Where Boeing went wrong — and what the company needs to fix

After two fatal crashes of its 737 Max airliner, a string of embarrassing quality-control snafus, and an almost catastrophic midair blowout, Boeing Co is a company in serious need of a deep-rooted cultural overhaul. It might finally get the fresh eyes needed to carry one out.

The planemaker on Monday announced a major leadership shakeup that includes the departures of Chief Executive Officer Dave Calhoun, Chairman Larry Kellner, and Stan Deal, the head of the commercial airplanes division. It is Boeing's most decisive action yet to hold itself accountable after an auxiliary exit door that was meant to be sealed shut instead flew off during an Alaska Airlines flight in early January, exposing passengers to a harrowing gush of wind and the company to withering scrutiny.

The plane in question was also a 737 Max, but it was a different model with different issues than the ones involved in the crashes in 2018 and 2019, which combined killed 346 people and spurred a nearly two-year global grounding of the jet. The US National Transportation Safety Board has said four bolts meant to hold the blown-off panel in place on the Alaska Airlines jet were removed in order to fix damaged rivets on the fuselage and were seemingly not reinstalled before the plane left Boeing's factory in Renton, Washington. Boeing has said it has no documentation of the work performed on the panel, a stunning admission that reinforces scathing criticisms by regulators of the company's safety culture and basic factory-floor management.

90 Days to Make a Plan

A panel of outside experts convened by the Federal Aviation Administration at the behest of Congress lambasted "a lack of awareness of safety-related metrics at all levels" of Boeing's organization in a report begun a year ago and issued in late February. The FAA separately conducted an audit of Boeing's production lines and found "multiple instances" of manufacturing lapses. In a late February ultimatum, the agency said Boeing had "systemic quality-control issues" and gave the company 90 days to come up with a comprehensive plan to fix them. "It wasn't just paperwork issues. Sometimes it's the order in which the work is done, sometimes it's tool management, which sounds kind of pedestrian but is really important in a factory," FAA Administrator Mike Whitaker has said. "It's really plant-floor hygiene." The FAA has temporarily capped production increases for the 737 Max until it's satisfied that the company's quality-control systems are rigorous enough.

In theory, manufacturing glitches are easier to fix than a design problem that would force Boeing to go back to a very expensive drawing board. In practice, tightening controls over Boeing's production processes has proven complicated. Boeing is in talks to reacquire Spirit AeroSystems Holdings Inc., the fuselage maker it carved out in 2005 that's been a frequent source of quality-control issues. These include incorrectly installed fittings attaching the vertical tail of the 737 Max to its body, improperly drilled fastener holes in a component that helps maintain cabin pressure, and the damaged rivets that forced workers to remove the fated panel on the jet destined for Alaska Airlines. Bringing Spirit back in house will give Boeing more control over a crucial corner of its production process.

Will it be enough? To help stabilize the fuselage maker, Boeing has already sent swarms of its own staff into Spirit's factories, extended millions of dollars in advances to the company, and rejiggered the terms of its contracts. "It might help if it was under common ownership, but I don't think that's necessarily a panacea to those supply and those exchange issues between Wichita and Renton," General Electric Co. CEO Larry Culp told reporters in early March, referring to Spirit's headquarters and Boeing's 737 factory, respectively. As a maker of jet engines, GE is a major Boeing supplier.

It doesn't get much more basic in manufacturing than remembering to install and tighten screws. The simplicity of this oversight — particularly after the company, regulators and others pored over every inch of the Max during the grounding — is what makes it so damning for Boeing's culture and ultimately for Calhoun's legacy at the company. Calhoun, who plans to step down as CEO at year's end, has been on Boeing's board since 2009. If there's a systemic problem, he is undoubtedly part of the system. He became CEO in January 2020 after his predecessor, Dennis Muilenburg, was ousted over the bungled aftermath of the 737 Max crashes: The FAA publicly admonished Boeing over perceived pressure to speed up the jet's return to service as the grounding dragged on.

Calhoun's Legacy

The Max returned to the sky about 10 months into Calhoun's tenure as CEO. Even China, which was the first to ground the Max and among the last to certify it again for flight, finally started taking deliveries of the jet again earlier this year. Boeing is still racking up orders for the Max and has largely sold out its delivery slots into the late 2020s. Still, its competition with Europe's Airbus SE, the only other significant commercial aircraft manufacturer, has become decidedly lopsided in favor of Airbus, and it's not clear how Boeing can close the gap.

Calhoun successfully steered Boeing through a pandemic collapse in air travel that at one point looked so daunting US lawmakers set $17 billion aside for the company in the initial $2 trillion Covid stimulus package, according to the Washington Post. (Boeing loaded up on corporate debt instead of taking the government loans.) But when lockdowns lifted and demand for flights quickly rebounded, the company failed to fully appreciate the toll that demand boomerang would take on suppliers such as Spirit that had already been strained by the Max grounding and by Boeing's earlier demands for hefty discounts in the pursuit of fatter profit margins for itself.

Calhoun toughened internal safety provisions by amending accountability safeguards and reporting protocols for the engineering and factory floor ranks. This included restructuring the unit within Boeing that houses workers deputized to sign off on aircraft designs on behalf of the FAA, with a goal of reducing the risk of management interference in regulatory oversight. However, the report from the FAA-convened panel of experts concluded there are still opportunities for managers to retaliate — particularly with regards to salary and furloughs — against workers who raise safety concerns.

Boeing's management overhaul appears to have been precipitated by the dismay of the company's customers — the ones ultimately responsible for the planemaker's profits and its market share relative to Airbus. The chorus of public criticism of Boeing by airline CEOs had become deafening. United Airlines Holdings Inc. CEO Scott Kirby has said he's "disappointed" in Boeing's manufacturing challenges. United is on the hunt for Airbus jets to replace orders for Boeing's Max 10 model, which has yet to receive FAA certification and may not for quite awhile. Alaska Air Group Inc. CEO Ben Minicucci has said he's "angry" at Boeing. American Airlines Group Inc. CEO Robert Isom has said Boeing's string of quality-control issues is "unacceptable" and that the company "needs to get their act together." Southwest Airlines Co. CEO Bob Jordan has said Boeing needs to "get the issues fixed." Before news of the CEO change, Boeing's airline customers were planning to meet directly with the company's directors — without Calhoun present, Bloomberg News has reported, and Boeing shares had fallen more than 25% since the beginning of the year.

Roots of the Rot

Just as Calhoun inherited a company in crisis, so will his successor. But just when Boeing's cultural rot began is a subject of debate. Some trace it all the way back to the company's 1997 merger with St. Louis, Missouri-based McDonnell Douglas Corp. The deal crystallized the plane manufacturing duopoly that has persisted to this day, with Airbus serving as Boeing's only true competitor. Before the deal, Boeing was known for its staunch engineering culture and incredible manufacturing feats. After the deal, financial crafts started to take priority over jet-making ones. In 2001, Boeing decided to move its headquarters to Chicago, both physically and mentally further away from the Seattle-area factories responsible for churning out its airplanes. (Under Calhoun, Boeing moved its headquarters again to Arlington, Virginia, even further away from Seattle.)

At the time of the merger with McDonnell Douglas, many corners of the US economy were influenced by the culture at General Electric under its then-CEO Jack Welch, and the expanded Boeing was no exception. Harry Stonecipher, a former GE executive who was indoctrinated in the Welch model of cutthroat capitalism and ran McDonnell Douglas before the merger, became Boeing's CEO in 2003. He replaced Phil Condit, who had resigned
amid probes into ethical breaches involving the company's defense business. In 2005, in the final days of Stonecipher's tenure as Boeing's CEO, the company struck a deal to sell the Spirit business — essentially just a pair of factory complexes in Kansas and Oklahoma that weren't designed to be a standalone company — to a private equity firm in an effort to eke out more dollars of profit. He was ousted before the transaction closed for having an affair with an employee.

Boeing hired another former GE executive — Jim McNerney — as its next CEO and the company's aggressive focus on profits and its stock price ramped up. During McNerney's tenure, Boeing spent more than $25 billion on share repurchases — money that might otherwise have gone toward aircraft development — while its chief rival Airbus took a far more conservative approach to its balance sheet. In 2011, after getting caught flat-footed by the success of Airbus' A320neo model, McNerney made the fateful decision to update Boeing's 737 model with new engines rather than replace it with a fresh design.

An Epic Mistake

Revamping the decades-old 737 design was cheaper and faster in the short term but epically expensive in the long run. The new, more fuel-efficient engines were much larger and could no longer fit neatly under the aircraft wing, so they had to be positioned further up on the plane. To help guard against a potential aerodynamic stall, Boeing added flight-control software — known as the Maneuvering Characteristics Augmentation System — that would push down the nose of the plane and help level it out. The two crashes of the Max were linked to this system, which could activate with a single, erroneous sensor reading and repeatedly force planes to nosedive, setting off a cacophony of alerts that overwhelmed pilots. McNerney is also the one who initially launched Boeing's infamous "partnering for success" efficiency program in 2012, with an aim of squeezing the company's suppliers for cost cuts in the pursuit of higher profit margins.

The GE connection skipped a generation: Boeing selected Muilenburg, who joined the company as an intern in 1985, as McNerney's successor in 2015. Still, Muilenburg doubled down on the "partnering for success" program — which was not so fondly dubbed "pilfering from suppliers" by the parts-makers pressed for discounts — and also on the buybacks. Boeing shares reached a record high in March 2019 — about four months after the first Max crash but only about a week before the second. And then along came Calhoun, who practically embodies the GE mindset that top managers can run any business, with stints overseeing that company's transportation, lighting, jet engine, reinsurance and broader infrastructure operations, among others. Calhoun left GE in 2006; he'd actually been in the running to head Boeing at the time but McNerney got the job instead. In 2021, Boeing hired Brian West, another former GE executive, to be its chief financial officer.

The Challenges Ahead

Rewiring Boeing's culture to prioritize safety and quality over profits won't be easy. The company's next CEO will require the patience and manufacturing expertise necessary to comb through Boeing's factory operations, process by process and detail by detail, until the pursuit of continuous improvement on the factory floor becomes central to the company's identity again. That could be someone like Larry Culp, who orchestrated that kind of turnaround at GE after taking the reins of the troubled company in 2018. When asked in a February interview about the Boeing CEO role, Culp said he was "looking forward to serving Boeing as their most important partner and supplier." Having orchestrated a major rehabilitation of an American industrial icon, it's not clear he's in the market for another fixer-upper.

Boeing's next CEO, whoever it is, will have to juggle the company's current crisis while also plotting its future and finding the funds to pay for it. "Our next leader is going to develop and call out the next airplane for the Boeing company," Calhoun said in an interview this week with CNBC. "It will be a $50 billion investment. That will all happen on that next leader's watch. So, I would like somebody who clearly has the experience inside our industry." While Boeing had more than $38 billion of net debt at the end of 2023, Airbus had a cash surplus, to the tune of about €14 billion ($15.5 billion).

The increasingly imbalanced plane manufacturing duopoly is partly rooted in Boeing's myriad manufacturing and operational struggles; it's anyone's guess at this point when the much-delayed Max 7, Max 10 or the wide-body 777X jets will receive FAA certification as the regulator takes a tougher stance on new jet approvals. But the unevenness also stems from Airbus's more comprehensive product lineup. Boeing's effort to stymie competition from Canada's Bombardier Inc. by successfully pushing the US government to slap tariffs on its regional planes backfired, thrusting the company into the arms of Airbus in 2017, before the tariffs were overturned. After acquiring a majority stake in Bombardier's C-Series program (now called the A220) for a pittance, Airbus has continued to win orders for the jets. A proposed joint venture with regional jet manufacturer Embraer SA of Brazil would have given Boeing a ready-made response, but it scrapped that deal in 2020, effectively taking itself out of the competition in this smaller end of the single-aisle jet market.

Boeing also has shelved efforts to develop a middle-market aircraft, which would target a niche between the wide-body jets typically used for long-haul flights and the largest models in the narrow-body market. The company has argued that current engine technology wouldn't deliver the kind of fuel efficiency gains needed to justify a costly new development program. This creates yet another competitive opening for Airbus, which is set to launch a longer-range version of its best-selling A321 jet later this year, allowing airlines to connect more cities without having to fill up the seating capacity of a wide-body jet.

The Bottom Line

Boeing is never going to be allowed to fail. It is the top US exporter, a major defense contractor and the country's only large-scale manufacturer of commercial aircraft. For the US government, punishing Boeing in a way that truly hurts would mean punishing itself in the process. For Boeing's airline customers, a duopoly — even a lopsided one — is better than a monopoly. It's just not possible for the aerospace industry to be entirely dependent on Airbus for narrow-body jets, not least of all because the European planemaker is largely sold out of its marquee single-aisle model through the end of the decade. "We all need Boeing to be stronger — two years from now, five years from now, 10 years from now," Southwest Airlines' CEO Jordan said in mid-March at a conference organized by JPMorgan Chase & Co. Even Airbus would ultimately prefer that Boeing planes not blow a hole midair. "It's never good when an incident happens, whatever the type of plane," Airbus CEO Guillaume Faury said at the World Government Summit in Dubai in February. "And this incident makes us very humble." It's in literally everyone's interest for Boeing to clean up its act. Only Boeing can make it happen.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.