Boeing: an aerospace juggernaut caught in turbulent times

Amid the focus on arguably the biggest election in a year of elections, another vote was being closely monitored. It was on a proposal by Boeing, the world’s largest aerospace company. The firm was aiming to end a six-week strike by its workers, offering them a 38% raise over four years. Fortunately for Boeing and its newly appointed CEO Kelly Ortberg, 59% voted in favour. The strike’s conclusion was the first step to rebuild Boeing’s brand and restore its reputation.

As a leading manufacturing exporter in the US and due to its strong relationship with its government, Boeing has long been a symbol of American capitalism. As the US aims to rework supply chains following pandemic-era disruptions to them, Boeing’s troubles pose a sizable threat.

Globally, its planes are used in over 150 countries. This worldwide network makes its influence even more widespread. You may think that the incident that kickstarted this tumultuous period was the door blowout on a Boeing 737 MAX plane in January. You would be wrong. Closer analysis suggests the problems at Boeing have been brewing for a long time.

What’s gone wrong?

Harry Stonecipher, an ex-CEO of Boeing, once said: “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.”

The change from an engineering firm to a business run by executives in boardrooms is highly visible when you consider that Boeing’s last design created from scratch was the 787 Dreamliner, launched in 2004 with its first flight in 2009. This program was estimated to cost $5.5 billion but ended up costing a whopping $32 billion.

As part of the development, 70% of the design, engineering, and manufacturing was outsourced to over 50 strategic partners, who in turn outsourced to various suppliers. This model is similar to Toyota’s. However, the Japanese manufacturer was able to cultivate a close relationship with their suppliers to ensure quality control – something Boeing failed to achieve.

Boeing used to be synonymous with engineering perfectionism, but it lost this title a while ago. One of its most popular models, the 737 MAX, was involved in two crashes in 2018 and 2019, killing 346 passengers. Subsequently, a door fell mid-flight from a 737 MAX aircraft this January. Following this incident, Boeing was once again subject to investigation by the US civil aviation regulator – the FAA. The FAA temporarily grounded the 737 MAX. This came after the aircraft had previously been grounded for nearly two years after the crashes in 2018 and 2019.

The 737 MAX was subsequently cleared to fly with some restrictions, but Boeing is prohibited from expanding the production of the model. The January crash has led the Department of Justice to open criminal investigations into Boeing. The company only recently pled guilty to criminal charges for the crashes in 2018 and 2019. Despite the numerous audits and fines imposed on the company, the many safety-related incidents show that Boeing’s path back to engineering excellence will be a long one.

Considering these incidents as well as the large amount of debt the company has racked up, the workers’ strike could not have come at a worse time. The strike cost the firm around $2.7 billion according to the Financial Times and despite the resolution, wage and pension hikes will cause significant financial stress. The workers were insisting on a defined benefit (DB) pension plan to replace Boeing’s less generous contribution-based 401K. The DB plan was abolished in 2014 and, if restored, could result in a $400 million increase in costs. With the current position that Boeing finds itself in, this would be far from ideal. The company has around $57 billion in debt, with $4.3 billion due in 2025. According to Jefferies, an investment bank, the total cost of wage hikes will be $1.1 billion over the next four years.  In late October, Boeing clinched one of the biggest stock sales of all time, at $21 billion, to avoid its credit rating being downgraded to junk. A junk rating would increase its borrowing costs significantly. Whether this move will prevent a drop in the ratings is something only time will tell.

The way forward

In a bid to regain its manufacturing expertise and become more connected to workers on the ground, Boeing appointed Ortberg as its CEO in August. Ortberg has 35 years of aerospace experience and is an executive with an engineering background, having had roles at companies such as Rockwell Collins and United Tech. In his address at the Q3 earnings call, he emphasised the importance of culture and also stated his plans to settle in Seattle to be closer to ground-level employees.

Despite its struggles, Boeing remains one of the two major players in aerospace alongside Airbus and has a $500 billion order backlog, indicative of rampant demand. Moreover, the capital-intensive nature of the field and its reliance on R&D acts as a barrier to entry, protecting Boeing from competition. Additionally, airlines have been faring well this year due to falling fuel prices, increased passenger flows, and automation. This is a good sign for Boeing too.

With its record equity raise, 38% wage hike proposal, appointment of Kelly Ortberg, and renewed focus on Seattle, Boeing seems to have finally acknowledged what its critics have been saying for a while. Looking at the nature of business in which developments and changes require large amounts of money and time to be invested, one of USA’s fallen angels must play the long game to achieve a semblance of what it used to be in its glory days.