Hiltzik: Has Boeing recognized its mistake?

Coverage of Sunday's announcement that Boeing had reached a landmark collective bargaining agreement with its largest union focused primarily on economic aspects, such as wage increases of 25 to 33 percent over four years, a reduction in employee health care costs and improvements in retirement benefits.

Much less attention has been paid to the consequences of another provision of the agreement with the International Assn. of Machinists and Aerospace Workers (IAWW), which represents 33,000 Boeing workers: the company's commitment to build its next new aircraft in Washington state rather than at the non-union site in South Carolina.

Boeing management presented this provision as a kind of community-building measure.

“This contract underscores our commitment to the Pacific Northwest,” said Stephanie Pope, general manager of the company's commercial aircraft division, in a video message to employees. “Generations of workers here have built incredible aircraft that connect the world.”

That means “job security for future generations,” she said. “It's a big commitment to you and our community.”

But there may be more to this commitment: It is a tacit admission that Boeing's decades-long efforts to inflate its stock price and maximize its short-term profits by undervaluing its tradition of engineering excellence and rigorous quality control have failed, turning the company into a conglomerate that neither makes money nor produces trustworthy products.

Boeing has not made a profit since 2018. Its planes have a disturbing reputation for falling from the sky and breaking apart in mid-flight.

The Starliner, which is designed to transport crews to and from the International Space Station, was judged so unreliable that NASA decided it would be safer to keep two astronauts on the ISS until February than to return them to Earth on the Boeing spacecraft. (The Starliner returned to Earth on Saturday without the astronauts.)

All in all, the Boeing story seems like a textbook example of what happens when management loses track – or, more precisely, has the wrong focus.

When a group of managers focuses on profits and shareholder returns rather than the core task of developing good products, it's a classic case of confusing the scoreboard with the game. When that happens, you usually lose the game.

Boeing's series of disasters dates back to just before the turn of the century. Let's take a look at the record.

The first misstep was Boeing's acquisition of bankrupt McDonnell Douglas in 1997. “In contrast to Boeing's culture of engineering excellence, McDonnell Douglas focused on cutting costs and modernizing older aircraft models at the expense of all-new aircraft,” Bill George, executive fellow at Harvard Business School, noted earlier this year.

Curiously, it was the corporate culture of the acquired company that also prevailed in the buyer. McDonnell Douglas executives pushed Boeing veterans out of the highest levels of management. One example of this is the appointment of Harry Stonecipher, who was CEO of McDonnell Douglas at the time of the merger, as CEO of Boeing in 2003.

Stonecipher's predecessor at Boeing, Philip Condit, had resigned in the wake of a scandal involving attempted recruitment of a Pentagon employee while she was in charge of Boeing's government contracts. (Stonecipher was forced to leave in 2005 because of an intimate relationship with another Boeing executive.)

There was a running joke in the hallways of Boeing that “McDonnell Douglas bought Boeing with Boeing’s money.”

Condit took a second step toward destroying the company's engineering culture in 2001 when he organized the relocation of the company's headquarters from Seattle, where the company had been based since its founding in 1916, to Chicago.

Condit's team justified the move with the need to be in an international transportation hub with “cultural diversity” and a reasonable cost of living, but Seattle meets all of these requirements.

What Chicago did offer, however, was $60 million in tax breaks and other benefits. Management portrayed the fact that the move put nearly 2,100 miles between headquarters and Boeing's most important business, the commercial aircraft industry, as an advantage: After all, it would immunize the executives and no longer be influenced by the concerns of engineers and quality assurance staff – as if that were a good thing.

“If the corporate headquarters is located near a major business,” says Condit, “the corporate headquarters will inevitably be involved in day-to-day operations.”

Stonecipher was the embodiment of a profit-at-all-costs mentality. “When people say I changed the culture of Boeing, that was my intention, to run the company like a business, not like a big engineering firm,” he said in an interview with the Chicago Tribune. “It's a big engineering firm, but people invest in a company because they want to make money.”

Cost-cutting became the guiding principle of Boeing's operational decisions. In 2019, the company announced it would move all production of its 787 Dreamliner wide-body aircraft to its North Charleston, South Carolina, plant, ending the shared jurisdiction between that plant and Washington state. The company justified this by citing the need for efficiency gains. However, given that South Carolina is a non-union state, this was widely seen as a blow to the machine workers' union, which had staged a 58-day strike in 2008.

At the South Carolina plant, which was teeming with whistleblowers, problems quickly came to light. Metal fragments were found in electrical enclosures that could have caused short circuits. Built-in parts did not work.

Another cost-cutting measure – outsourcing the design and manufacture of Dreamliner components to subcontractors around the world – resulted in a comedy of errors that caused so many problems that executives admitted it would have been cheaper to do the work in-house. Some parts made by far-flung suppliers didn't fit together. Some subcontractors couldn't meet their production quotas, leading to huge production backlogs when key parts weren't available in the required order.

Instead of providing detailed blueprints to subcontractors as it had previously done, Boeing required its suppliers to create their own plans. At least one major supplier did not even have its own design department at the time of the order, according to an analysis by the European consortium Airbus, Boeing's biggest global competitor.

Boeing's now-infamous 737 Max aircraft, which was supposed to be a more fuel-efficient version of the best-selling 737, also had problems. Two crashes of the new plane less than five months apart in 2018 and 2019 – the first crash was by Indonesian airline Lion Air and the second by Ethiopian Air – claimed the lives of 346 passengers and crew and led to a nearly two-year suspension of flights and nearly half a billion dollars in fines; the company agreed to plead guilty to charges of defrauding the U.S. government.

In January of this year, a blind door panel in the fuselage of an Alaskan Airlines 737 Max exploded during flight, resulting in an eight-month flight ban.

During that entire period, Boeing has distributed billions of dollars to its shareholders in the form of dividends and share buybacks. That included nearly $31 billion in dividends, including $5.8 billion paid in 2019 and 2020. During those years, the company reported losses totaling more than $12 billion.

From 2013 to 2019, the company bought back $43.5 billion worth of stock, a strategy aimed at boosting its stock price. Boeing ended its dividend payout in 2020 and its share buybacks in 2019.

At that point, the company was facing a spate of losses. From 2019 to 2023, Boeing lost $26 billion on revenue of $307.7 billion. The effort to reinvent itself – or perhaps return to its roots – is not over yet.

If anything, the company has been moving in the wrong direction. In 2022, it announced it would abandon its Chicago headquarters and move to Arlington, Virginia, ostensibly to accommodate its role as a government contractor. (The company said the move would bring it closer to its “customers and stakeholders and its access to world-class engineering and tech talent” — not that lobbying on Capitol Hill would be any more convenient from Arlington.)

There could be a fundamental change at Boeing. The new CEO Kelly Ortberg – an importer of the aerospace group Rockwell Collins – has expressed a desire to improve labor relations.

Asked for comment on the dismal long-term performance, the company referred me to a statement Ortberg issued last month after meeting with leaders of the IAM local unions representing Boeing workers. In it, he expressed his “determination to reset our relationship and negotiate a new contract under which we can work together to build a strong future for our employees in the region.” He added that after the meetings with employees, he was “impressed by the talent of our people and … grateful for their candor.”

“In the coming weeks, I will continue to visit our Boeing sites to see the work and meet our teammates. I am impressed by the talent of our people and grateful for their candor in our discussions,” he said. The new contract could help him address ongoing quality problems, and it certainly preempts a strike by machinists that was scheduled to begin Thursday, the deadline for union members to ratify the contract.

But the company still has a long way to go to restore its reputation as one of America's preeminent manufacturers. For more than two decades, management teams have been concerned with the bottom line but seemingly failed to realize that the bottom line depends on making a product that customers value, and in doing so, they have gambled away their reputation.

The story of Boeing is a gothic tragedy, and it usually ends badly for everyone.