair was a research position, with a focus on defense economics issues, and defense industrial base issues in particular. It was a time of an imagined “peace dividend,” and a downsizing of the defense industry. A major part of this downsizing was achieved by industry consolidation. Boeing-MD was just one part of that.

The pitch that got me the job (which I turned down for a mixture of professional and personal reasons) was that I would study the effects of this consolidation, and in particular the effects of declining competition. In the subsequent years I have watched the serial procurement nightmares that have plagued the US military which have largely borne out the concerns that I raised when interviewing for the USNA position.

Lack of competitive discipline enables dysfunctional management. That’s the underlying problem at both the civilian and military sides of Boeing. And it’s not a problem that is addressed easily.

During WWII, management dysfunction at Ford Motor Company (still ruled by the iron hand of Henry Ford and his henchman Harry Bennett) posed a serious threat to the U.S. war effort. The government intervened, and essentially forced out Henry I and Harry, and installed Henry II (“Henry the Deuce”) to straighten out the company. After the war, the Deuce brought in the “Whiz Kids” to drag it kicking and screaming out of the Henry I cult of personality. (My dad was a very junior Whiz Kid, hence my living in West Wayne and Dearborn in my early years.). That brought on its own problems, of course, but it was likely necessary to save Ford Motor.

The situation at Boeing isn’t exactly the same, but it rhymes. So who is going to carry out the necessary intervention? Hard to see who that would be. And the same fundamental market factors that have allowed Boeing to be mismanaged for years will exist even if there is a complete turnover in the top management and the board room. Meaning that since the underlying causes of Boeing’s fall are structural, it’s hard to be optimistic about things turning around anytime soon.

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11 Comments »

  1. An obvious analogy for a company that faces no competition is the armed forces or local police forces. Are there cases of a whirlwind reformer drastically improving them?

    Two suggestions: (i) The chap who shook up policing in NYC (Bratton?), (ii) The chap who shook up the Royal Navy before WWI, Jackie Fisher.

    I was going to mention Napoleon but the man who marched the youth of Western Europe to their deaths in Russia is perhaps not an ideal model.

    Comment by dearieme — February 27, 2024 @ 6:25 pm

  2. While I take your views seriously and having worked in the industry with another dysfunctional history, how does Airbus manage to stay sharp? Is it just they had a competitive advantage at entering the single-aisle segment last and there’s not much room for Boeing to leapfrog them? Is in the nature of a quasi-government business? Or, are they too headed for a fall?

    Comment by The Pilot — February 27, 2024 @ 8:04 pm

  3. @the pilot
    The reason Airbus may be slightly less dysfunctional than Boeing may be because they don’t actually make anything. They just assemble components supplied by (semi)competitive tender.

    Military procurement in Europe is no better, arguably worse, than in USA. The Airbus heavy lift /refueller was so far over budget and behind schedule that there was serious talk about scrapping the programme and buying from Boeing.

    Comment by philip — February 28, 2024 @ 11:31 am

  4. @The Pilot. I figured I’d hear from you 😉

    I think of it like currencies. It’s all relative, and in many cases the “strong” currency is just the one that sucks least.

    Yes, you are right that Airbus faces the same structural issues in civilian aircraft. Things have yo-yo’d over the years, with Boeing having the edge at times, and Airbus at others. So I wouldn’t say that Airbus is necessarily “sharp” except at times relative to another dull knife.

    The greater diversification of Boeing amplifies its issues. Especially the defense business.

    Comment by cpirrong — February 28, 2024 @ 11:49 am

  5. @phillip

    No builder “makes” an airplane anymore—even big items like wings, flight controls, avionics, fuselages are all outsourced and assembled by the named company. Buy a Boeing or Airbus and it’s just a formation of hundreds of suppliers. One Bombardier line still exists as raw materials at one end, airplanes emerge from the other end. I think the F-16 is the same in Ft. Worth.

    Airbus looks a bit sharper because the A320 was a major disrupter that Boeing hasn’t been able to compete with.

    @SWP, like the theory of competitive discipline, but it’s hard to imagine a means to bring competitors to the market—very high barriers in IP, capital, esp. The A380 tests Airbus being sharp, as is the A400 program.

    Comment by The Pilot — February 28, 2024 @ 8:04 pm

  6. I feel this was a missed opportunity for ‘Boeing, Boeing, gone!’

    This reminds me of the quality issues which hampered British industry in the 70s. No doubt there were a range of factors which combined to bring it to the point where the window fell out of the Prime Minister’s new car but collective memory is of a kind of lassitude brought on by unions, under investment and over taxation. Bean counters may play their part but I think there must be more at play here. Some of these issues are more about culture and what it means to be professional. Leaving clutter, FOD, around the plane seems on the face of it just poor working practice in an environment dominated by engineers. Given the airline industry is often held up as an example of safety culture at its best, it seems odd that such a poor culture should have been allowed to evolve.

    Comment by lundenwic — February 29, 2024 @ 3:32 am

  7. @lundenwic: is there any room in the Boeing story for my own explanation for the awful performance of the British car industry in the 70s; to wit, that the work force chose the management?

    In the following sense: the secondary schools of the country in the 60s were full of bright young shavers who were minded to study engineering at university. In the TV news, week after week, they saw the absurd misbehaviour of the car industry trade unions. So they overwhelmingly decided not to seek careers in that biz, which was left to recruit its engineers and managers from people too dim to see what was going on.

    Or, to put the Boeing matter more broadly – if the managers and engineers are duds, why? Who chose them? Where did the able people go instead?

    Comment by dearieme — February 29, 2024 @ 5:38 am

  8. @dearieme: I like your train of thought. Though perhaps in the US the situation is less that Boeing repelled good engineers than Silicon Valley and Wall Street attracted them

    Comment by lundenwic — February 29, 2024 @ 6:07 am

  9. 1. Once travelling I was short on T-shirts. There was only an aviation shop at the airport. Just bought what looked okay, 2 dark blue T-shirts with white small print: ‘If it’s not Boing, I’m not going’. Can’t remember the airport. But some time later, guess in Helsinki, wearing such a shirt, without thinking about the print, the stewardess at embarkation got in my way, crossing her arms, shaking her head, saying ,No, sorry, it’s an Airbus…’.

    2. The Atlantic article sees the cause in a change of culture. Even without any competition at all, the ,engineering culture’ would produce quality and profits. It’s not a lack of ‘competitive discipline’. It’s an example that shows that markets alone don’t make things work. That’s just a myth and religious believe. And it shows that functioning markets are not a standard: is the (European) Gas or Electricity market more functional and ‘real competitive’?

    Comment by Mikey — February 29, 2024 @ 6:51 am

  10. I view the McDonnell Douglas / Boeing merger as a doubling down on participation in Military Acquisition as opposed to what is the real world market (by comparison) economics of commercial aviation.

    To me, one of my overriding questions is how much of our industrial problems are caused by industrial overdependence on the cost-plus nature of the US Military Industrial Complex? It may be more pernicious than the “Rate Base” games of the utility industry. My understanding is most of the contracts are “our cost” + 15% profit. Hence the incentive to stretch out design and development and delay production on most major hardware. 20 year development cycles for F-22 & F-35 which time span used to represent several generations of aircraft (P-80 & 86, to F-10x’s Century series, to F-4 Phantom, F-111 for example. Why take any risks when you can spend a lot of money on lobbying, providing employment to retired general staff and maneuvering production to politically important districts?

    Look at ship building. What gets built in US shipyards other than work on military vessels and a new or refurbishment of a few Jones Act vessels? The first LNG carriers were built at General Dynamics’ various New England shipyards (by the way, what is the synergy between Air Craft and ship building anyway)? Or Martin Marietta having been in both aerospace and cement (they owned a cement plant in my home state) – then they merge with Lockheed to become Lockheed Martin. Missile silos needed concrete, I guess. Anyway, the construction of LNG tankers moved to Japan, along with VLGC’s. Understandable in a sense since Japan was first major importer of LNG and LPGs (Propane and Butane). Now construction of those vessels has moved to China (as well as, earlier South Korea).

    As I had long shared The Prof’s skepticism of Musk; I have since toned down my disbelief. Looking at what Space X has accomplished in a culture that is far more “At Risk” than our Space Program ever (actually NEVER) operated under.

    Maybe the leftist critics (and Ike) were right all along. The biggest Welfare Queens could be found in the Military Industrial complex. Ike’s farewell address is a reading I have gone back to time and again, and I think it explains great deal of what ails us from an industrial perspective.

    Comment by JavelinaTex — February 29, 2024 @ 9:58 am

  11. @Prof:
    – As a person working in this industry, that is an excellent summary. Boeing can “lose” to Airbus and still sell a thousand planes per year.
    – I would argue that you simply don’t want too much “sharpness” in your airplane makers – given the stakes, society has a clear preference for high safety over outright financial and engineering performance, and nobody has yet found a way to have both.
    – As regards competitive pressure, keep an eye on COMAC. The C919 is choc-full of the same system suppliers as Boeing and Airbus, and given their captive local market, they ALREADY have enough orders to attain economy of scale. The plane itself is quite run-of-the-mill, but their next generation of products might offer a much more significant challenge to the current duopoly.

    @Philip:
    “The reason Airbus may be slightly less dysfunctional than Boeing may be because they don’t actually make anything”
    This is ENTIRELY incorrect. For one thing, Airbus makes wings, fuselages, flight control computers, cabin systems and on and on. Yes, a lot of production of other parts is outsourced, but that’s the case with almost any product so complex and capital intensive. And in fact, Airbus outsources a lot less than Boeing, so this CAN’T be the reason for the difference.

    I think that the biggest differences between Boeing and Airbus come down to two things:
    – Labour law: In Airbus, unions simply would not allow the kind of punishment-of-bad-news and obvious self-enrichment that has been seen from Boeing management, and management could not simply make those people “go away”. The problem in the US is that there is a tendency to a single union, which just replaces one self-interested party with another, often to the detriment of the common good. However German works-councils and French competitive-unions are incentivized to work for long-term goals because they are genuinely accountable to the employee ballot, and crucially they wield real (but limited) power.
    – Specifications: If we take the example of the lithium batteries that grounded the 787 fleet, or the 737 MCAS, the specifications provided by Boeing to their suppliers appear to have been very simple: “Make a battery with this capacity”, “make a system that points the nose down when the sensor says it’s high”, and not a huge amount more than that. In contrast, if you sit down and read an Airbus spec (you can’t, so you’ll just have to take my word for it), the level of detail is incredible. Every scenario is planned for, every detail (from system reliability, down to the paint on the box) has performance requirements, and over successive aircraft programs loopholes have been closed off and lessons have been learned. System architects in Airbus have the right to refuse to implement something if they have valid technical reasons and they have a “Programs” management structure that goes right up to a direct-report to the CEO to make sure that their input is respected and that objectors are protected.

    So when Boeing tried to do all this in one big bang on the 787, it went poorly because they just didn’t have the necessary institutional memory to specify the requirements and to monitor the suppliers (the complexity of “the machine that builds the machine”). They might have learned lessons from that, but we see from the released e-mails that when MCAS came around, the engineers were told by management to make it work as requested and that no argument would be accepted. So they made it work as best they could in the constraints imposed, presumably fearing for their jobs if they didn’t. And we see how many lives that cost…

    Comment by HibernoFrog — March 4, 2024 @ 3:38 am

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