A GE9X engine of a Boeing 777X is seen here inside the Everett assembly plant. A problem with the engine will delay the first flight of the new plane. (Mike Siegel/The Seattle Times/TNS)

A GE9X engine of a Boeing 777X is seen here inside the Everett assembly plant. A problem with the engine will delay the first flight of the new plane. (Mike Siegel/The Seattle Times/TNS)

737 crisis leaves Boeing badly behind in race with Airbus

With loss of a previous strategic advantage, this disastrous year will be followed by a precarious 2020.

By Dominic Gates / The Seattle Times

SEATTLE — Since the second fatal 737 Max crash, in Ethiopia in March, and the subsequent worldwide grounding of the jet, Boeing — the company that built the Pacific Northwest’s manufacturing economy and made the region a global powerhouse of aerospace technology — has suffered a precipitous fall.

Ongoing investigations of the crashes have spotlighted the badly flawed design of the Max’s flight control system and a largely self-certifying oversight regime that failed to catch the flaws. Congressional investigators are combing internal Boeing documents for evidence of malpractice, and a Department of Justice probe means even a criminal indictment is not ruled out. The jetmaker’s stellar global reputation is badly tarnished.

Through it all, said Richard Aboulafia, vice president of analysis at aviation consulting firm Teal Group, Boeing has displayed “an absence of leadership, an absence of strategy and an inability to communicate.”

The disastrous year will be followed by a precarious 2020: As Boeing’s new leaders struggle to recover control, they face crucial decisions about developing new airplanes while they cope with depleted financial resources, a distracted engineering corps and a loss of Boeing’s previous strategic advantage against rival Airbus. They’ll also face pressure to reverse a two-decadeslong decline in the company’s historic culture of engineering prowess, which many blame for the Max disaster.

Although newly ousted CEO Dennis Muilenburg was an engineer, he stuck closely to the financial engineering playbook of his predecessor, Jim McNerney. Whistleblowers and leaked documents have raised damaging accusations that management drove too relentlessly to cut costs and deliver on schedule.

A former senior leader at Boeing, who asked for anonymity to speak freely, blamed the Max crisis on a “push away from engineering excellence, driven by cost-cutting.”

“All of us who care about Boeing, we want to learn from this and ensure it never happens again,” the former executive said. “We have to get back the engineering discipline and make it the No. 1 priority.”

Boeing’s proposed fix for the Max — making sure the flight control system that went haywire in the crashes has multiple redundancies — in concept is solid. In practice, it’s taking much longer than anticipated to ensure the software is bug-free and hides no pathways to another single-fault failure.

It looks like the grounding of the Max will stretch into a full year. Yet no serious industry analyst doubts that the Max eventually will fly again and that when it does, it will be a safe airplane.

Aboulafia believes Boeing must not only steady itself by fixing the Max and restarting production but then must follow up as soon as practical to secure its future by launching an all-new airplane.

Adam Pilarski, senior vice president at consulting firm Avitas, points to the recurring cycles in the aviation industry. Though both Airbus and Boeing have suffered major setbacks over the years, the two aerospace giants still divide the business in a powerful duopoly and neither can feed the demand for new jets alone.

He’s optimistic that despite the debacle of 2019, Boeing will reverse its fortunes.

“In the long run, aviation is not dead. Boeing is not dead,” Pilarski said. “Eventually, Boeing can recover its strategic position.”

Fall from grace

In fall 2018, Boeing was riding high, raking in cash from ever-accelerating 737 production and widely seen as having the upper hand strategically over Airbus.

Boeing’s Max had been launched late but was catching up on the Airbus A320neo, and in 2019 Boeing anticipated flying its new Everett-built 777X and launching an all-new “New Midmarket Airplane” (NMA) — a prospective 797.

Even after the October 2018 crash of Lion Air flight JT610, the stock kept climbing, until March, when CEO Muilenburg could boast that the share price had tripled during his tenure. But with the second crash and the worldwide grounding, Boeing’s dominant position swiftly crumbled. The stock is now down a quarter from its high.

Delivery and sales numbers show a stark divergence of fortune with rival Airbus.

Through November this year, Airbus had 718 net orders and delivered 725 aircraft, while Boeing booked just 56 net orders and delivered 345.

In the crucial single-aisle category, Airbus delivered 578 of its A320 family of planes and Boeing just 121 single-aisle 737s. About 400 more Maxes were built that cannot be delivered until regulators clear the jet.

With Boeing sales stalled, Airbus raked in orders for its largest single-aisle jet, the A321neo, and launched new versions with extra fuel tanks to offer significant extra range.

As a result, airlines are buying the A321neo for medium-range international flights, such as transatlantic routes. That’s the heart of the mid-size, midrange market Boeing planned to target with its NMA, a plane carrying 220 to 270 passengers up to 5,700 miles.

The economics of the A321neo are forcing a shift away from larger, twin-aisle jets, which are much more expensive to buy and to operate. The jet’s order backlog has swelled to more than 3,200 airplanes as “the middle market has gotten way bigger than anyone expected,” said Aboulafia.

But at Boeing, any new airplane remains just an idea.

And the new 777X, delayed by engine-development problems, won’t fly until sometime in 2020.

Stan Sorscher, a retired Boeing engineer and longtime policy analyst with Boeing’s white-collar union, the Society of Professional Engineering Employees in Aerospace (SPEEA), describes a shift at Boeing over the past two decades from an engineering culture that strove for quality, high performance and problem-solving during development of a new airplane to one focused narrowly on cost-cutting.

This deliberate strategy from the very top of the company led to massive, ill-thought-out outsourcing and the discarding of engineering talent as work was moved out of the Puget Sound region.

Sorscher said that has led to major failures on Boeing’s latest two major airplane development programs — first the heavily outsourced 787 Dreamliner and then the minimally upgraded 737 Max. Both planes had to be grounded over safety issues.

Sorscher said Boeing had built up a superb engineering culture through building new planes every 10 years or so and passing on the knowledge through generations of engineers, but “we’ve now had two decades of workers who have not had the experience of going through a good, high-performance development program.”

Boeing at bay

As 2019 ends, Boeing is paralyzed by the Max crisis.

After months of optimistic declarations that the Max fix was close to approval, the FAA pricked that bubble in December, when FAA boss Steve Dickson told Muilenburg to get real. In response, Boeing finally announced a complete halt to the 737 Max assembly line in Renton until further notice. The board fired Muilenburg shortly after and appointed company Chairman Dave Calhoun to take over as CEO.

“Right now, there is a fire and they have to put it out,” said Pilarski, of Avitas.

Now Boeing must wait for FAA clearance while it braces for compensation negotiations with suppliers and airline customers. Its leverage is limited: Boeing needs suppliers to maintain capacity to restart and ramp up production again. It needs airlines to keep their Max orders.

Yet Boeing faces hostility from all quarters.

It had already alienated many suppliers long before the crashes as it relentlessly pressed them to lower their prices.

Major supplier Spirit AeroSystems in Wichita, Kansas, kept things running well by maintaining a production rate of 52 fuselages per month, even when Boeing cut its rate to 42 jets per month. The Renton shutdown forced Spirit to halt production completely.

Boeing’s airline customers, strung along for months, have lost patience. U.S. pilot unions have displayed open anger at Boeing.

United Airlines, tired of reassessing its schedule every month, pulled the Max from the schedule until June and said it expects to have to cancel more than 13,800 flights for the months of December through to June.

“Boeing has no friends anywhere,” said the former senior company leader.

On top of this, when the FAA finally gives the Max the OK to fly — late February or early March is the new target — it will be a daunting logistical challenge to restart the global supply chain and perform the maintenance needed to get the backlog of parked airplanes back in the air and delivered.

Even assuming the FAA’s approval doesn’t slip further, some of the parked jets may remain undelivered through next year. It could be 2022 before Boeing’s Renton plant is back to normal.

The future

Aboulafia, of the Teal Group, worries that the Max crisis will leave Boeing incapable of taking steps essential to its future, in particular responding to the new market demand for mid-size, midrange, single-aisle planes for international routes — jets like the Airbus A321neo.

He says “an arms race” by airlines to re-equip their fleets with these new airplanes is already under way. This month, United Airlines said it will buy 50 new A321XLRs, the extra-long-range version, to replace its aging Boeing 757 fleet.

“This is exactly the moment that Boeing needs to invest in its future,” said Aboulafia. “There will be a wave to catch. People want a new jetliner. You prepare for the wave and you catch it.”

He believes Boeing should drop the twin-aisle NMA concept and instead go for a replacement to the Max that skews toward the larger end of the single-aisle segment, the A321neo’s size.

Without the crashes, he thinks Boeing could have “turned on a dime” to pivot toward that idea. Now, with cash squeezed and debt mounting, he fears the Boeing board won’t make the necessary investment and will lose that market completely to Airbus.

Yet the best Boeing strategy is not obvious.

Pilarksi agrees that Boeing needs to catch that next wave. But he still sees the NMA concept as Boeing’s best answer to the A321neo. The NMA plan includes new, innovative production technology that he thinks Boeing should apply to a Max replacement, only some years later.

Whatever strategy is chosen, he said that as it emerges from the Max crisis, Boeing needs to “tell the market that it is not out of business.”

“They need a moonshot,” said Pilarski. “They better start working on it. I’m sure they are.”

Sorscher, the former Boeing and SPEEA analyst, said Boeing won’t succeed at that next new airplane unless its leaders can reassert legacy engineering standards.

“The cost-cutting business model is OK for mature products that don’t involve innovation and risk,” he said. But whatever next new airplane Boeing develops, he believes it must restore its “problem-solving, high-performance engineering culture.”

Sometime in the new year, Boeing hopes for its first good-news event in many months: the long-delayed first flight of the new 777X, with its massive composite wings.

In late January, Boeing’s new leadership will reveal the latest tally of the cost of the Max grounding, updating the $9.2 billion estimate through October.

The rest of the year is likely to be a long slog, getting the Max program restarted and slowly ramping back up again. No one can yet foresee the long-term impact.

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