Podcast Summary: Boeing's Biggest Blunder? Financial Engineering

Podcast Information:

• Title: The Indicator from Planet Money
• Host/Author: NPR
• Episode: Boeing's Biggest Blunder? Financial Engineering
• Release Date: December 3, 2024

Introduction

In the December 3, 2024 episode of The Indicator from Planet Money, NPR delves into Boeing's current turmoil, attributing much of the company's recent struggles to a shift from its engineering-centric roots to a focus on financial engineering. Hosts Darian Woods and Weylon Hoang, along with expert guest Carl Tack, unpack the cultural and financial transformations at Boeing that may have led to operational and safety challenges.

Boeing's Challenging Landscape

The episode opens with the backdrop of Kelly Ortberg's leadership as the new CEO of Boeing. Appointed just over two months prior, Ortberg faced immediate crises, including a strike by 33,000 Boeing machinists and the announcement of plans to lay off approximately 10% of the workforce.

Kelly Ortberg (00:47): “We really need to embark on a culture change that is something more.”

Ortberg emphasized the urgency of stabilizing the company while also planning for the future, signaling the end of Boeing’s brief “honeymoon period.”

Shift from Engineering to Financial Engineering

Weylon Hoang explains that Boeing’s current predicament stems from a fundamental cultural shift within the company—from a focus on engineering excellence to prioritizing financial metrics.

Weylon Hoang (01:01): “The culture change that Kelly Ortberg is talking about, it's an acknowledgement that what's gone wrong at Boeing was something fundamental interwoven in the very nature of the company and its decision making.”

This transformation began in 1997 when Boeing acquired McDonnell Douglas, leading to a gradual takeover by McDonnell Douglas executives who emphasized financial performance over engineering prowess. The legacy of Jack Welch’s financial strategies at General Electric (GE) significantly influenced Boeing’s approach during this period.

Impact of Financial Engineering

Carl Tack, a finance professor, identifies two key hallmarks of financial engineering that have permeated Boeing’s operations:

1. Aggressive Cost Management

   Boeing implemented stringent cost-cutting measures, including layoffs, supplier discounts, and evaluating managers based primarily on their ability to reduce expenses.

   Weylon Hoang (06:02): “These decisions were made which may have had some relationship to Boeing's recent travails.”

   This relentless focus on efficiency reportedly pressured employees to prioritize cost savings over safety, contributing to quality lapses.

2. Distributing Money to Shareholders

   Between 2013 and 2019, Boeing allocated approximately $65 billion to stock buybacks and dividends rather than reinvesting in the company.

   Carl Tack (08:08): “Boeing spent $65 billion on stock buybacks and dividends... money that could have been used in the company in various ways.”

This strategy created a moral hazard, where the company prioritized shareholder returns over long-term sustainability, leaving Boeing vulnerable when crises arose.

Outsourcing and Quality Control Issues

Outsourcing became a significant aspect of Boeing’s cost-cutting strategy, leading to a complex supply chain with over 600 suppliers for the 737 Max. This fragmentation reduced Boeing's oversight over critical components, exacerbating quality control issues.

Weylon Hoang (06:53): “The supply chain for say, Boeing 737 Maxs became really complex... and that limited how much oversight Boeing had when it came to quality.”

A notable example involves a supplier acquired by Boeing after issues arose with fuselage components:

Darian Woods (07:08): “The supplier came under intense scrutiny this year after a door plug blew out at the site of an Alaska Airlines 737.”

In response, Boeing reversed a 2005 outsourcing deal, indicating a potential shift back towards in-house manufacturing to regain control over quality.

Consequences and Current Challenges

The repercussions of Boeing’s financial engineering are evident in the company’s operational challenges, including two major crashes in 2018 and 2019, and subsequent safety incidents. While Ortberg hesitates to directly link these tragedies to financial decisions made years prior, he acknowledges that insiders see a connection.

Kelly Ortberg (07:30): “When Boeing shifted from... a culture of engineering design... to making a lot of money for shareholders, decisions were made which may have had some relationship to Boeing's recent travails.”

Financial strains have left Boeing with an almost $60 billion debt pile and a backlog of over 5,000 commercial airplanes, complicating efforts to recovery.

CEO Kelly Ortberg’s Strategic Shift

Ortberg is spearheading a cultural renaissance aimed at restoring Boeing’s engineering excellence. He advocates for a return to the factory floors and engineering labs to reestablish the company’s foundational strengths.

Kelly Ortberg (09:15): “We need to be on the factory floors, in the backshops and in our engineering labs.”

As a former engineer with experience leading an aerospace company, Ortberg brings credibility to his vision of balancing financial health with engineering integrity.

Conclusion: Navigating the Road Ahead

Boeing stands at a critical juncture, striving to overcome its financial burdens and restore its reputation for engineering excellence. Ortberg's leadership marks a potential turning point, as the company seeks to mitigate past financial missteps and reestablish its commitment to building safe, reliable airplanes.

Weylon Hoang (09:56): “Yet, they're still not out of the woods, I don't think.”

The episode underscores the intricate interplay between financial strategies and operational integrity, offering a nuanced perspective on Boeing's ongoing challenges and the path forward.

Notable Quotes with Timestamps

• Kelly Ortberg (00:47): “We really need to embark on a culture change that is something more.”
• Weylon Hoang (01:01): “The culture change that Kelly Ortberg is talking about...”
• Carl Tack (08:08): “Boeing spent $65 billion on stock buybacks and dividends...”
• Kelly Ortberg (07:30): “When Boeing shifted from... a culture of engineering design...”
• Kelly Ortberg (09:15): “We need to be on the factory floors, in the backshops and in our engineering labs.”
• Weylon Hoang (09:56): “Yet, they're still not out of the woods, I don't think.”

About the Hosts and Contributors

• Darian Woods: Host of The Indicator from Planet Money, providing insightful economic analysis.
• Weylon Hoang: Co-host, guiding listeners through complex financial and business topics.
• Carl Tack: Finance professor and former corporate lawyer, offering expert perspectives on Boeing’s financial strategies.
• Kelly Ortberg: CEO of Boeing, navigating the company through significant operational and cultural challenges.

Supporting Information The episode was produced by Enel Carreras, with engineering by Gilly and fact-checked by Sierra Juarez. Production credit goes to Kkkannon, ensuring a high-quality, informative session for listeners.