Boeing's biggest blunder? Financial engineering.

Summary

Podcast Summary: "Boeing's Biggest Blunder? Financial Engineering"

Podcast Information

• Title: The Indicator from Planet Money
• Host/Author: NPR
• Episode Title: Boeing's Biggest Blunder? Financial Engineering
• Release Date: December 3, 2024
• Description: A deep dive into the complexities of Boeing's corporate strategies and their repercussions on the company's performance and culture.

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Introduction

In the December 3, 2024 episode of The Indicator from Planet Money, hosts Darian Woods and Weylon Hoang explore the critical issues facing Boeing under the leadership of CEO Kelly Ortberg. The discussion delves into the shift from an engineering-centric culture to one focused on financial engineering, examining how this transition may have contributed to Boeing's current challenges.

Boeing's Troubled Landscape

Hosts' Overview:

• Darian Woods and Weylon Hoang set the stage by highlighting Boeing's precarious situation, marked by a 33,000-strong machinists' strike and plans to lay off 10% of employees (00:14).
• Kelly Ortberg, Boeing’s CEO, emphasizes stabilizing the company and strategizing for the future during his first quarterly earnings release (00:30).

Leadership and Culture Change

Kelly Ortberg's Approach:

• Ortberg recognizes the necessity for a fundamental culture change at Boeing, moving beyond superficial measures like motivational posters (00:47).
• He underscores the importance of returning to Boeing's engineering roots, stating, "We need to be on the factory floors, in the backshops, and in our engineering labs" (08:09).

Carl Tack's Perspective:

• Carl Tack, a finance expert and former corporate lawyer, posits that Boeing's shift from an engineering focus to financial engineering is at the heart of its current woes (01:59).

The Shift to Financial Engineering

Historical Context:

• Boeing's pivotal shift began in 1997 with the acquisition of McDonnell Douglas, which brought in executives prioritizing financial metrics over engineering excellence (03:27).
• This transition mirrored the Jack Welch playbook from General Electric, emphasizing short-term profits and stock price boosts (04:21).

Defining Financial Engineering:

• Weylon Hoang explains financial engineering as a corporate strategy focused on maximizing shareholder value, often through cost-cutting and financial maneuvers rather than product innovation (01:26).

Hallmarks of Financial Engineering at Boeing

Aggressive Cost Management:

• Ortberg and Tack identify aggressive cost-cutting as a primary characteristic, involving layoffs, supplier pressure, and managerial evaluations based on cost reduction (04:56).
• This approach extended to outsourcing manufacturing, leading to a fragmented supply chain with over 600 suppliers for the 737 Max, complicating quality oversight (05:21).

Distributing Money to Shareholders:

• Boeing allocated approximately $65 billion to stock buybacks and dividends between 2013 and 2019, funds that could have been reinvested into the company (07:02).

Notable Quote:

"These are the hallmarks of a financial engineering run company and they look a lot like GE in its heyday." — Kelly Ortberg (04:50)

Impact of Cost-Cutting Measures

Operational Consequences:

• Former Boeing employees report feeling pressured to prioritize efficiency over safety, a claim Boeing disputes (04:56).
• The outsourcing strategy led to supply chain vulnerabilities, exemplified by the door plug failure at an Alaska Airlines 737 (05:47).

Recent Strategic Reversals:

• In response to supply chain issues, Boeing announced the acquisition of a previously outsourced fuselage supplier, a move seen as a potential reversal of past outsourcing decisions (06:02).

Outsourcing and Supply Chain Issues

Complex Supply Networks:

• The reliance on a vast network of suppliers diminished Boeing’s control over quality, contributing to safety incidents and operational inefficiencies (05:21).

Case Study:

• The 2005 decision to offload plants in Kansas and Oklahoma to an investment firm, which later became a key supplier for the 737 Max, highlights the long-term implications of outsourcing (05:47).

Shareholder Distributions and Moral Hazard

Financial Prioritization:

• Tack explains that Boeing's emphasis on shareholder returns created a moral hazard, where the company became overly reliant on financial maneuvers rather than sustainable business practices (07:19).

Consequences:

• This strategy left Boeing vulnerable when financial reserves were insufficient to weather crises, such as the recent safety incidents and operational setbacks (07:54).

Current Challenges and Future Outlook

Financial Strain:

• Boeing faces an almost $60 billion debt and a backlog of over 5,000 commercial airplanes, exacerbating its financial and operational difficulties (08:30).

Cultural Reengineering:

• Ortberg’s task includes not only financial stabilization but also a comprehensive reengineering of Boeing's corporate culture to prioritize engineering excellence and safety (08:30).

Notable Quote:

"A lot of insiders think those two things are related." — Kelly Ortberg on the connection between financial decisions and recent crashes (06:24)

Conclusion

The episode concludes by emphasizing the critical need for Boeing to balance financial management with its engineering heritage. Kelly Ortberg's leadership is pivotal in navigating these challenges, aiming to restore Boeing's reputation and operational integrity. The long-term success of Boeing hinges on its ability to reconcile shareholder expectations with the essential demands of aerospace manufacturing.

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Transcript Timestamp Reference

• 00:12: Introduction by Darian Woods
• 00:14: Weylon Hoang introduces the episode's focus
• 00:30: Discussion of initial challenges under CEO Ortberg
• 00:47: Carl Tack on culture change
• 01:01: Weylon Hoang on failed culture posters
• 01:26: Introduction to financial engineering topic
• 01:41: Introduction of Carl Tack
• 01:55: Kelly Ortberg poses critical questions to students
• 02:02: Discussion on corporate purpose
• 02:17: Braun's perspective on business purpose
• 02:38: Ketty Ortberg's balancing act between shareholders and customers
• 03:11: Historical shift from engineering to financial focus
• 03:27: Adrian Ma on Boeing's engineering reputation
• 03:43: Boeing's innovation with the 747
• 03:57: Acquisition of McDonnell Douglas and cultural shift
• 04:21: Comparison to General Electric under Jack Welch
• 04:50: Ortberg on financial engineering similarities to GE
• 04:56: Hallmarks of financial engineering: cost management and shareholder distribution
• 05:21: Impact of cost-cutting and outsourcing
• 05:47: Example of outsourcing and its consequences
• 06:02: Boeing reacquiring a key supplier
• 06:24: Ortberg on the relation between financial decisions and safety incidents
• 07:02: Financial distributions to shareholders
• 07:19: Dutcan on moral hazard and shareholder focus
• 07:54: Consequences of financial prioritization
• 08:09: Boeing's current status and challenges
• 08:30: Summary of Ortberg's tasks
• 09:07: Production credits (skipped in summary)

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Note: Timestamps are provided for reference and to align quotes with their original context within the episode.

Transcript

[Darian Woods]

This is the indicator from Planet Money. I'm Darian Woods.

[Weylon Hoang]

And I'm Weylon Hoang. Back in October, Kelly Ortberg presided over his first quarterly earnings release as the new CEO of Boeing. He'd been on the job for just over two months, and given all of Boeing's troubles, there really wasn't much of a honeymoon period.

[Darian Woods]

Yeah, 33,000 Boeing machinists were on strike, and Kelly Ortberg had announced plans to lay off about 10% of employees. He told CNBC in an interview that his short term priority was stabilizing the company and looking further ahead.

[Carl Tack]

And we really need to embark on a culture change that is something more than just a poster on the wall. It's really going to.

[Weylon Hoang]

I guess those posters of the cat saying hang in there didn't work.

[Darian Woods]

If that doesn't work, I don't know what will.

[Weylon Hoang]

I know, I know. Let's just give up. You know, this culture change that Kelly Ortberg is talking about. It's an acknowledgment that what's gone wrong at Boeing was something fundamental interwoven in the very nature of the company and its decision making. And for many Boeing observers, the mistake was shifting focus from engineering to financial engineering.

[Darian Woods]

Today on the show, we explain what financial engineering is and why this cultural change at Boeing may have led to the company's current problems.

[Weylon Hoang]

Carl Tack is a former corporate lawyer and investment banker. Today he teaches finance at the College of William and Mary. And a couple weeks ago, he gave a talk about Boeing to a group of students. And he opened with a provocative question.

[Kelly Ortberg]

What is the purpose of a business corporation? What's the purpose of Boeing?

[Darian Woods]

These are deep, metaphysical, questions.

[Weylon Hoang]

Many a corporation has sat on a hillside and pondered this very thing.

[Kelly Ortberg]

These were mostly finance majors. And when I polled the class, the vast majority of students put up their hand effectively to say the purpose of a business corporation is to make money for shareholders.

[Weylon Hoang]

That's what I would have said.

[Kelly Ortberg]

That's what a lot of people say. And it's not necessarily wrong. The real question is, okay, but how? And what does that mean when we have a situation where, for example, serving customers conflicts with making money for shareholders? Which takes priority.

[Darian Woods]

Yeah, which does take priority. You know, Karl thinks it should be serving customers by making products or services that they want to buy.

[Kelly Ortberg]

Boeing makes airplanes. That's why Boeing exists. To do that sustainably over long periods of time. We have to make money for shareholders, because if we don't make money for shareholders, we're not going to attract the funding we need to build airplanes.

[Weylon Hoang]

In other words, making money should be subordinate to the goal of making airplanes. For Carl, the tension between these two purposes, making money or making airplanes, is at the heart of Boeing's troubles.

[Darian Woods]

But this tension wasn't always so apparent. For the first part of Boeing's history, the company was known for its engineering prowess. There's this old saying, if it's not Boeing, I'm not going. And the company actually still sells merch on its website with the slogan chances.

[Adrian Ma]

Are you've heard about the plane with the spiral staircase in first class.

[Weylon Hoang]

This 1969 commercial for Pan Am touts the features of the Boeing 747, the first airplane with two aisles. Because of its size, it revolutionized air travel when it was introduced.

[Adrian Ma]

The plane with the two wide aisles and the three widescreen movies and the eight foot ceilings. In economy and chance, chroniclers of Boeing's.

[Darian Woods]

History point to 1997 as a turning point for the company. That year, Boeing acquired FELLOW Airplane maker.

[Kelly Ortberg]

McDonnel Douglas and then effectively Mcdonnell Douglas executives took over the company. By all accounts, that changed the culture of Boeing. Over a 20 year period from a firm of engineers to, you know, a business run by not necessarily engineers. Boeing became much more financially oriented.

[Weylon Hoang]

This is financial engineering. Earlier, this mindset had transformed General Electric. It was during the tenure of legendary CEO Jack Wel. He was known for a relentless focus on short term profits and boosting GE stock price. In practice, this led to closing factories and laying off workers.

[Darian Woods]

Former GE executives took the Jack Welch playbook to other companies. And this group of alums included a CEO of McDonnell Douglas who later became CEO of Boeing.

[Kelly Ortberg]

I can tell you the hallmarks of a financial engineering run company and they look a lot like GE in its heyday.

[Weylon Hoang]

We're going to talk about two of these hallmarks. Aggressive cost management and distributing money to shareholders. So number one is pushing costs down. For Boeing, this meant layoffs, freezing out suppliers that refused to discount their prices and evaluating managers based on their ability to cut costs. Former Boeing employees have talked about feeling pressured to choose efficiency over safety. Although the company disputes this.

[Darian Woods]

The focus on cost cutting also meant outsourcing more manufacturing. Now this is something a lot of companies do, from Apple to Boeing's European rival Airbus. But the supply chain for say, Boeing 737 Maxs became really complex. It had over 600 suppliers, including ones for critical components. And that limited how much oversight Boeing had when it came to quality.

[Weylon Hoang]

Here's one example of that outsourcing. In 2005, Boeing offloaded plants in Kansas and Oklahoma to an investment firm. That investment firm created a new company that later became the supplier of fuselages for the 737 Max.

[Darian Woods]

The supplier came under intense scrutiny this year after a door plug blew out at the site of an Alaska Airlines 737. This summer, Boeing announced it was acquiring that supplier, basically reversing the deal it did back in 2005. Carl thinks Boeing may be having second thoughts about outsourcing some of its core operations.

[Kelly Ortberg]

When Boeing shifted from 25 years ago, a culture of engineering design, manufacturing excellence, to in this middle period, making a lot of money for shareholders, decisions were made which may have had some relationship to Boeing's recent travails. I'm not going to pound the table and say Boeing's, you know, had the crashes in 18 and 19 and the Alaska airline incident because of financial decisions they made 15 years ago. I'm not saying that. I can't say that. But a lot of insiders think those two things are related.

[Weylon Hoang]

So hallmark number one of a financial engineering focused company is aggressively keeping costs down. The second hallmark is distributing lots of money to shareholders. Carl says Boeing spent $65 billion on stock buybacks and dividends between 2013 and.

[Kelly Ortberg]

2019, money that could have been used in the company for in various ways. And instead it went out the door to shareholders.

[Darian Woods]

Boeing is the dominant commercial aircraft maker in the U.S. carl thinks executives may have believed their company was too big to fail and that might have enabled greater risk taking on the financial side.

[Weylon Hoang]

This is a concept known as moral hazard. And Carr believes Boeing's habit of paying shareholders instead of reinvesting profits or saving money for a rainy day. It worked. Until it didn't.

[Kelly Ortberg]

When the proverbial stuff hit the fan, Boeing was in a financial position which could very well have taken down the company, right? As of now, it hasn't. But they're still not out of the woods, I don't think.

[Darian Woods]

We reached out to Boeing for the story, and the company referred us to a statement CEO Kelly Ortberg recently made where he said, we need to be on the factory floors, in the backshops, and in our engineering labs.

[Weylon Hoang]

It's language that harkens back to Boeing's roots, and he does have the pedigree to match. He's a former engineer who previously ran an aerospace company.

[Darian Woods]

Still, Kelly Ortberg has a long list of problems to address. They include an almost $60 billion debt pile, a backlog of more than 5,000 commercial airplanes, and maybe most importantly, a re engineering of Boeing's culture.

[Weylon Hoang]

This episode was produced by Angel Carreras with engineering by Gilly Moon. It was backtracked by Sierra Juarez. Kikin Cannon is our show's editor, and the Indicator is a production of npr.

[Darian Woods]

Hey, it's Darian Woods, Weyland Wan and Adrian Ma. We want to take a moment to talk about what makes the indicator and everything you hear on NPR special.

And because it's the Indicator, we're going to have some fun and do it as a little poem.

[Weylon Hoang]

Adrian and I have not heard this, so take it away. Darian.

[Darian Woods]

NPR is public media, like an interstate, a public good connecting places big and small. We want everyone understood, freely available to whoever wants it. No paywalls or tolls to drive through. Now, the reason we can keep building these roads, it's all because of you.

[Weylon Hoang]

Wow, Robert Frost reincarnated.

[Darian Woods]

Well, you know, there's two roads ahead. One is donating to NPR and one isn't. Choose the other one.

[Weylon Hoang]

So, yes, it is because of you that NPR can do this work. And the Indicator can come to you every weekday to explain what's happening in the economy, in business, at work and at home.

[Darian Woods]

If you already support us, whether it's through NPR or donating to your local station, thank you. If you haven't taken the leap yet, now is a great time because it's Giving Tuesday with npr. You get to hear this and other NPR shows without sponsor messages. And there are other perks, too, like bonus episodes and discounts at the NPR shop.

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