The Rise and Fall of Boeing

Creating a Catastrophe

Author

Arman Madani
February 8th, 2024

The 737-Max incidents that have haunted Boeing the last 5 years are jarring. Not least because they highlight fundamental design flaws from a company known for its engineering culture (see, the B-52 program). But to really understand the $20B worth of flaws in just over a decade of the 737-Max’s existence, we need to understand how Boeing has morphed over a century. How have antitrust policies, politics, and corporate culture morphed over time to lead us here?  

Constructing a Colossus

Boeing was founded in 1916 by William Boeing. At first, they started out by manufacturing smaller aircraft out of an old ship yard. They were pivotal in pioneering aircrafts into what we know today for mail, military, and civilian use. 

A 1920s map of Seattle with images of William Boeing and Boeing Plant No. 1 highlighted. Maps courtesy of https://www.davidrumsey.com/

A 1920s map of Seattle with images of William Boeing and Boeing Plant No. 1 highlighted. Maps courtesy of https://www.davidrumsey.com/

The Boeing we know today was originally born out of antitrust action in 1934 that broke up aeronautical corporations. The government wanted to prohibit one company from basically vertically integrating the entire aviation industry — they’d be too powerful. So they made 3 companies: Boeing, United Airlines, and United Technologies (now part of Raytheon). One to design and manufacture aircraft, one to operate an airline, and a third to do research and development on aviation technology. So the company we know today as Boeing was born here.

Boeing’s acquisitions prior to 1934 (The US Postal Service didn’t like negotiating contracts with a vertically integrated corporation). Design by https://youtube.com/@theArmanMadani 

Boeing’s first president post-break up was Clairmont L. Egvedt, a chief engineer and aircraft designer. Boeing was known for heading the company with engineers and aircraft designers — basically people who knew about the intricacies of building an aircraft. 

Their follow ups to the B-52 program and entry into commercial aviation aren’t too shabby. The 707 program was the first commercial jet airliner delivered in 1958 and flew through 1983 in the US. The 737 program has run for 60 years, raking in a whopping 17,000 orders in its lifetime but was considered a massive risk that Boeing executives were “betting the company on”. The engineering culture and calculated risk in a Cold War environment fueled the company’s rise to a dominant position in the market. Critically, the success validated the approach of putting the engineers in charge.

But by the time the 1970s rolled around, attitudes had changed regarding what the airline industry would like like in the new century.

Deregulation

In 1978, Congress passed the bipartisan Airline Deregulation Act — an act that prohibits states from regulating prices or service provided by airlines and disbanded the US Civil Aeronautics Board.  

Congressional votes for the Airline Deregulation Act of 1978 *it wasn’t close

Airlines adopt a hub-and-spoke model where a few hubs like New York, Chicago, or Atlanta as hubs that connect smaller markets (the spokes). This maximizes load on any individual aircraft (because you’re carrying people going to the hub and people connecting) but requires fewer aircraft for any individual carrier. But the act also allows smaller, low fare, and regional airlines to grow, increasing the aggregate demand for large aircraft. The act also established the Essential Air Service which subsidizes flights from smaller communities (roughly $300M / year) which Boeing indirectly benefits from. For example a flight from Wichita to Boise is almost certainly not profitable to maintain while a flight from San Francisco to New York is. These subsidies and regulations are mostly aimed at airports and airlines but are boons for Boeing as they prop up aircraft demand. But there’s direct help as well.

Delta’s Hub-and-Spoke model starting in 1980. Courtesy of Smithsonian National Air And Space Museum https://airandspace.si.edu/stories/editorial/airline-deregulation-when-everything-changed 

The Clinton administration blesses and protects a merger between Boeing’s only other American competitor, McDonnell-Douglas. Leaving only the French Airbus as a competitor, but the government only buys American so the contracts Boeing wins from the government starts to balloon.

According to Boeing’s 2022 10-K, 40% of Boeing’s total revenue comes directly via the Department of Defense. It began heavy lobbying to remain the incumbent aircraft manufacturer ($288M since 1998). The FAA even lets the company regulate its own planes starting in 2009 (“self-regulation”).

Shareholder Value

Boeing’s executives changed after the McDonnell-Douglas merger. The new executives are more professional manager types as opposed to draftsmen or aircraft designers as before. The priorities seemed to shift to focusing on winning contracts and returning shareholder value. Boeing was a leader in dividend and stock buyback outlays until the 2 Max crashes of 2019: 

Dips in shares outstanding corresponding to stock buybacks. 1998– 2019. 

So there’s a duo of incentive problems: (1) you lacking any domestic competition in commercial aviation and (2) incentivized to think on a quarterly basis.

The company also began looking to “risk sharing partners” (as far as I can tell, this just means outsourcing) and cut costs. For example, aircraft design was outsourced to a design center in Moscow until the 2022 invasion of Ukraine and software engineering for the Max was outsourced to Indian firms where engineers were reportedly paid $9 an hour . This practice has somewhat presciently been maligned by internal Boeing engineers — not least because wages for American labor have stagnated: 

Essay circulated on September 8th, 2003. via https://www.airliners.net/forum/viewtopic.php?t=213075

Conclusions

It’s a pattern of complacency, profit seeking, and corruption that kicks off the catastrophes for Boeing. The Max is emblematic of a colossus turning into a corporation, which in turn becomes corrupted by government guarantees and greed.

So the Boeing story isn’t about one company’s momentary mishap but rather a series of cautionary tales spanning decades. A cautionary tale of how even a one-time bastion of American engineering can spiral in the face of greed. A cautionary tale of how governments can — perhaps willfully — fly blind for decades. A cautionary tale of what happens when a private entity is devoid of accountability. And a cautionary tale of how catastrophes are constructed bolt-by-bolt.

Sources: 

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