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: Boeing's Biggest Blunder? Financial Engineering
• Release Date: December 3, 2024

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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.

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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.”

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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.

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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.

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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.

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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.

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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.

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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.

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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.”

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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.

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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.

Transcript

[Kelly Ortberg]

Npr.

[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.

[Kelly Ortberg]

And we really need to embark on a culture change that is something more.

[Darian Woods]

Than just a poster on the wall.

[Weylon Hoang]

It's really going to, 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 acknowledgement 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.

[Carl Tack]

This message comes from Capital One. Say hello to stress free subscription management easily track block or cancel recurring charges right from the Capital One mobile app. Simple as that. Learn [e-mail] subscriptions terms and conditions apply.

[Sierra Juarez]

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[Carl Tack]

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[Weylon Hoang]

Carl Tack is a former corporate lawyer and investment banker. Today he teaches finance at the College of William and Mary. And. 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.

[Kelly Ortberg]

Are you've heard about the plane with a 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.

[Kelly Ortberg]

The plane with the two wide aisles and the three widescreen movies and the eight foot ceilings and economy and chances.

[Darian Woods]

Chroniclers of Boeing's history point to 1997 as a turning point for the company. That year, Boeing acquired Fellow Airplane maker.

[Kelly Ortberg]

McDonnell 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 Welch. 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 plans 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. Karl 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. kyle thinks executives may have believed their company was too big to fail and that might have enabled greater risk taking. On the financial side, this is a.

[Weylon Hoang]

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 Enel Carreras with engineering by Gilly. It was fact checked by Sierra Juarez. Kkkannon is our show's editor, and the indicator is a production of npr.

[Carl Tack]

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[Sierra Juarez]

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