The Supply Chain Matters blog provides another update regarding the discordant number of events affecting commercial aircraft manufacturer Boeing much of which stems from the aerospace company’s troubled corporate culture. In this industry focused editorial we note that difference is that now industry watchers are voicing overt concerns.

Since our last update that provided the lowlights of Boeing’s 2020 full year operational performance, more events have occurred.

 

Financial and Operational

In late January, the manufacturer reported its biggest quarterly loss that made its annual deficit approach nearly $12 billion for 2020. The company booked a $6.5 billion pre-tax charge related to development of the 777X aircraft to reflect expected lower profits for the planned newest generation of wide body aircraft. Because of current depressed market conditions, the new aircraft is now not expected to enter service until 2023.

Annual revenues declined 24 percent to $58.2 billion.

The company’s cash burn rate in 2020 amounted to $18.4 billion as aircraft deliveries more than halved from 2019 levels. The manufacturer declined to provide guidance relative to 2021 performance.  Investors are hoping that revenues will increase with the resumption of deliveries of the 737 MAX aircraft after nearly two years of being grounded.

Three additional developments occurred last week that are worthy of mention.

Visibility came to light in published reports from The Wall Street Journal and the Washington Post regarding an investor lawsuit alleging that Boeing’s board of directors neglected their responsibility to provide safety oversight before and after the two tragic accidents involving the 737 MAX aircraft.

According to the published reports, board members allegedly moved in lockstep with the company’s management instead of providing oversight. The WP report reported that the lawsuit: “raises questions about the truthfulness of David Calhoun, a Boeing director who took over as chief executive of the aerospace giant after the board ousted his predecessor, Dennis Muilenburg.”  The Wall Street Journal added that lawsuit alleges that current chief David Calhoun exaggerated to journalists the extent of the board’s oversight between the two accidents.

Boeing responded to the Post report indicating that the lawsuit presented “a distorted account” of public comments provided by the company’s directors in the wake of the two accidents.  A motion to dismiss has been filed arguing that its board was actually closely involved in the planning and certification process of the aircraft.

Further last week, Boeing announced that two longtime directors would step down from the board and not seek re-election at the company’s annual meeting to be held in April. According to a published report from The Wall Street Journal citing informed sources, the departures had been under consideration in an effort following the MAX crisis in order to recruit board members with fresh perspectives. Two new board members were recruited a year ago, both with aircraft safety and engineering perspectives. The company’s board has further maintained a safety committee to provide oversight.

 

Added Safety Incidents

A little over a month ago, an Indonesia based Sriwijaya Air Boeing 737-500 dropped off radar on a domestic flight and crashed into the sea just minutes after takeoff. A recent New York Times report indicates that a preliminary investigation into the crash has found that a difference in the level of thrust between the plane’s two engines may have contributed to the aircraft rolling over before it plunged into the Java Sea. Boeing continues to work with local air safety investigators on determining the root cause of this incident.

Over this past weekend a United Airlines Boeing 777-200 aircraft flying from Denver to Honolulu experienced a catastrophic engine failure shortly after takeoff. The aircraft managed to safely return to Denver, but engine parts had fell to the ground, luckily without causing injury or significant damage.

The U.S. National Transportation Safety Board (NTSB) has confirmed that two fractured fan blades associated with a Pratt and Whitney PW-4000 engine may have caused the failure.  Reports indicate that in early December, a Japan Airlines 777-200 flying from Okinawa to Tokyo incurred a fan blade failure incident shortly after takeoff.

Global regulators have now moved quickly to operationally ground all Pratt powered 777’s for immediate engine inspections. Reportedly the Pratt engine model fan blades are subject to a 2019 inspection mandate stemming from earlier incidents. United Airlines quickly grounded 24 aircraft that have the Pratt engines while certain airlines in Asia and Europe have also grounded similar models pending engine inspection requirements.

What impact this grounding has on international passenger or air freight travel remains to be seen, as is the time required to inspect all the Pratt engines suspected.

While this latest incident has more to do with an engine manufacturer’s design, the headlines and the passenger videos of a disintegrated engine are another stain to Boeing’s corporate or engineering reputation. What may be lost in the headlines is that the aircraft structures held and that the pilots were able to safely land the aircraft without tragedy.

 

Supply Chain Matters Editorial Commentary

Engineering Prowess

A sobering opinion column published last week by industry trade publication Aviation Week raised the question as to whether Boeing would become the industry’s next McDonnell Douglas.

The column observes that it has been 25 years since McDonnell Douglas merged with Boeing and drew a parallel to what caused the former’s demise. The column declared whether it is time to consider whether Boeing Commercial is destined to share a similar Douglas fate. A statement indicates:

Given Boeing’s significant engineering cuts, program execution problems, clear prioritization of shareholder returns, extremely uncertain product development roadmap and deteriorating market share outlook, it is time to consider whether Boeing Commercial Aircraft 9BCA) is destined to share Douglas’s fate.

The column goes on to specifically describe shortfalls in slashed engineering spending with most of this spending having to be allocated to rectifying design issues with the Boeing 787 and 737 MAX aircraft. A further area of mention was abandoned product development, the notion that over the past five years, considerable engineering resources were expended on a new midmarket aircraft concept under the assumption of a twin aisle design to compete with a single-aisle market need.  Rather than a fresh new design, the company’s engineering teams dealt with design schemes that called for either a larger 737 MAX, a shrunken 787 Dreamliner, or reengined 767.

The opinion column concludes that a Douglas-like fate would be a tragedy for the entire industry.

Industry watchers also cite Boeing’s “cozy” relationships with federal regulators such as the FAA allowing the manufacturer to self-regulate or allegedly abuse such a relationship. The company has reached a $2.5 billion settlement with the U.S. Justice Department over the 737 MAX incidents. The settlement involved a $244 million fine along with $2.3 billion in compensation to customer airlines and families of the victims involved in the two crashes. The aircraft manufacturer was charged with one count of conspiracy to defraud the United States but reportedly will avoid prosecution on this charge, with the provision that the company avoids further legal issues for a period of three years.

 

Additional Thoughts

There can be little question that Boeing remains a manufacturer with a host of significant financial, operational and corporate culture challenges. Unforeseen but just as critical has been the COVID-19 impact on international air passenger travel, providing a perfect storm of compounding events.

The company is now described as financially and operationally fragile and has been forced to further cut engineering investment and sell off buildings and assets. That includes the shuttering of the manufacturer’s engineering research center in Seattle and the expected idling of former production facilities around the Seattle manufacturing campus.

The Economist recently quantified that: “Before the pandemic, about one in 130 American workers was employed either by Boeing, with domestic payroll of 143,000, or by one of its 12,000 local suppliers, with another 1m workers.”

Many in the industry and in supply network ecosystems want the company to survive the current compounding crisis. That includes archrival Airbus, that understands that a vibrant ecosystem of engineering innovation and global supply network is critical for industry growth, innovation and sustainability. Supply Chain Matters certainly shares in these concerns.

Boeing’s efforts to change its board composition are praiseworthy, but more actions are obviously in the cards. According to financial markets, the company has reportedly eroded upwards of $140 billion in shareholder value over the past two years. So much for the strategy of shareholder returns. Investors who now seek compensation for lack of board level safety or engineering oversight were content to garner handsome short-term dividends and share buy-back rewards.

As many are now concluding, during an industry boom, a prioritization of short-term shareholder returns by the company’s leaders may have caused other consequences related to Boeing’s former engineering prowess.

While the COVID-19 disruption has indeed added an unforeseen disruption to the industry, Boeing’s financial and operational challenges were already being strained by the unfortunate 737 MAX incidents.

Boeing will need a lifeline and added strokes of luck and determination. That seems to be becoming more obvious by industry watchers.

The U.S. needs to have a vibrant aerospace industry and associated supply network ecosystem.

 

Bob Ferrari

 

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