It was the first time I felt like I didn’t have control of anything. “I was shocked by the entire situation,” said 40-year-old Tran, who was a passenger aboard the Alaska Airlines flight bound for Ontario on January 5.
Tran was flying on a Boeing 737 Max 9 when an unused door blew off in mid-flight. He sat inches from the hole, fighting the powerful decompression that resulted, and holding onto his life as the suction pulled out his shoes.
Tran’s phone vanished from his hand and he suffered injuries including a deep wound on his leg.
Boeing could have made this statement in retrospect. It is currently facing its most serious crisis to date and seems to be unable to control the levers. One problem after another keeps throwing it in the air. The airline, and the rest of the world, are in disbelief as they watch one of America’s greatest icons fail and lose 346 lives.
According to Reuters the US Department of Justice is considering bringing criminal charges against a large company. This would be a first of its kind.
Boeing’s Reputation is Shredded
Two whistleblowers, including John Barnett, a former Boeing employee who died due to PTSD caused by what his family described as a “hostile working environment” at Boeing, have been killed in recent months.
Boeing’s reputation was publicly damaged by a Senate committee in front of families of crash victim victims. The panel criticized Boeing for its safety and quality failures, and a whistleblower claimed that the company cut corners.
Investors have also expressed their anger at Calhoun during a shareholder meeting in May. They questioned the $33 million salary package of the CEO.
Boeing is in a mess.
Calhoun’s resignation from his post is not surprising.
There are many questions that come to mind. The most important question is: What went wrong? How and when can things return to normal?
Crisis of credibility: Earnings fall, orders are muted
Boeing’s stock price has dropped by nearly $200 and its market cap has fallen more than 30% since the Lion Air crash in 2018. The first of two consecutive fatal crashes killed all 189 people on board.
It was worth around $182.01 at the time this article was written, compared to a daily average share price of $369.
In the latest financial results of the company, published on April 24, 2024, the company reported a loss of 355 million dollars, a loss core per share of 1,13 cents.
The revenue for commercial aircraft was down 31% year-over-year at $4.7 billion.
Statista reports that Boeing lost $11,585 in net earnings over its most recent three financial years, 2021-2023. This is almost the same as the $11,941 in losses Boeing suffered in 2020 – the year of pandemic, when there were mass quarantines around the world and almost no planes flying.
Safety concerns are also causing the company to struggle to secure new orders. According to a report by the Associated Press, Boeing only received four orders last month for new planes. No orders were placed for their best-selling 737 Max. This is the second consecutive month that no orders have been placed for 737 Max.
Boeing’s response to ICD when asked for comment about this story was to direct ICD towards the Orders & Deliveries database of the company on its website. This confirmed that only one customer placed an order for 4 planes last month.
Boeing has only received 142 gross new orders in 2024 compared to 1456 in 2023.
Fitch Ratings, in response to ongoing developments, downgraded Boeing’s rating outlook in April from ‘stable’ to ‘negative’. In May, it lowered its forecasts for 2024 aircraft deliveries and the free cash flow of the company.
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 spent nearly $4 billion of cash in its first quarter. The company’s CFO Brian West stated that this figure could be “possibly even worse” in the next quarter. However, he added that Boeing would return to producing cash in 2024.
Losses for the US economy
Boeing has been accused, more than just impacting its bottom line and stock price, of dragging down the entire United States manufacturing industry.
Wells Fargo cited Boeing as the catalyst for the disappointing Durable Goods Orders Data the bank was expecting to see on the 27th of June.
In the end, we expect durable goods to have declined 1.6% in May. However, overall orders may have been somewhat slowed by aircraft orders last month. Boeing released separate data showing that the company only received 4 gross new orders in May. This is far below the historical average for the month of may, where close to 50 orders are placed. It was also a bit lower than the 7 orders placed in April.
Tim Quinlan, an economist at Wells Fargo, told ICD that the new dismal Boeing sales figures would likely have a “significant” impact on all of America’s Durable Goods Orders.
Quinlan added
Boeing’s May was a bad month for new orders. After accounting for cancellations, we estimate that there were only 3 net new May orders. The deliveries look better, with 24 new delivery, but it is still lower than the average of 41 new deliveries since 2000.
Wells Fargo’s weekly financial commentary for the week of June 28, 2008, stated:
In May, durable goods orders were up 0.1%. Nondefense aircraft orders fell ‘only’ 2,8%. This was a surprise, as Boeing’s earlier data showed relatively weak order numbers.
What went wrong?
Experts attribute the collapse of Boeing’s quality to a culture that prioritizes profits over safety and design.
Some say that the seeds of a new culture were sown when Boeing purchased McDonnell Douglas in 1997.
In a Fortune article from 2000, McDonnell Douglas was described as Boeing’s St. Louis competitor. “Historical caution and conservatism allowed Boeing to blow it out of jetliner business before it purchased it.”
After the merger, many McDonnell executives were in high-ranking positions within the new entity. Former McDonnell CEO Harry Stonecipher became Boeing CEO Phil Condit’s No.2.
Fortune described Stonecipher as follows: “….whose style of hard-talking and show-me the money management strikes Boeing loyalists as noxious, shortsighted and noxious. The joke in Seattle is that McDonnell Douglas purchased Boeing using Boeing’s funds. More than one analyst has used the term “reversetakeover.”
James Collin, in his 2004 bestseller ‘Built to Last,’ compared Boeing with McDonnell Douglas and said: “If there is a reverse takeover – the McDonnell Douglas ethos permeating Boeing – then Boeing will be doomed to mediocrity.”
“There was one thing that has made Boeing great from the beginning. They understood that Boeing was an engineering-driven, and not a financial driven, company. They always thought in terms of “What could we build?” and not “What makes sense to build?” If they don’t honor that as their main mission, they will become just another company over time,” he said.
Predictions have been accurate.
In response to the incident of January 5, the Federal Aviation Administration (FAA), in a six-week audit conducted by Boeing and Spirit AeroSystems found that the companies had failed multiple times to meet manufacturing quality control standards.
Whistleblowers also claimed that a “culture” of retaliation was present at the company. Engineers who pointed out flaws in the manufacturing processes were threatened and silenced.
Boeing’s R&D expenditures are also higher than those of rival Airbus.
Boeing’s R&D spending from 2017 to 2019 remained relatively constant, hovering at around $3,200m according to Statista. Airbus, on the other hand, increased its R&D spending over this period.
Both companies reduced their R&D spending after the pandemic. However, Airbus only cut by 17% until 2021 while Boeing cut almost twice as much – 30%.
Calhoun stated that Boeing had increased quality controls at suppliers, as well, during the shareholder meeting in May. Calhoun responded to a question from a shareholder about safety by saying that Boeing was increasing its training of new employees, and simplifying certain processes to avoid defects.
Calhoun said that Boeing was investigating the allegations made by whistleblowers of a culture retaliation against those who brought up safety concerns and was also enforcing its policy of non-retaliation.
In his prepared remarks, he stated: “We will measure progress one plane at a time.”
Why Boeing will likely remain buoyant?
The company can’t be written off yet, despite the constant doubts that surround its future. Boeing could be too big to fail.
The reason for the invincibility of Boeing is not its own strength but rather the dynamic of the aircraft manufacturing industry.
Aircraft production is largely controlled by Boeing and Airbus. The barriers to entry for this industry are high. With safety being the most important factor, it is clear that plane-making cannot be done in a hurry.
Since the early 20th Century, both companies have produced aircraft. They have gained valuable expertise, brand loyalty and recognition, and they have also achieved volumes that allow them to enjoy economies of scale.
The Federal Aviation Administration (FAA), the European Aviation Safety Agency, and other authorities have all invested heavily to obtain regulatory certifications. This is a lengthy and expensive process.
Reuters reported that the resumption in wide-body jet delivery to China, which was halted due to a Chinese regulator review in the past few weeks, validates Boeing’s theory of staying afloat. Boeing warned investors about the China delivery delays earlier.
Boeing announced on Monday that it would also buy back Spirit AeroSystems, one of its main suppliers, to ensure safety and quality. Experts have stated that the company sold Spirit to private equity investors in 2005, which affected its supply chain’s reliability. Spirit makes fuselages, among other parts, for the 737 Max.
The current situation is unlikely to be a turning point for the industry, even if Airbus gains at Boeing’s cost, but only up to a certain limit.
John Strickland is the director of JLS Consulting, and an aviation veteran. He told Invezz that:
Boeing has fallen behind Airbus in terms of market share due to management’s lack of time to focus on innovation and product development. This is unlikely to increase due to the supply chain issues affecting Airbus and both manufacturers.
Airbus data shows that the backlog at year-end 2023 was 8,598 aircraft.
Airbus is still ahead of Boeing in terms of plane orders and delivery for the past five years. It has also gained some Boeing customers who have been with them for a long time, such as Japan Airlines and Korean Air.
Strickland explains:
While I don’t see this as an immediate issue, the current challenges may catalyse new opportunities in the regional aviation space where China has great ambitions. These opportunities may not become apparent until the end of the decade, and they will require a focus on after-sales support and quality.
Boeing may be down but it is not out yet. It is a question of how and when it will be able get back on track.
Strickland stated:
It will take years to reverse the crisis. It is not just a matter of technical processes, but also of organisational culture and management style. This is a complicated mix that must be carefully sorted out in the required time.
The Boeing crisis: Will the company survive? This post may be updated as new information becomes available
