How Boeing bean-counters broke an American innovator


The atmosphere was tense. Boeing’s board meeting was drawing to a close. The chief executive had just laid out his plans for the company’s new plane.

The project was eye-wateringly expensive. Everyone knew it could make or break the company.

One of the non-executive directors had repeatedly asked how many planes Boeing expected to sell and therefore how much money it would make. But he couldn’t get a straight answer.

Eventually he put his head on the table and was heard to mutter: “My God! These guys don’t even know what the return on investment will be on this thing!”

The year was 1966, the chief executive was the legendary Bill Allen and the plane was the 747. The non-exec’s reticence was understandable but, as it turned out, entirely misplaced.

The Jumbo Jet-sized gamble ended up completely transforming civil aviation and cementing Boeing’s reputation as the leading aerospace company in the world.

The idea for the 747 first emerged on a fishing trip in Alaska in 1965. Allen and his friend Juan Trippe, the founder of Pan-Am, were discussing the explosion of overseas travel since Boeing introduced the 707, ushering in the jet age, just seven years earlier.

Trippe believed air travel could triple in the coming 15 years. But airlines would struggle to transform that growth into profitability unless they had a jet that was at least two and half times bigger than the 707.

“If you build it, I’ll buy it,” said Trippe. “If you buy it, I’ll build it,” replied Allen.

Four years (and several fraught board meetings) later, the first jumbo jet was delivered to Pan-Am in 1969. No other aircraft manufacturer produced anything remotely comparable for the next two decades, meaning Boeing rarely had to discount in order to win business.

The company’s return on investment for the 747 has never been disclosed but analysts believe it probably runs to several hundred percent.

Textbooks will eventually be filled with the lessons learned from Boeing’s spectacular fall from grace since its heyday. Chief among these, as many have pointed out, is the folly of putting financial returns ahead of engineering excellence.

The reputational damage from the two fatal crashes of 737 Max 8 aircraft in 2018 and 2019 has now been compounded by an emergency door on a 737 Max 9 blowing out mid-flight.

The scene inside the Boeing 737 after the blowout - Twitter

Allen must be turning in his grave. He was obsessed with ensuring Boeing was “always reaching out for tomorrow” and making the best planes possible. Profit was a secondary consideration.

As a result, the US aerospace company became such a byword for innovation, efficiency and safety that people would say: “If it’s not Boeing, I’m not going.”

Indeed, it inspired a French farce (later translated into English and turning into a film starring Tony Curtis) called “Boeing-Boeing” in which a bachelor’s carefully planned life is disrupted when the three airline stewardesses to whom he is engaged all turn up in his Paris flat at the same time because of the introduction of a speedier jet.

The economist John Kay has written of how he used to tell his students that Boeing enjoyed such economies of scale and scope that its dominance of civil aircraft manufacture was virtually unassailable.

Why, then, did Boeing forsake its proud history of building magnificent flying machines and let an upstart European company like Airbus win an increasing share of the market?

Partly it was the result of a series of acquisitions in the 1990s, culminating in the merger with McDonnell Douglas in 1997, which diluted the company culture. Partly it was a decision to focus on military contracts and a relationship with the Pentagon that often got way too cosy.

Partly it was the result of the global aerospace industry becoming an effective duopoly, prompting Boeing to complacently assume it was unlikely to be ditched by airlines because Airbus, the only viable alternative, wouldn’t be able to deliver on the new orders for years.

But at least part of the reason why bean-counting eventually triumphed over innovation was because that’s precisely what its owners demanded.

Such pressure was already evident in the non-executive’s exasperation in the 1960s and it only increased over time. In the 1990s, Phil Condit, one of Allen’s ill-fated successors, talked about Boeing operating in “a value-based environment where unit cost, return on investment, shareholder return are the measures by which you’ll be judged”.

As a result, Boeing chose, for example, to refresh the 737 (first introduced in 1967) and turn it into the Max rather than building a new plane to take on Airbus’s A320neo (first introduced in 2016).

During the Senate hearing in October 2019 into the fatal crashes, Senator Jon Tester told the company’s then-chief executive Dennis Muilenburg: “I would walk before I would get on a 737 Max. You shouldn’t be cutting corners and I see corners being cut.”

With all the focus now on ensuring the existing range is fit to fly, innovation could remain on the backburner for years. Dave Calhoun, the current boss, has said the company won’t be working on a new model until at least the 2030s.

Unsurprisingly, this has made it increasingly hard for Boeing to attract and retain the best engineers. Thus, a vicious cycle has developed.

Spotting the problem is one thing. Turning it around is far easier said than done when many investors have gone from kicking tires to ticking boxes.

Forecasts for profitability, margins and return on investment may be somewhat ephemeral but they have more solidity than concepts like leadership and excellence.

Ideally, you want a management team that can combine financial discipline with vision. But, forced to pick one, many modern investors too often plump for the former over the latter.

How would Allen have fared in the current environment? Would he have been able to greenlight the 707, the first jet passenger plane, despite estimates for the cost of the prototype and necessary changes to Boeing’s production line coming in at more than the value of the entire company?

Would he have been allowed to authorise the launch of the 737 despite only having one customer signed up at the time? Would he have got the 747 past the board despite not even having a factory big enough to build the huge plane?

Those questions may be hypothetical but they’re also depressingly easy to answer.

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