CULTURE IN CRISIS
Boeing’s Cost-Cutting Addiction Squeezed Every Dollar Out 737 Until Disaster Struck
How did the company that birthed the Jet Age with the innovative 747 fall so far?
The calamity of two successive crashes of Boeing’s latest jet, the 737 MAX-8 has left the company facing the most serious scrutiny it has ever faced, including a potential criminal investigation by the Department of Transportation.
The crashes killed 346 people, men women and children, and appear to have had a common cause: a rogue control system that took over from the pilots and sent the airplanes into a terrifying death dive.
In its reputational consequences for Boeing this could be the equal of the Deepwater Horizon disaster for BP and the diesel emissions scandal for Volkswagen.
And Boeing’s reputation is no small thing. It is one of America’s most consequential companies: In the space of little more than a decade in the late 1940s and early 1950s Boeing laid most of the groundwork for the Jet Age, the single greatest transformation in human mobility.
I have been covering Boeing closely for nearly 30 years. This began when I wrote a book about the creation of the 747 that also involved researching the long prologue of how Boeing pioneered the science of high-speed commercial flight.
I interviewed a score or more of Boeing engineers, most of them retired, who through their endeavor had created a company culture that was fully alert to the risks involved in their learning curve.
Their first commercial jet, the 707, was twice as fast as the propeller-driven models that preceded it and airline pilots sometimes found it challenging to fly. In the first three years of its life 19 pilots were killed in 707 training flight crashes.
The rate of fatal crashes involving passengers was shockingly high. The most serious early one was when 130 people died in a crash at Orly Airport in Paris in 1962—the highest number of fatalities in any air disaster at that time.
For the next decade hundreds died every year in 707 crashes, a rate that would be intolerable now but was then considered the inevitable price of a technology that was still being mastered. Crashes were frequently a result of a sequence of failures of not just the airplane but the relatively primitive air traffic control infrastructure and poor understanding of the role of weather.
That was why in 1966, when Boeing began planning the 747, the engineers understood that they would be putting well over double the number of people carried in a 707 at risk in a single airplane.
Joe Sutter, the chief engineer in charge of the 747, made his priority very clear on the first page of his outline of the airplane: “Safety is the prime design objective of the 747 Design Program; it shall be given first priority in all design decisions. The designer shall insure attainment of this safety objective.”
The still unfolding story of the design process behind the 737 MAX-8 has highlighted how the Federal Aviation Administration has ceded oversight to Boeing of the process to certify the airplane as safe—a custom that has apparently long been in place at Boeing.
But the process of certifying the 747 shows another side to that relationship. Many features of the 747 were new. Some of the most critical were due to its size. For example, there was the issue of how more than 400 passengers could be evacuated in an emergency within 90 seconds, the goal set by the FAA.
Sutter’s designers solved this by creating exit doors that were double the width of those on the 707, and by creating the first double-aisle cabin to speed exit.
As they worked with Boeing the FAA inspectors were looking at hundreds of technical innovations they had never seen before. The only way they could certify that none of these would put the airplane at risk was to create new certification standards around them and then test them and, if they passed, to promulgate those standards as the ones to be met in the future—by all airplane designers.
There was never any suggestion that this process was unhealthily incestuous and was covering a bias in favor of Boeing. With the kind of quantum leap in design that the 747 represented it was the only way to refine the science of aviation safety.
Sutter’s goals were met and the 747 was followed by a series of other new Boeing jets that led to new levels in safety as millions more passengers took to the air.
The most striking measure of that change is to look at the global numbers to see ratio of deaths to flights. In the 1990s it was one death per 600,000 flights. In 2018 it was one death for every 4.6 million flights. That’s about 100 times safer than at the start of the Jet Age in the 1950s.
As I got to know those men I was inevitably drawn into the magic of the Boeing legend. In those days the corporate headquarters sat alongside Boeing Field in Seattle where every new jet was flight-tested. It was a modest 1930s building without any ostentatious corporate feel. None of the people who established the legend got rich doing it.
They were not stereotypical. Fast risers were to sent to MIT for a year of advanced training. A professor told one of them: “You send somebody here and they’re always good. That’s not unusual. IBM sends good people every year, General Motors, Eastman Kodak. But if you’ve seen one IBM guy you’ve seen them all. The Boeing company hasn’t sent two alike here yet.”
On later visits to Seattle I always kept in touch with veterans of that group. There were grumblings that the company was changing. There was less tolerance of mavericks, more pressure to conform.
This unrest came to a head in 1997 when Boeing merged with McDonnell Douglas. In its race to industry supremacy Boeing had seen off its oldest competitor, the Douglas Airplane Company and its other main domestic rival, Lockheed, had pulled out of commercial airplanes.
The old hands complained that in terms of company culture McDonnell Douglas had taken over Boeing. That complaint was further stoked in 2001 when Boeing moved its corporate headquarters to Chicago.
And, in reality, it wasn’t the same company anymore because it could not be if it was to survive: Boeing was now an international aerospace goliath, employing 140,000 people. The commercial airplane division had become just another part of a conglomerate that was making billions as a defense contractor with widely dispersed plants. Chicago was a more logical place to manage them from.
The changes were palpable in Seattle. For me, Boeing’s originating genius was part of a semi-mystical quality related to place. Alongside Boeing Field the Boeing executives could smell the burned kerosene in the air as they watched the prototypes come and go; there was a tired after-hours joint called Joyce’s Final Approach where they went to chew over the challenges of the day.
By the 1990s the new Boeing had a serious competitor. The Europeans had pooled their best brains and resources to create Airbus. Almost before Boeing realized what was happening, Airbus had gatecrashed a lucrative market that Boeing thought it owned with the 737 for the basic airline workhorse, the single-aisle jet.
Airbus introduced the first of a family new single-aisle jets, the A320, in the 1980s and within a decade, for the first time, this airplane had established Airbus’s reputation with scores of airlines who previously would have turned to Boeing. Essentially, there was now a global duopoly of two equally regarded contenders.
And this is where the origin of the MAX-8 crisis can be found, in the way that Boeing responded to the A320.
Once the new form of Boeing was settled after the merger with McDonnell Douglas priority was given to meeting the challenge of the A320. That meant a reappraisal of the 737.
The 737’s origin story is extraordinary. It very nearly didn’t happen. In the mid-1960s its proponent, a brilliant and swaggering engineer named Jack Steiner, pushed for it against the judgment of the company’s long-time boss, William Allen, who thought the company’s resources were overstretched already with the 747. Steiner went behind Allen’s back and lobbied the board, winning their consent.
Allen’s resistance seemed justified when no U.S. airline was interested in buying the 737. Steiner managed to sell 22 of them to the German airline Lufthansa, but the first iteration of the 737 was a dog. The Germans complained that it fell so far short of promised performance that they had been conned by Boeing salesmen.
Then, when the company was deep in financial trouble caused by the escalating costs of the 747, Steiner pursued the idea of selling the whole 737 program, including the plant, to the Japanese.
That never happened. But by 1981 Boeing fixed the 737’s shortcomings by giving it new engines. One more man was needed to see the airplane’s true potential: a lawyer named Herb Kelleher.
In 1971 Kelleher launched a small airline with a radical new business model, Southwest. Kelleher set out to build his airline around one airplane, the 737, fly as many as seven flights a day with every airplane, and sell seats at a price lower than any competitor could match.
So was born the model for the budget airline and the 737 proved with its robustness and utility to be the ideal size for the intercity domestic routes that Southwest slowly came to dominate.
The ugly duckling became the goose that laid the golden egg: airlines around the world followed the Southwest model and the 737 became by far the fastest-selling airplane in Boeing’s history.
However, the A320 had leapt ahead of the 737 by introducing state-of-the-art cockpit technology including “fly-by-wire” controls first developed for military aviation.
Boeing’s post-merger reappraisal of the 737 considered creating an all-new 737 that would not only match the A320 but be more adaptable to upgrades as engine technology—the great driver of improvements in efficiency— advanced.
Instead, they opted for a compromise, called the 737 NG (New Generation) that was launched in 1997. The NG had larger and more efficient new wings and tail surfaces, some new avionics and an engine upgrade—but retained the 1960s fuselage that, as it would turn out, greatly inhibited how much the 737 series could continue to be competitive against the A320.
Those drawbacks didn’t seem to matter: sales of the 737 broke through the 10,000 level, a number unimaginable when the airplane was created. In 2011, when another upgrade was needed to exploit a significant advance in engines, the decision was, again, to postpone a completely new design and—in what would obviously be the final push of the 737’s capabilities—create the MAX version by fitting the new engines to the existing airframe.
The accountants called this “fully monetizing” a product of which large parts were more than 50 years old. Some of the Boeing old-timers shook their heads and lamented that this hybrid of several generations of technology would, inevitably, be compared unfavorably to the A320. But the accountants were vindicated. Orders for the MAX series topped 5,000 and the production rate was pumped up to 52 per month—unprecedented.
Now the new jets coming from the Seattle plant are being parked rather than delivered until the grounding ends, a grounding caused by two fatal crashes in five months that involve questions about the way the new engines have changed the airplane’s flight characteristics.
To be sure, laments about the compromises made to hitch an old airplane to new engines were never based on fears that safety would suffer. The NG series had as good a safety record as any airplane and there seemed no reason to suspect that the MAX would reverse that trend.
Nonetheless a Boeing veteran told me that whatever refinements were made to the 737’s design it was bound to be suboptimal because of its age. He also believed that by going on producing an airplane that would soon prove obsolescent Boeing had sacrificed long-term command of the market for short-term profits.
“They have lost touch with customers’ requirements,” he said, “and the need to lead the future of airplane design, and of air transport in general. The MAX will get fixed and go on to be a good jet but not a great one, as it could have been had Chicago not screwed up and shut down the alternatives being considered.”
In fact, it has been notable from the onset of the MAX-8 crisis that the CEO of the Boeing commercial division, Kevin McAllister, based in Seattle, has been invisible. The corporate response has been directed by Boeing’s president, chairman and CEO, Dennis Muilenburg, from Chicago.
Until now Muilenburg had been good for Boeing stockholders. Under his leadership shares had risen by 157 percent by the end of 2018 and produced a 20 percent increase in its dividend. (As of this week Boeing stock has fallen by 10 percent, wiping an astounding $23 billion off the value of the company.)
Muilenburg has pushed hard on two policies aimed at making Boeing even more profitable. The first was a rigorous program of continuous cost-cutting and, at the same time, of finding new ways of making money—which included making some cockpit equipment on the MAX-8 optional extras that, it now transpires, should have been standard for safety reasons.
The second was to follow auto industry practice in recognizing that car dealers make as much on servicing cars as they do selling them and seize back after-sales service for Boeing from a diversity of companies now providing it. Muilenburg believes this business could be worth $50 billion a year by the mid 2020s.
Boeing’s first response to the Lion Air crash was reactive, defensive and had the feel of being heavily lawyered. They pushed responsibility to the pilots, arguing that even if they were unaware of the presence of the new MCAS system they should have recognized a similar problem known as “runaway stabilizer” and by resorting to standard instructions for handling that would have recovered control of the airplane.
They persisted in this strategy. Although together with the FAA they were planning a new software patch and other changes there was no transparency about the process, since it was axiomatic that if something needed fixing it was an admission that it was not working.
After the Ethiopian disaster two weeks ago that defense collapsed. Every day Boeing is taking a beating in the media with continuing revelations about the problems of the MAX-8. Muilenburg issued a carefully scripted statement of contrition—but it also sounded wounded: “I spent time with our team members at our 737 production facility… and once again saw firsthand the pride our people feel in their work and the pain we are all experiencing…”
As he always does Muilenburg signed off with his usual colloquial signature, “DENNIS.”
Analysts have calculated that airlines are losing $75,000 a day on each MAX-8 while grounded. If the grounding lasts 90 days the cost to Boeing would be $2.5 billion. But some things can’t be measured in money. The financial penalty is bad enough, but the cost to Boeing’s reputation is incalculable. That sound I hear must be the hum of some great Boeing engineers spinning in their graves.