We should be worried about Boeing. Not only because of its serial underperformance as a corporate and the impact this has on its ability to offer a critical service to the global economy — manufacturing passenger jets. But because so many of us use its products while 35,000 feet up in the air.
Anyone who has read the horrifying stories of the crashes in 2018 and 2019, and seen the photos of the Alaska Airlines 737 Max 9 this month with a giant hole in its fuselage, is all too aware of what the consequences of this corporate failure are for our safety.
What exactly happened to Boeing?
The problems of Boeing became first apparent in late 2018 and early 2019, when two 737 Max 8 jets crashed killing a combined 346 people. The Max 8 was the biggest crisis in Boeing’s history. Investigations following the crashes revealed the company had concealed design flaws in flight control software from pilots and regulators in a race to get the aircraft certified.
Then, this month, the supposedly safer Max 9 version operated by Alaska Airlines lost a chunk of its fuselage mid-flight, causing a catastrophic cabin depressurisation. Incredibly fortuitously, no one died — however countless objects were sucked out and fell 16 000 feet, including an iPhone which was remarkably still operating when it hit the ground.
Read more in Daily Maverick: Boeing needs to get real: the 737 Max should probably be scrapped
What is the Max?
The Max is the updated version of Boeing’s best-seller, the 737 which for decades was the workhorse of short-haul air travel. The US plane maker launched the model in a rush to catch up with European arch-rival Airbus whose new, more fuel-efficient A320neo was snaring orders. In its haste to get the aircraft certified and launched by 2017, Boeing cut corners, leading to the accidents.
Therein lies why this happened. According to Peter Robinson, the author of Flying Blind: The 737 Max Tragedy and the Fall of Boeing, the roots of this crisis can be traced back to the decisions of management from the early 2000s. CEO James McNerney, an ex-General Electric executive and Harvard MBA brought in the tenets of maximising shareholder returns as practised by the then doyenne of management, Jack Welch.
Management’s remuneration was, of course, overwhelmingly based on quarterly share price performance, ensuring that the incentives of management were directly opposed to what was in the long-term best interest of the company (and the passengers in its aircraft).
Out went the obsession with quality and engineering, replaced by a focus on cost-cutting and maximising share price returns. Management for free cash flow and returning that cash to shareholders was the mantra. From the priority being building excellent and safe aeroplanes, the primary focus of the company became raising the dividend and buying back shares.
Between 2016 and 2019 Boeing spent $40-billion on share buybacks for investors, money which would otherwise have been invested into capex, ensuring safer aeroplanes.
The comparison with Airbus is insightful. In European corporate culture, with European shareholders, management did not feel under the same pressure at all. The focus continued to be on building the best and safest planes possible. As might be expected, when McNerney stepped down Boeing had 60% of the single-aisle market with the 737, and Airbus had 40% with the A320. Now that market share has reversed, with Airbus by far the dominant and more respected company.
Where to from here for Boeing?
With $40-billion of debt on its balance sheet, and with Chinese passenger jet manufacturer Comac in its rear view mirror with its single-aisle plane the C919, the future of Boeing is highly uncertain. Can it be turned around? Openly analysts are debating whether nationalisation, a previously unthinkable outcome for an American corporate champion, is inevitable.
But there are broader questions. Where did capitalism go so wrong? Boeing is simply indicative — sadly these same incentives are prevalent across US corporates and indeed the world. SA companies are no different; several JSE-listed businesses have been accused of counterproductive management incentives (notably Pick n Pay, whose abysmal long-term performance is at least partly the result of dividend payments to the Ackerman family shareholders, at the expense of investment into the company).
Perhaps managers and investors should look towards Europe where such practices are far from the norm. Capitalism should not be about juicing the short-term share performance, but rather investment for long-term growth. This ultimately benefits management, employees and the broader economy.
Once again, Airbus is instructive. Even before the most recent Max 9 disaster, the share price of Airbus has for years outperformed its American rival. Over five years, Boeing’s share price has almost halved while Airbus is up almost 60%.
The consequences of the paradox within shareholder capitalism are clear. When incentives for management are so skewed, in the long run, everyone loses. DM