“Madagascar: Escape 2 Africa”, a 2008 animated comedy film, centres around a bunch of talented penguins that tinker together a rickety aeroplane from haphazard spares to be launched by a slingshot over the canopy of the African jungle. The penguins’ engineering reputation is thoroughly tested when the plane comes apart.
I always have to think of head commander penguin Kowalski and his crew when yet another setback is reported from the 100-year-old, US aeroplane maker Boeing.
The penguins and their fellow zoo animals survive, of course. Sadly this could not be said of the 346 passengers who died in two crashes of the now infamous 737 Max in the Philippines in October 2018 and Ethiopia in March 2019. Design flaws of the upgraded “same plane but better” 737 – long denied until the US Federal Aviation Authority had to withdraw its licence – proved fatal.
When I reported in 2019 about the aircraft “designed by clowns who are supervised by monkeys” (Boeing engineer in an internal memo) I wondered not only if the Max would ever fly again, but also how the Chicago-based blue-chip company can survive ever-mounting losses, caused by production halts, supply chain disruptions, compensation claims by victims and airlines as well as large-scale order cancellations. This was before COVID struck.
Both production setbacks and the pandemic-induced plunge in civil aviation have cost Boeing losses of USD$30 billion so far, and counting. I had argued in my piece that as a premier defence contractor, any US administration would loathe to let their national aircraft manufacturer suffer for long. The “unfair state subsidy” battle with European rival Airbus was still raging and I assumed that as a US company Boeing would always have the upper hand.
At the nadir of the Max-crisis I bought Boeing shares at USD$352.32 apiece. In the meantime the sham fight at WTO courts about illegal subsidies had come to a draw and opposing sanctions were recently halted in a vague truce between the US and Europe. Yet it turned out that to be the better defended duopolist (both manufacturers share 90 per cent of the civil aviation market) was not enough. To build planes which fly was quite essential.
When I wrote my second piece on Boeing last year, the share price had dropped to USD$288.20. Now, while I write this it stands at USD$219.40. While I had expected the pandemic-induced drop in flight demand to have a sizable impact on the order books of Boeing and Airbus, I did not foresee that the Chicago-based firm would unlearn how to put together planes that do not share the penguins’ fate.
The series of bad news is uninterrupted. In February, United Airlines flight 328 scattered parts of its engines over the suburbs of Denver, as fan blades of Pratt & Whitney’s turbines, in operation since 1995, broke off. A similar accident had happened three months earlier with a Japanese Airlines flight from Naha to Tokyo. Both airlines grounded all planes fitted with the malfunctioning, or rather mal-inspected engines. The same month, a 747 cargo aircraft dropped parts of its turbines after takeoff from Maastricht airport.
It seems Boeing was increasingly relying on penguins, as their qualified engineers moved elsewhere
The production of the Boeing 787 ‘Dreamliner’, manufactured since 2009, was recently reduced to a trickle after the US Aviation Authority looked in disbelief at badly fitted fuselage sections, the welding of wrong-sized shims and bodywork with wobbly surfaces. A plane produced for many years, a ray of hope after 18 months of disaster with the Max, proved all of a sudden too difficult to be put together.
It seems Boeing was increasingly relying on penguins, as their qualified engineers moved elsewhere, hired by defence competitors, Elon Musk’s Space X, Microsoft and Amazon’s drone division. An estimated 3,200 engineers and their expertise left last year alone, demotivated by bad leadership, cost cuts, supply chain haemorrhages and threatened job cuts.
Defence and aerospace, undamaged by lockdowns and travel restrictions, should have been the reliable bedrock of steady income while passenger planes failed to sell. Yet it is this division which is increasingly showing the same manufacturing incompetence. In 2011, Boeing was the preferred bidder for the US Air Force to supply 179 aerial refuelling and military transport aircraft. The first of the contracted KC-46 Pegasus planes, remodelled from the Boeing 767 jet airliner, was delivered in 2019, with an astounding three-year delay. It soon became apparent that they are not quite fit for refuelling and came with a lot of loose material and debris on board.
The president of the United States and commander-in-chief would not fare much better. Two Air Force One presidential planes were ordered in 2018, ridiculed by Trump for their USD five billion price. “Cancel,” he twittered bumptiously. Humiliated, Boeing agreed to a fixed-price contract of USD 3.9 billion. As it turned out, the two ‘AF1’ planes will be not delivered on time, and will come at a much higher price tag. The company went cap in hand to beg for a more generous payment, having already booked a forward loss of USD 486 million for the two planes ‒ admittedly a pittance when compared to Boeing’s civil aviation losses, yet proof of its commercial ineptitude.
Instead of being the star supplier for NASA and the private space race, Boeing’s Starliner capsule mounted on top of NASA’s Atlas V rockets could not take off until now, as measurement failures and corroded valves have postponed its launch to an unknown date in the future. At the first test, 13 valves in the propulsion system did not open ‒ a far cry from the glorious days of Saturn V’s manned space missions. As if to admit to its incapability, Boeing is now a mere junior partner in Richard Branson’s Virgin Orbit, the Virgin Galactic spinoff recently flipped to the stock market and specialising on satellite programmes for NASA and military contracts.
Gone are the days when Boeing, once the pride of America, could dictate to the US Aviation Authority what to certify and how. Ruthless cost-cutting, the strong-arming of suppliers and large share buybacks made Boeing the darling of the stock market. How pedestrian, bureaucratic and hopelessly European had Airbus looked in comparison, which is now reaping the success of much higher R&D spending, while its peer in the US is bleeding from 1,000 cuts to its manufacturing prowess.
It is difficult to tell how both companies will fare in a rapidly changing aviation market. While costly research will have to focus on a zero-emission future, carbon taxes, emission regulations and cap and trade will make air travel too expensive to expand at similar rates as in the past, thus suppressing the turnover of airlines and the order books of plane manufacturers.
My guess would be that in a necessary world of zero emissions, Boeing will be the last to come to grips with this new reality. It will look like a car manufacturer failing to build solid cars while ignoring the demands of future mobility needs.
I should have sold a long time ago. Can I face the loss now?
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
Andreas Weitzer, independent journalist based in Malta
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