The forces behind Boeing’s long descent
A shareholder-first culture fueled the 737 Max crisis. Now it may keep the aerospace giant from recovering.
For nearly a year, the world’s largest aerospace company has been engulfed by a scandal of its own making. The 737 Max crisis, which unfolded after 346 people died in two crashes linked to software malfunctions in Boeing’s newest jetliner, has put the company under an unforgiving lens. Scrutiny from journalists, crash investigators, regulators, Congress, and the Department of Justice has exposed profound flaws in Boeing’s corporate culture—shaking its workforce, forcing supplier layoffs, and shattering fliers’ trust.
What’s more, the Max scandal isn’t the only dire threat to Boeing’s trajectory. Well before the crashes, Boeing had struggled to plug a gaping hole in its product lineup between its single-aisle 737 and larger twin-aisle 787 planes. Now, plans to launch an entirely new, “clean sheet” jetliner for this midsize market have been shelved, as the company scrambles to get the Max back in the air.
These twin crises, industry insiders say, spring from a culture that consistently put short-term rewards to shareholders ahead of engineering-driven decisions and long-term strategy. For all of Boeing’s business coups and innovation, one stark statistic has come to symbolize the company’s priorities: Over the past six years, Boeing spent $43.4 billion on stock buybacks, compared with $15.7 billion on research and development for commercial airplanes. The board even approved an additional $20 billion buyback in December 2018, less than two months after the first 737 Max crash, though it subsequently shelved that plan.
Down payments on orders for the Max—the fastest-selling jet in Boeing’s history—helped pay for the rounds of buybacks. Share repurchases, in turn, have helped the company’s stock price more than triple since 2016, even after a recent sharp drop. Boeing’s defense-and-space and global services divisions, which together account for about 40% of revenue, have kept it afloat even as commercial-jet sales fall. But the Max scandal has put an end to Boeing’s run as a Wall Street bull. Each new revelation suggests that the company’s shareholder-centric mentality has contributed to—and perhaps is partly to blame for—both the Max crisis and its potholed product road map. “Wall Street does not want to hear about new clean-sheet planes,” says Ken Herbert, an aerospace analyst at Canaccord Genuity. And so far, he adds, the board of directors hasn’t “provided the leadership or oversight the company’s needed.”
Boeing declined to comment for this story. But the question facing new CEO David Calhoun is whether he can break Boeing’s addiction to shareholder payouts and plot the company’s long-term recovery.
Boeing’s culture problems aren’t two or even 10 years in the making. Aerospace experts trace them to 1997, when Boeing acquired rival McDonnell Douglas, absorbing many of that company’s executives along with its finances-first ethos.
In the years prior to the merger, Boeing had largely avoided share repurchases; McDonnell’s board, led by its CEO Harry Stonecipher, had pursued them enthusiastically. Within a year of the merger, buybacks became a cornerstone of Boeing’s strategy. As a Boeing executive and later CEO, Stonecipher also advocated aggressive cost-cutting, pushing the company to deliver an after-tax profit margin of 7%—a mark Boeing had not hit since the 1970s. His successor, Jim McNerney, continued to put profit margins first. “When people say I changed the culture of Boeing, that was the intent, so that it’s run like a business rather than a great engineering firm,” Stonecipher told the Chicago Tribune in 2004. “It is a great engineering firm, but people invest in a company because they want to make money.”
The downsides of cost-cutting soon appeared in Boeing’s 787 Dreamliner program, which began in 2003. Management pushed the company to save money by outsourcing development of critical components to suppliers, many of which proved not up to the task, leading to repeated breakdowns and delays. When the jet finally flew in 2011, it was three years late and $25 billion over budget. In 2013, after the plane was in service, electrical fires in batteries on two 787s prompted regulators to ground the airplane for nearly a month.
The 787’s painful legacy continues today, notes Scott Hamilton, head of aerospace consulting firm Leeham Co. Its problems prompted Boeing leadership in 2011 to decide to put new engines on the 737, dubbing it the 737 Max, rather than build an entirely new airplane. “Their hand was forced,” Hamilton says. “The issue was how badly they screwed up the 787 program, which destroyed their product strategy for the next several decades.”
Boeing suspended buybacks during the 787 debacle. Resuming in 2013, they have since averaged $6.2 billion annually. Meanwhile, the company has spent an average of $2.47 billion annually on commercial-plane R&D. By 2016, the 787 program was cash positive, and that year Boeing leadership committed to returning 100% of free cash flow to shareholders. “Let’s say you only return 50%,” Hamilton says. “You could have funded an entire airplane program.”
The company desperately needs that program now. By the middle of the past decade, Boeing was confronting its lack of a new mid-market airplane (known in-house as the NMA). This category of jetliner carries around 250 passengers over distances of 4,000 to 5,000 miles. Mid-market is the only segment of the commercial-jet business expected to see strong demand in the near future, making the category critical to Boeing and rival Airbus. “Boeing likely needs two clean-sheet airplanes this decade,” says Richard Aboulafia of consulting firm Teal Group.
In 2016, however, then-CEO Dennis Muilenburg pledged to double Boeing’s profit margins to the mid-teens, a goal that made plane development that much more challenging. Punting on the decision to begin designing an NMA became an annual tradition for Boeing leadership.
Boeing’s indecision has given Airbus room to dominate the market. Given its problems with the Max, analysts and consultants agree that the earliest Boeing can start an NMA project is 2021. Even on that timetable, Boeing “will have lost market share to the A321XLR and maybe the A330neo,” two new Airbus models, says Ron Epstein, an aerospace analyst for Bank of America Merrill Lynch. “Some of it is fait accompli,” he adds. “The XLR is here—that’s [lost] market share” for Boeing.
“The decisions Boeing makes in the next five years will define the business for the next 25 years,” says Herbert, the Canaccord analyst. “They need to embrace an engineering culture; they need to embrace what worked for the company’s first 85 years.” Herbert points to Boeing’s unprecedented run of creativity in the late 1950s and ’60s, when it launched the 707, 727, 737, and 747.
But the fallout from the Max crisis may well push Boeing in the opposite direction. Costs related to the Max have topped $9 billion and could easily double. To shore up its balance sheet Boeing is reportedly considering borrowing money to pay shareholder dividends—and cutting R&D spending. Those are steps in the wrong direction, says Epstein. The only way forward is to put investors’ short-term interests on hold, he argues: “If you don’t do that—if you cut R&D, cost-cut, give cash to shareholders—then you’re playing with Boeing’s future.”
Real Money
204%: Increase in Boeing’s stock price since Feb. 11, 2016
$43.4 billion: Amount spent by Boeing on shareholder buybacks since 2013
$9 Billion: Current estimated cost to Boeing of the 737 max crisis, in lost orders, cost overruns, and production shutdowns
(Source: Company and analyst estimates)
A version of this article appears in the February 2020 issue of Fortune with the headline “Boeing’s Long Descent.”
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