The Weekly Reflektion 31/2022

The culture of a company is set by the management and what the management decides to focus on and not to focus on. When the company is involved in the manufacturer of aircraft or any other activity that can lead to Major Accidents, safetyshould of course be a management focus, some may say the primary management focus.

Boeing Share Price development from 2010 to 2019

Have you lost your way under the pressures of shareholder expectations?

In our Reflektions in week 29 and 30 we covered the development of the Boeing 737 MAX and the problem with the modification that led to the crashes of Lion Air Flight 610 on 29th October 2018 and Ethiopian Airlines flight 302 on 10thMarch 2019. What happened at Boeing that allowed the 737 MAX to fly with a known problem?

In 1997 Boeing merged with McDonnel Douglas. While Boeing was recognized as an innovative aircraft manufacturer that produced some of the best aircraft in the world, it was not regarded as a good commercial performer by Wall Street. This was about to change. The new management focus was on reduction of operating and capital costs, and financial discipline. Outsourcing of design and construction was encouraged to ‘optimize’ costs and this new model was utilised on the design of the 787 Dreamliner. There was significant resistance to this model in the Boeing organisation and this resistance seemed justified as the 787 Dreamliner introduction was delayed by three years. The management however retained belief in the model and claimed it had not been implemented correctly.

To demonstrate a ‘new’ culture the management decided to move the Boeing head office to Chicago leaving the symbolic centre in Seattle. The message to Wall Street was not letting sentiment get in the way of performance. Financial engineering including a share buy back scheme, led to a significant increase in the Boeing stock price from 2016. The management were on a high and were certainly not going to slacken their efforts for further financial success.

One of the main threats to this success was the future sales of the Boeing 737 MAX. To compete with the Airbus A320 NEO, Boeing needed to produce a new version of the Boeing 737 with the latest ‘high efficiency’ engines and no changes that would lead to a requirement for significant additional training for pilots. This led to the utilisation of the MCAS system to ensure the aircraft behaviour was similar to the previous versions. The MCAS was effectively kept secret from the FAA and from the pilots that would fly the aircraft. 

During the development work, problems were encountered with the MCAS, and the consequences of these problems wererecognized by the Boeing engineers and test pilots. Internal emails, revealed after the crashes, indicated that Boeing had gone to extraordinary efforts to evade scrutiny from the FAA. This included some employees lying to the FAA about the 737 MAX design. There seems little doubt that Boeing exploited the trust they had already established with the FAA over many years. Early in the 737 MAX development, Boeing engineers and management conspired to keep the MCAS a secret to achieve the objective of no additional pilot training. 

The 737 MAX story is one of Boeing management sacrificing the traditions of safety and engineering rigour on the altar of stock price performance. The real sacrifice however was the 346 people that lost their lives due to Boeing managements’ failures.

Reflekt AS