:: April 2019 Letter ::
To my deep regret, my only personal contact with Herb Kelleher, the great founder of Southwest Airlines who died in January, was, predictably, over a drink in a bar. As for any aviation fan, that moment made my list of career highlights, and indeed life highlights. Not only was he a remarkable character who helped reinvent the industry, he also provided what may be the best management quote ever: “Your employees come first. And if you treat your employees right, guess what? Your customers come back, and that makes your shareholders happy. Start with employees and the rest follows from that.” This was not only a humane vision of the world; it was also a great maxim for long-term company success.
Boeing really needs to learn from Herb. That’s the big lesson I can provide after 30+ years of following the company, and after spending the past months, like everyone else in the industry, studying the two 737MAX8 disasters and the subsequent groundings. The likeliest explanation for the design mis-steps that contributed to (but were not solely responsible for) these two crashes relates to company culture, and how Boeing values its employees, particularly engineers.
First, a few words in support of the 737MAX, against the mass of misinformation out there. This was the right product to launch. Boeing was not being greedy, desperate, or short-sighted; rather, there was no business case for a clean-sheet design. I advocated for it at the time, as did many others (see my July 2011 letter). And it was not a rushed job; six years is a lavish amount of time to allow for a derivative jetliner. The result is a good jet, but one with a problem. As Bank of America/Merrill Lynch analyst Ron Epstein told me, “It’s not a flawed product. It’s a good product with a flaw inserted inside it.”
But about that flaw. There were many causes of the two crashes, but MCAS connects them. And under examination, the design and integration of the MCAS looks shoddy. There are valid questions about the training requirements associated with its introduction, too. One upside: fixing the MAX isn’t a major technical challenge. The mistakes are too obvious to not be easily fixable.
As Epstein asked on Boeing’s earnings call this month, “How did this happen?” First, it wasn’t about money. There is no significant economic difference between doing MAX with a perfectly fine stall avoidance system and doing it with MCAS. The R&D budget for MAX was quite adequate. And it wasn’t about time – again, they gave it six years, so there’s no evidence at all that this was rushed.
That really just leaves one possibility: company culture. And there’s a lot to go on here. Like others, I’ve been writing about the rift at Boeing between engineering and management for decades (see my June 2002 letter). But during the key years of MAX development, things got toxic. If you want to keep reading, see my September 2014 and January 2013 letters. But to summarize, company management made a concerted effort to cut labor costs and to destroy labor’s bargaining power. Pensions were eliminated, and benefits cut.
Machinists were the primary target of the contract re-negotiations, which helps explain the recent spate of stories about production line issues on the 787 and KC-46, and the associated whistleblower allegations. But engineers were hit too. More importantly, the engineers were also marginalized, from a management perspective. The BCA president who launched the MAX left the company, and his replacement, in charge of the development phase, did not have an engineering degree. Neither did the company CEO, so you had an aerospace engineering company led completely by non-engineers. That company CEO, Jim McNerney, also bragged about his ability to make employees cower. Somehow, the two found a way to get through the 787 battery crisis by relying on the hard work of others, and perhaps not fully understanding what those others needed to do.
The big question: Was this dynamic a key factor behind the mistakes that led to MCAS? If so, how did that play out? First, in the absence of any other likely causes behind the MCAS debacle, this might be the right place to look. Second, it might have been an issue of empowerment and communications. This alignment of non-engineers, particularly when the CEO had a notoriously imperial style, could not have been good from the standpoint of correctly allocating resources, and most of all, listening to any concerns by engineers. Delivering bad news was generally regarded as a very bad career move, which explains why the CEO wasn’t told that the Dreamliner rolled out on 7-8-07 wouldn’t be ready to fly for another year.
In the backdrop of those labor problems Boeing enjoyed unprecedented prosperity, and was creating a seemingly unstoppable financial juggernaut, purely for the benefit of investors. In 2012, 19% of operating cash flow was given out in the form of shareholder dividends and buybacks. By 2015, the last year of McNerney’s reign as CEO, this had risen to 99%, or $9.3 billion in dividends and buybacks. McNerney’s salary skyrocketed, hitting $29 million in 2014.
The percentage of cash flow given to investors has since gone down, but the absolute amount has risen (2018 saw 84% returned, but a record amount of $12.6 billion). If there was a race to give away cash in the jetliner business, Boeing certainly won. Per Bank of America/Merrill Lynch, “Boeing has materially outperformed Airbus on capital return over the last 15 years, returning $78bn of capital to shareholders, vs. Airbus returning €11bn through dividends and buybacks.”
This juxtaposition of disgruntled labor and record shareholder rewards was basically a recipe for a rift between management and the people responsible to creating aircraft. And it was a perfect reversal of Kelleher’s maxim. Share price was obsessed over. Customers came second. Company assets, such as people, became a commodity, something to be measured against returns.
Has Boeing changed since those awful years of toxicity, the very years of MAX development? Can it continue to recover from those bad old days? Thankfully, both the head of BCA and Boeing now have engineering degrees, and there does seem to be a better approach to labor. People I speak with at Boeing seem a lot less angry than they did then (although there’s still plenty of anger out there). On the other hand, this month, CEO Dennis Muilenburg asked the board “to establish a committee to review our company-wide policies and processes for the design and development of the airplanes we build,” and somehow, as Ron Epstein noted, they created a committee without a single engineer.
And there’s also this conundrum: Management is addicted to growing the company’s share price, and investors are hooked. In February 2016 the was at a five year low of $109. Just before the second crash, it peaked at $446, and has stayed in the $375-380 range. So, as long as the share price stays reasonably high, there’s not much reason to think anything will change. And Boeing will be fine. Until the next crisis.
Yours, ‘Til President Trump Demands That Boeing Rename Itself,
© Richard Aboulafia 1997-2006, All rights reserved.