The origin of problems with the Boeing 737 MAX and a possible solution via return to fundamentals. :PART TWO
How Boeing’s Problems With the 737 MAX Have Caused its Stock Price to Fall
By George A. Haloulakos, MBA, CFA
Boeing’s travails with its 737 MAX – two crashes that killed 346 people in 2018
and 2019 plus a mid-air blowout of a fuselage panel in 2024 – has caused its
stock price to decline concurrent with damage to its brand image. This is a direct
result of abandoning its core competencies – Engineering & Design — in favor of
a cost conscious, short-term financial focus on quarterly earnings performance.
[Sources: (1) Why Boeing’s Problems With the 737 MAX Began More Than 25 Years
Ago – By Bill George, HBS Working Knowledge, Jan 24, 2024. Why Boeing’s Problems
with the 737 MAX Began More Than 25 Years Ago – HBS Working Knowledge (2) Personal
Papers of Dr Vassilios Elias Haloulakos (1931-2019) Sr Scientist & Aerospace Engineer]
Boeing common (BA-NYSE) is a cyclical stock with long cycles. Of note is that
since the late 1950s Boeing historically was able to maximize shareholder value
on a sustainable, very long term basis with its Engineering & Design prowess.
The best quality airframe with the best safety record. Each new generation of
aircraft was a “bet the company” risk but Boeing made it work. [Sources: (1)
BOEING BULL & BEAR CYCLES and (2) RISK AND FINANCIAL DECISION MAKING –
By George A. Haloulakos, MBA, CFA]
Following the 1997 acquisition of McDonnell Douglas (MD), Boeing started to
veer off course from its culture of engineering and design excellence by placing
greater emphasis on cost-cutting and upgrading older aircraft in place of
designing all-new generation aircraft. This shift in strategy reflected focus on
maximizing quarterly earnings at the expense of creating sustainable, long-term
shareholder value. The chase for short-term financial gains was exemplified by
moving its corporate headquarters from Seattle, WA to Chicago, IL in 2001 to
gain $60 million in state & local tax credits. This move separated top
management from engineering and product decisions in Seattle as Boeing had
no businesses in Chicago. In the ensuing years rather than reinvest surplus
cash to create new generation aircraft, Boeing opted to maximize profits from
older generation models and use its surplus cash to buy back its common stock.
Dr Vassilios Haloulakos observed in 1997 that while it was reported that Boeing
acquired MD, it was the MD senior management that ended up as the largest
Boeing stock holders thereby facilitating the aforementioned shift in strategy.
Share buybacks are only useful AFTER having fully reinvested in the core
business to keep the lead and IF the surplus cash is not needed for a rainy day.
The MD group focused on cost while ignoring the sustainable value created from
Boeing’s Engineering and Design excellence. Their so called lower risk, cost
conscious approach created higher (not lower) operating risk than the “bet the
company” approach before the 1997 merger.
The Boeing 737 airframe (FAA-certified in 1968) was a major driver in expanding
worldwide commercial jet travel because its low-to-the ground design was
conducive for small regional airports as baggage could be uploaded manually by
hand without the aid of equipment and passengers could enter-and-exit using
roll-away stairways. The 737 variants that followed continued this trend. But
with Airbus introducing its A-320 aircraft in the late 1980s, Boeing’s 737
dominance started to lose momentum, especially as new A-320 variants
incorporated new technologies (e.g., larger, more fuel efficient engines) that
could not be easily adapted to the low-to-the ground Boeing 737 models. Instead
of launching a new generation single-aisle aircraft to replace the 737, Boeing –
now fully being piloted by an MD cost-cutting, risk-averse mindset – opted to
upgrade a 1960s airframe design by upgrading to the 737 MAX. The ensuing
widely-reported problems with the 737 MAX cited earlier in this article arose from
this “penny wise, but pound foolish” decision has led to loss in shareholder value,
decline in reputation and potentially damaging future lawsuits that could further
diminish the Boeing stock price and its brand image. MD’s historic success with
military aircraft did not successfully translate to help maintain Boeing’s leadership
in commercial jet aircraft. Instead, the MD culture placed Boeing at greater (not
lower) risk by trying to upgrade earlier generations that were not conducive for
incorporating the new technologies and to fall behind Airbus.
Going forward, Boeing faces the immediate challenge of fixing the problems with
the 737 MAX and regaining momentum in the commercial jet aircraft business.
On a longer-term basis, is the challenge of restoring its Engineering & Design
excellence and commercial aviation leadership associated with its longtime “bet
the company” strategy that enabled Boeing to launch the commercial jet age. To
accomplish this feat requires a return to understanding the fundamentals and
history of this approach. To get started on helping to restore this once iconic
American aircraft maker to the stratosphere of excellence, I invite all of you
readers and followers of Boeing to please review my research publications (1)
BOEING BULL & BEAR CYCLES and (2) RISK AND FINANCIAL DECISION
MAKING (A Case Study on the Boeing 367-80 prototype that launched the 707
commercial jet airliner and KC-135 military tanker). To get copies of these two
research publications, please send me an email. [email protected]
About the Author: George Haloulakos, longtime CFA Charterholder Finance
Instructor and Special Situations Analyst, is author of “CALL TO GLORY – How
the Convair B-58 Hustler Helped Win the Cold War.” ISBN: 9780-6924