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The demise of Boeing is a story about the failings of capitalism


Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

How did shareholder capitalism, supposedly the most successful way ever devised of managing an economy, lose its way? While there can be many explanations, the humbling of the once mighty US corporate titan Boeing is perhaps the most illustrative and insightful parable. It serves as a metaphor for the crises of capitalism itself.

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


Comments - Please in order to comment.

  • William Kelly says:

    Far too simplistic an analysis of a complex argument. Pinning this on capitalism is blatant nonsense as evidenced by the author himself in the comparison between airbus and boeing. If anything it’s the exact argument for advancement of capitalism in that the weak and poor quality get weeded out and the better product wins. At best this is simple click bait, at worst poorly informed.

    • JDW 2023 says:

      Not sure I can agree with your criticism. You haven’t even offered a reasoning for your argument for capitalism ensuring higher quality. And to say that this is ‘click bait’ tells me you woke up emotional this morning with a cold cup of coffee. I for one found this an interesting and informative article with serious relevance to where this fast-paced world finds itself. Thanks to the author and DM.

      • Enver Klein says:

        I have to agree with JDW.

      • Henry Coppens says:

        I agree with William, but the article is fine by me – just an interesting example of something gone wrong. However, if the author is trying to imply, to wit: the ‘crisis of capitalism’ and I hope not, “Look. Your so called great capitalism ideology does not always work – so look at others. Here is a case in point” , then one example of a company failure, albeit a big company, – among many, many successes, hardly makes the point. The big thing with capitalism is that it has and does create wealth. The wellbeing of the citizens of the west , Japan, others and soon to be other countries will attest/attests. Agreed, not always in the most ethical way, and there will always be upsets such a Boeing. But a lot of these are not capitalism’s fault. They are usually due to bad management, bad choices (even if in hindsight) etc. This is in stark contrast to what other ideologies, such as those that are tribally run or require state onwership of everything deliver (or don’t).

      • Amadeus Figaro says:

        Capitalism means that buyers will look at other aircraft makers.

    • Natale Labia says:

      The article is about shareholder capitalism aka Friedman doctrine.

      • MT Wessels says:

        Massive knee-jerk in the comments, protecting capitalism as an ideology and missing the point of good vs bad ways to practice capitalism in the long term interest of customers, shareholders and employees.

        John Maynard Keynes: “the decadent international but individualistic capitalism, in the hands of which we found ourselves … is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous — and it doesn’t deliver the goods. In short, we dislike it, and we are beginning to despise it.”

      • Amadeus Figaro says:

        I think this is just about the same problem that has been identified as the cause of most of the recent crises and scandals. Short termism, the curse of the quarterly reporting cycle etc. It’s not even perpetuated by shareholder capitalism but speculation industry of analysts, commentators etc. Long term shareholders will bring Boeing back to its path.

      • Amadeus Figaro says:

        Boeing’s problem in relation to Airbus could be simply that it has no owners who in terms of contagion would also carry the blame. With Airbus you know who condemn and demand answers from for failures at Airbus.

    • J Bailey says:

      I think you read Capitalism and then were blinded to the rest of the article William. The argument is more nuanced than that. The point is that Capitalism has been going down hill for a while now. Part of this is to do with a view that sees share holder return as more important than capital expenditure (i.e short term profits v long term gain), another part is neo liberalistv economics that mistakenly views State economics as a form of SME accountancy and finally a situation where Western governments have failed to provide the buttress against the injustices of the worst aspects of the Capitalist system in a bid to please voters by reducing taxes.
      The big question is how do we get back to a situation where our economic system serves the majority and, although I’m a social democrat in my inclinations, please read this as a question, not as advocating for any particular economic position.

    • Bob Dubery says:

      It depends on what we think Boeing is about. And what management thinks Boeing is about. For a while it was a very good investment. You could buy Boeing stock, it would do well for you, and all was good in the world. So in that sense it was ticking the free market boxes.

      The comparison with Airbus is interesting. Airbus stayed focused their core business instead of just looking at the share price.

      This story has played out before. Enron being a notable example. There is a trap that companies can fall into when the market and making money from the market is all that counts. So maybe a dig at laissez faire capitalism is warranted here.

    • Trevor chandler says:

      Totally agree. My advice to journos is too stop using words that end with ism. The only 2 guiding principles that prevail are balance and meritocracy

  • ilike homophones says:

    thank you, Sir Natale Labia, for penning a masterpiece, reflecting the values of DM and the surname mentioned everywhere

  • Samuel Ginsberg says:

    The profit motive was exactly what drove companies to compete in providing the marvels of engineering that we take for granted. Even if Boeing were to fail their contribution to aviation has been monumental… All in the name of competing for the profits that capitalism requires.

    • Johann Olivier says:

      … then they lost their way. It used to be a company run by engineers. They built a better product. Then the ‘moneymen’ took over. Quality took second to profit. This is where oversight comes in. Yes. Capitalism is good, but not if unfettered. The costs are too great.

  • Geoff Krige says:

    Interesting article. But I think this is not so much a failure of capitalism as it is failure of greed-inspired management. When politicians manipulate things for their own benefit, rather than the benefit of the country, we call it corruption. When executives manipulate things for their own benefit, rather than the benefit of the company, we should also call it corruption, not a failure of capitalism

    • Adriaan 18 says:

      Agree! The heading is easily misunderstood and one must read the article carefully to understand the nuances. You hit the nail on the head Geoff! The true failing is when executive and political greed starts to take hold, which is a recipe for disaster.

    • Ted Baumann says:

      Geoff, your comment actually proves the author’s point. Capitalism is defined by private ownership of productive capital. If those private owners decide to be greedy and to emphasize short term considerations over long-term sustainability, well that’s just capitalism at work. This is precisely why throughout most of modern history the most important factor determining success or failure of national economies is the regulatory framework that shapes how capitalists behave. If laws and regulations permit corporate managers to do what Boeing’s did, then you get the Boeing result. On the other hand, if the regulatory framework is like that surrounding Airbus, you get the Airbus result. On that score its instructive to remember that Boeing got its start as a quasi-nationalised company serving the US war effort in World War II. It was on the basis of those publicly-driven revenues that the company became the private success that it once was. This illustrates the fact that every single capitalist enterprise on the planet is fully intertwined with the society in which it exists-and which gives that society the right to construct a regulatory framework that is in its interest, not in the interests of capitalists only.

    • District Six says:

      You mean that the failures of capitalism emphasised by Labia is a personal moral failing. I think it is more than that. It is a systemic failure.

  • ralph malan says:

    I understand Boeing’s decline in quality & safety commenced in 1997 when it merged with McDonnel Douglas & the McDonnel Douglas management displaced the Boeing team. Different aims – cost cutting for short term gains = executive bonuses.

  • M Q says:

    Why is this a failure of capitalism?

    It seems that Capitalism is also responsible for the amazing performance of that iPhone that survived a 16000 foot drop.

    This is a strawman hitpiece attacking capitalism, not journalism.

    Capitalism self corrects. If Boeing is not able to correct it’s errors, it will fade away and a different, better capitalist business will take it’s market share. Capitalism doing what it does.

    Not a failure, but ultimately a success by making someone else more competitive.

    • Carsten Rasch says:

      meanwhile people die. and s company like Boeing going under can hardly be described as self-correction. Seems more like self-destruction to me.

    • Johann Olivier says:

      The ‘self-correction’ of capitalism is a truly scary concept when it comes to highly risky ventures. What is the cost of ‘self-correction’? Yes, right now, in the US, folks are filtering out all Boeing MAX airliners from their flight bookings, but at what original & potential cost? The whole Boeing saga is a sad one of ineffectual oversight & indifferent (to quality) manufacturing. It wasn’t always so.

  • Warwick Johnson says:

    A very concise analysis of the ills, not just of capitalism but skewed management contracts and values. This is another face of what we are experiencing in SA, not least with SOEs – where long-term success is crippled by short-term greed. I believe that there needs to be legislation to counter this, in all spheres of business. It would be tricky, but I think possible. As an addendum, the situation of “too big to fail” needs to be addressed, perhaps by compartmentalising large entities and forfeiture of one or more components being invoked in the event of overall failure.

  • Johan Buys says:

    I’m uncertain what the author prefers to capitalism?

    Central command and control through state owned entities? There are countless studies of the difference in efficiency between capitalist industries and non-capitalist ones. Besides efficiency measures such as the energy per tonne of say Aliminium produced, capitalism is where most innovation originates from.

    Capitalism works when it operates as intended, namely that the owners of capital do not abdicate their control over the hired help. Short-term thinking sinks many ships, exactly how rewarding the hired help in a power utility for less loadshed inevitably means five years later the plants are falling apart due to lack of maintenance.

    Modern accounting as seen in IFRS is certainly NOT helping. For many companies, there is little correlation between operating cashflow per share and headline earnings per share = that alone rang alarm bells looking at Steinhoff years before the collapse.

    Apple is the most valuable company in the world. It can already today complete the process of the company paying back to shareholders all the capital they subscribed for, plus all the reported profits, and still generate $100 billion a year new cash. They will have negative Net Equity but not for the usual reason that arises through accumulated losses.

  • Rae Earl says:

    The communist USSR state produced absolute rubbish during the cold war. Everything from motor cycles to cars and planes were vastly sub-standard to equivalent products produced by capitalist manufactures in the West. Capitalism is the driver of every successful economy and should be nurtured, not condemned. The article does not attack capitalism. It merely highlights bad corporate trends in capitalism in the US. Capitalism is alive and well in the EU where the corporate mindset is not governed by financial greed.

  • Stuart Thom says:

    The latest incident the component that failed was produced by a company lauding diversity and inclusivity, not skills. That the problem with business today. Hiring to tick boxes not hiring for ability to do the work

  • James Webster says:

    The decisions made within a company are decisions made by the human beings within that company and those humans have moral agency by virtue of being human beings, the immoral decisions of Boeing originate with immoral human beings, not with capitalism. It would be human beings with similar moralities that would be running any other body that under some other economic system was producing aeroplanes. Those human beings, still lacking morality, would make no-doubt identical decisions, resulting in failures similar to ones now facing Boeing. To put it in a nutshell, the same problems will occur under capitalism, socialism, marxism or any other economic framework because some human beings are immoral. Quite frankly I’d rather trust myself to an aeroplane built by capitalists than one built by marxists.

  • James Webster says:

    On a point of grammar, Jack Welch can not be the “doyenne” of anything, “doyenne” is a term that refers exclusively to a woman, hence to say “the then doyenne of management, Jack Welch” is totally incorrect.

  • Sydney Kaye says:

    I think Boeing’s decline should be looked at as a specific case from which general conclusions cannot be drawn. After a merger the McDonnel Douglas management took over from the Boeing team replacing an engineering culture with a profit one. Their cost cutting led to quality shortcuts. However the problem lies with the regulators who let them get away with that and went along with what was effectively self certification

  • sandy govender says:

    Fantastic article!! Chasing dividends and shareholder profits because of the remuneration link, will result in management trying to trim costs to boost profit. This may work for some products, but when your business is producing safe passenger aircraft, cutting corners kills people and ends up destroying the share price anyway. The problem is not with capitalism. The problem is the structuring of salaries and the core philosophy of a company. Warren Buffet himself would agree that a good business most often will not look for quick and easy returns with an impossible trajectory in terms of future dividends and share value growth. A good company invests in itself , ensures that quality comes first and educates management to value the company holistically. Salaries and incentives should be a mix of factors. The growth of the company should be projected years ahead as an organic plan to allow for investment to flow into the company to strengthen it. Airbus, did just that and are reaping the benefits of their corporate culture, company philosophy and healthier incentive options.

  • Jack Russell says:

    And the vast amounts of money paid to the mediocre upper middle management level in their cushy jobs with fat salaries, share options, perks and bonuses……. no “skin in the game” and huge arrogance.?

  • Louis Potgieter says:

    Klaus Schwab (WEF leader) proposes Stakeholder capitalism as a fix. See his book for nuanced criticism of capitalism.

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