The Moment That Boeing's Culture Started To Rot

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1:27Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, this might seem like the most obvious statement in the world, but I'm really worried about Boeing. And I don't mean like flying on one per se. Oh, really? Well, I mean, that's kind of what I would be worried about. But I feel like I need to do a disclaimer before we do this episode, which is that I have a massive soft spot for Boeing. I think a lot of Americans actually maybe still do. My dad flew B-52s and then he flew 737s for Southwest for a long time. I've been in a 737 simulator with him.

2:07I covered airlines, not really aerospace, but airlines for a while. And so I feel like my life has to some extent been a little bit entwined with Boeing. A large part of my inheritance, if I get it, is Southwest stock, which I think still kind of correlates with Boeing given that their fleet is all 737s. So there's my disclaimer. That is a very good and thorough disclaimer. No, like, so when I say like I'm worried about Boeing, I mean, I guess as someone who flies. As a passenger. As a passenger occasionally. You know, Boeing is one of the most important manufacturers in the world, certainly to the U.S.

2:45economy. Commercial aviation is one of the areas in which the U.S., Boeing is still a dominant leader. It's not one of these spaces that's like lost its, you know, crown in one way or another to China, the way we've seen in other industrial sectors. And, you know, as a society, it feels like policy-wise, we want to reinvigorate American manufacturing. We know about the importance of complexity, which is something that we talk about a lot on this show. Probably, you know, a Boeing plane. These are among the most complex manufactured products in the world. And so if the preeminent maker of planes in America is having perpetual trouble making planes, that worries me about the country.

3:24So there's two things here. I think there's two ways of sort of thinking about what the Boeing story or at this point, the downfall of Boeing really says about the economy. And I say downfall because while it's true, it hasn't been superseded by a Chinese manufacturer. It has lost a huge amount of market share to Airbus, its main competitor. So two things. So one, absolutely indicative of, I guess, the path of American manufacturing or industrial capacity within the U.S. But I also think it says a lot about the structure of the economy and the wider incentives at play. And you think about, you know, concentration of corporate power.

4:07Boeing and Airbus are so emblematic of this. You basically have a duopoly or you had for many years. And now we're kind of moving, I guess, to a monopoly as Airbus, you know, sells even more planes. But it's interesting to me, both from a manufacturing perspective and also from an incentive perspective, like what are the decisions? What is the system in place that leads to an outcome where you have one or two extremely dominant manufacturers of something that's really important? Totally. And then, of course, you know, just sort of dovetailing on what you said, like there's all these questions about sort of financial capitalism versus industrial capitalism.

4:45And whether, you know, is this an area in which desire to boost the stock price through one way or another by increasing the dividend, allocating more to shareholders rather than reinvesting in safety, et cetera, like that, whether that was the impulse or whether that was a driver of the troubles that we've seen at Boeing, like huge. I just think like core questions for us and, you know, the U.S. economy. Boeing is sort of an expression at this point of some of the thorniest issues. facing the U.S. economy, it feels like. It kind of encapsulates all of them. So we really have to do a Boeing episode, probably more than one, but we got to start.

5:24So I'm really excited to say we literally do have the perfect guest today. We are going to be speaking with Peter Robinson. He is the author of Flying Blind, The 737 Max Tragedy, and The Fall of Boeing. It was a New York Times bestseller. He's also our colleague, and he's an investigative journalist here at Bloomberg. So Peter, thank you so much for coming on Odd Lots. Thank you for having me. There's so many different ways we could begin this and Boeing touches on so many things. But where does the story begin in your view or in your book, literally? Like when you think about the Boeing saga, where does the story begin?

6:01Well, it really reflects some of the things that Tracy was saying, because this is a company where just about everyone that I meet has an incredible amount of pride. in the product they got into the industry because they wanted to build things that fly they wanted to affect the future they wanted their work to have meaning and i started covering this company in the late 1990s so i have a lot of history following it uh what what i noticed again and again was that the these workers uh seemed let down by management they seemed let down by management who weren't investing for the future who were pushing for free cash flow over investment in new products.

6:38And what we've seen increasingly over the last few years is the fallout of those really management allocation decisions that are being shown to be deeply flawed. So we should probably talk about why we're doing this episode right now. Yeah, we kind of forgot in the intro. I guess it's a testament to just how many problems Boeing has had at this point with its new MAX 9 model. It's just been like, I guess, years and years of problems at this point. But Pete, why don't you explain what has happened recently? What's the latest fiasco in the history of this relatively new aircraft introduced by Boeing?

7:17This is an almost brand new aircraft. The MAX 9 is the latest version of, I believe, the fourth version of the 737, which dates back to 1967. The world's most popular aircraft for a time, right? For a time, yeah, and best-selling narrow-body plane of all time, more recently superseded by Airbus. But I'm sure people have seen the terrifying cell phone videos of a portion of the plane being ripped off and the plane landing with a gaping hole in its side, which Boeing CEO Dave Calhoun said was our mistake. And the leading theory is that it was due to perhaps shoddy workmanship at either Boeing or its leading supplier, which used to be part of Boeing until an outsourcing strategy, which was partly designed to raise free cash flow, led Boeing to sell that supplier.

8:11Huh. So, of course, now, you know, just again, zooming out, obviously, January 5th, we saw we've seen the cell phone videos of the door flying off and sort of miraculously nobody died. The plane was able to make an emergency landing. But, of course, the story in many people's minds begins in 2018 with the two crashes, one in late 2018, one in early 2019 with the 737 Max. What is the 737 MAX? Actually, when there is a 737 MAX 8 or a 737 MAX 9, what is this product? It is a roughly 150 to 180 seat airplane that is designed to be the most cost-effective A to B device in the skies. The 737 is designed for quick turnaround, short haul flights.

9:02It's meant to be extremely reliable and cost-effective for the airlines. And so a lot of low-cost airlines like Southwest fly the 737. And the MAX, as you mentioned, in 2018, the MAX 8 had just been introduced. And in the space of five months, had two crashes that were found to be due to a flight control system that had been implemented without telling the pilots it was there and pushed the nose of the plane into the ground without them being able to control it. So I realize it's early days on the most recent incident with the Alaska airline plane and the door kind of blowing out. But what do we know so far about that particular situation?

9:46And I guess what's the significance of the difference of something happening with, say, you know, bolts not being drilled correctly versus a problem in the flight control, I guess, essentially software of previous crashes? In some ways, this could be seen as a potentially as a simpler problem than the problem with the flight control software, because that was the flight control software was a design issue that required extensive reworking of the software and retraining of the pilots. In this case, it seems that someone didn't do their job and there wasn't potentially a second set of eyes on the work that was done.

10:26So what happened was that a portion of the plane that would have looked like a window to passengers was actually behind the wall, an emergency exit. And there was a plug door put over that part of the plane. And that plug door, as the plane reached 16 ,000 feet, escaped the plane and the hole opened. And the theory is that there are just four bolts that attach this plug door to the plane. And either they were not fastened properly, or they simply weren't installed at all. Escaped the plane is a very creative way of saying like catastrophic in-flight decompression, but there we go. Yes, it would have been, it was terrifying to people on the plane.

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12:35Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by ZeroHash. Complete disclosures available at public.com slash disclosures. The story that people tell, or is this idea, and you sort of already hinted at it, is like that at one point, Boeing had an engineering culture.

13:12And I'm sure there still isn't a very intense engineering culture, but that was really dominant. And then it became more of a financial culture or a shareholder-friendly culture. People were brought in and there was more focus on dividends, et cetera. And I get why people tell the story. But what actually happened? What was the culture of Boeing maybe during its best days? And then when did that begin to change in your view, in your telling of the story? I've talked to employees from pretty much every era, even back to the 1950s, people who worked at Boeing. And the early stage of Boeing is very much this, there's a saying at Boeing, we hire engineers and other people.

13:51It was very much focused on product. It was focused on customers. It was, you know, we'll have a service team. when a new airplane was introduced, there would be a service team waiting at every landing to see how the plane performed. Over time, as the company grew, especially as it became dominant, one train of thought is that complacency set in. Boeing at the time, by the 1980s, had more than 60 % of the market, and it did settle into essentially a duopoly with Airbus. The 777 in the 1990s was, many people have told me, was the high point of Boeing's design culture. One person called it Boeing's Camelot.

14:30What happened after that point was two things. Boeing purchased McDonnell Douglas, and McDonnell Douglas was the also-ran to Boeing's leader for much of the commercial jet age. That brought in McDonnell Douglas leaders who were trained more in the free cash flow approach to management, and especially one leader, Harry Stonecipher, who had been a disciple of Jack Welch. And it was very much raised the stock price, buybacks, not as much investing for the future. And if you recall, in the late 90s was also the time when Jack Welch was seen as the paragon of corporate culture. The cult of GE. This kind of leads into something I wanted to ask, but why did Boeing feel, this might be a weird question, but why did it feel financial pressure at all, given that it was the leader in aerospace manufacturing at that moment in time.

15:24It wasn't like anyone was really doing better than it, at least until, I guess, until Leahy came in as the Airbus CEO. That's an interesting question. They felt two kinds of pressure. They felt market pressure because Airbus came in and did have extensive state support and built what was considered a very, very, very good airplane, the A320, which had fly-by-wire technology and electric sensors that Boeing's 737 didn't have. It was a more analog plane that was using cables and pulleys to connect to the flight surfaces. So there was some real competition from the point of view of the product. And there was always the comparison.

16:03Boeing would be compared to other industrial companies, and the comparison company for Boeing was General Electric. And so Phil Condit, the CEO in the late 90s and early 2000s, would be compared quite critically by Wall Street analysts to Jack Welch. Why aren't you raising the cash flow like he is? Why aren't you raising the dividend? It's so crazy to me that people made that comparison when it's like GE making, I mean, not exclusively, but consumer appliances versus a company designing planes. They did make engines, right? Yeah, they have a huge engine. That's fair. But still, there's a lot more, I guess, leeway when you have an industrial conglomerate maybe to experiment versus when you're making one thing.

16:43Completely agree. Okay, so they brought in McDonnell Douglas executives, some of whom, or at least one of whom was a Jack Welch accolite. Wall Street started comparing its margins to GE. And so, you know, the influence of Jack Welch thought all over the place. From the perspective of engineers within the company, what did they notice as this new breed brought in? Were there changes in what they were told to do? How did that manifest itself internally? That's a good question. They started feeling it in all sorts of ways. One good example is their employee evaluations. I saw one engineer's evaluation where the manager had noted ideas are measured in dollars or as the MAX was being developed, which was a time when Boeing did have cash, but instead was spending between about 2013 and 2018 about$40 billion.

17:42on buybacks, but the MAX, the engineers were noticing, was held to a tight budget, and they were told that any changes would have to buy their way onto the airplane, so that when one engineer proposed adding a check and balance of the flight controls that would have potentially noticed the issue with the flight control software that led to the crashes in 18 and 19, was told that no. You basically anticipated my question, But when you look at what happened in 2018 and 2019, can you just sort of tell the story, the sort of succinct version of the story about what was going on inside Boeing that they made this software change and apparently did not communicate well to pilots or to the airlines buying the planes that this change had been made?

18:32It became over time, it became a very compartmentalized organization, a lot of different silos. And there was one silo that was looking at the issues that were raised by the larger engines that were put on the plane. The larger engines, you know, potentially made the plane more prone to stall. So one group of engineers added this software that would push the nose down. And late in the process, there was a decision made to tie that software to a single sensor, the AOA gauge, which is prone to, you know, bird strikes is prone to various failures. Separately, there was a group at Boeing that were working with the FAA and pilots on the flight manual for the plane.

19:15And the flight manual showed that there were no changes to the flight control software. MCAS was not described. Late in the process, it was discovered that there were these certain conditions where the nose of the plane could be pushed down, but it did not appear in the flight control manual. So it was a miscommunication. And ultimately, what the Justice Department found is that a couple of Boeing's employees who learned about this change late should have told the FAA, should have brought in the FAA and had that included in the manual. How do you disaggregate, I guess, corporate short termism and the drive for profits and, you know, bureaucratic oversights that led to two massive tragedies?

19:59I think more than 300 people killed in both those crashes versus Boeing catering to what customers were asking for. Because I remember in sort of the mid 2010s, you know, oil prices were going up. the refrain in the aerospace industry was always make the planes more efficient more efficient more efficient and the larger engine sizes that were you know located closer to the front of the aircraft that eventually had to be offset with the new flight control system mcas it was a result partially of trying to make the plane burn less fuel and i guess to some extent give the airlines what they were asking for.

20:41Yeah, it's, I mean, it is a, it's an industry that's under tremendous cost pressure. In this case, as Boeing said itself, it was a few lines of code. It didn't, it wouldn't have costed anything to do the job correctly. But as you're saying, it is partly pressure from customers that's driving this. And it was, you know, in some ways, Southwest's desire to keep the plane similar to previous versions that led to some of the cost pressures. How do you balance the drive for continuous improvement and efficiency with the dangers of over-engineering or creating these kind of problems? You know, the simple is always better.

21:20And in some cases, Boeing's management lines became awfully confused. In the case of the MAX, the engineering team was reporting to a business unit manager, and it was the business unit manager who was making these decisions. There was a, they called it a countdown clock that was put up near that person's desk so the engineers could see, you know, exactly how much time there was left. Maybe, you know, Tracy's question makes me think about this question in another way, but there's complexity and there's sort of these weird business lines of reporting, as you've just mentioned, versus, again, the sort of shareholder capitalism and buybacks and the lack of investment or the lack of reinvestment or internal investment.

22:04Like, how much of this story, setting aside uses of capital, how much is it a story of the company just becoming, as a corporation, internal and weirdly complex? And now I'm thinking, Tracy, about our episodes on software and that maxim, and we talked about it, that the software product itself becomes a reflection of the complexity within the organization. Yeah, but the irony was that, like, the A320 is the more complex aircraft. Well, that too, like, I'm also curious, like, why haven't some of these same issues bedeviled Airbus the same way? Yeah, that's the question I was going to ask. Like, why hasn't Airbus succumbed to the same financial incentives that have been Boeing's downfall?

22:45Or the complexity of a gigantic flying machine? I mean, I think, I mean, one difference is that it is, in Europe, it is not, to this point, it's not the same shareholder-driven culture. and consistently the capital expenditures have been higher at Airbus. We had some numbers on Bloomberg showing that over the last 10 years, Airbus's revenue has grown, Airbus's CapEx has grown, Boeing, the revenue has declined, and the CapEx has declined. So there's a more long-term management focus. I was told there isn't the same hire-and-fire mentality, that there are stricter work rules. So that you may not have the turnover, you know, of employees that you see in the United States.

23:36Should Boeing be nationalized? Some people would argue that Airbus, I mean, what you're alluding to is like Airbus is almost someone's going to get very, someone's going to get very mad. Right, right. We cannot say. But it's at least perceived, right? Yeah. To be more of a state. De facto nationalized, kind of. Please don't at me online. I believe there are big like WTO fights over this. Yes, yes. Yes, that's a good way of putting it. It's an interesting question. I've wondered that myself. I think you mentioned other countries coming into the market. China has an airplane that they've delivered one or two a year so far.

24:15It's probably not a viable competitor over 10 years. But if Boeing doesn't get its act together, you have to wonder if nationalization is a possibility. It's got$40 billion in debt. You can't imagine a future where the U.S. wouldn't want to maintain a viable commercial aircraft manufacturer. It's also so important for military aircraft. And in some ways, as you alluded to, it is state-supported already through the military and space contracts.

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27:07What happened after 2019? So I don't remember. I didn't follow it that closely. But, you know, I assume that after the crashes in 2019 and the flaws discovered with the software, et cetera, we're discovering, I imagine management, you know, went through a big thing. If we're changing, we're going to change the culture. We're going to focus. Safety is our number one priority. I'm just imagining. I don't I didn't see that, but I imagine they said things like safety is our number one priority. There were memos, Joe. Many memos about all that stuff. What did actually happen, though? Did the company change in any way after the second crash in 2019?

27:43Well, you've imagined the messaging exactly right. There were times in the mid-aughts when Boeing wouldn't mention the word safety in its annual report. But Dave Calhoun, taking over as CEO, mentioned safety was the number one priority many, many times. There was a safety committee created for the board. Boeing, shockingly, didn't even have a committee dedicated to safety until the MAX accidents. And I'm told that Dave Calhoun, you know, talked extensively to Mike Fleming, who was the exec in charge of the Max's return to service. I'm told that he talked to him regularly. And what you're seeing is that throughout the organization, the same problems are there.