Boeing’s nosedive: How greed ruined a great American company

Guest Post by Henry Johnston

What was once essentially a collective of engineers known for innovation and craftsmanship now operates in the interests of Wall Street

On a sunny day in August 1955 Boeing test pilot Alvin ‘Tex’ Johnston was to take the Dash-80, the prototype of the Boeing 707, out for a test flight at an annual hydroplane race over Lake Washington near Seattle. The large crowd gathered for the event included many of the top names in the aviation industry.

Rather than perform a simple flyover, the swaggering Tex, who got his start flying crazy loops on daredevil flights on a tri-motor plane across the dusty plains of Kansas, aimed to impress the gathered luminaries. Instead, he put the plane into a stunning barnstormer-like double barrel roll that left the crowd below astonished and his boss, Boeing CEO Bill Allen, mortified that the newly crafted jet was out of control and about to crash.

It was a fitting gesture for a plane whose very genesis was the result of a huge gamble. As the 1950s dawned, Boeing was at a crossroads. Having thus far thrived as a manufacturer of military aircraft whose modest forays into commercial aviation had met little success, the company needed direction as its defense contracts had mostly dried up with World War II over and the Korean War winding down.

It was at this time that CEO Bill Allen decided to bet the house – $16 million to be exact, a huge sum in those days – on building a jet transport prototype. It is hard to overstate how ambitious this project was. Not a single customer had committed to buying the plane, and it was hardly clear that such an aircraft would be viable in the market. “The only thing wrong with the jet planes of today,” said the head of TransWorld Airlines around that time, “is that they won’t make any money.”

Failure may very well have meant the end of the company. It was a resounding success. After a few lonely, uncertain years, an aircraft was built that would shrink the world and usher in the glittering jet age. A few short years later, the company would embark on another hugely expensive gamble that paid off when it undertook to build the six-story-high, 225-foot-long Boeing 747.

In 1957, when the 707 made its maiden flight, fewer than one in ten American adults had ever traveled in an airplane. By 1990, more adult Americans had flown than owned a car.

For many decades, Boeing was a decidedly unpretentious, engineer-driven company with a culture emphasizing both dazzling innovation and the sober virtue of impeccable craftsmanship. It was a place where the top managers held patents and could talk shop with the floor workers.

Even as late as the mid-1990s, the company’s chief financial officer reportedly kept his distance from Wall Street and answered colleagues’ requests for basic financial data with a dismissive, “Tell them not to worry.”

In hindsight, this principled aloofness has a bit of Shakespearean “last of all the Romans” feel. The company would soon be transformed beyond recognition.

Great companies invariably embody some intangible quality of the nations that spawned and nurtured them. Boeing came to represent in distilled and mythologized form something that Americans had come to see as forming an essential part of their national identity: unpretentious and focused on the task at hand. But if Boeing was the quintessential American company on the way up, it came to embody many of the country’s ills on the way down. Few companies have traced an arc of ascendancy and decline that so closely mirrors the nation’s own trajectory.

The singular event cited as marking the beginning of Boeing’s downfall was its 1997 merger with McDonnell Douglas, which put it on a collision course with a culture steeped in cost-cutting and financial performance. Somewhat perversely, although Boeing had acquired McDonnell, it was the latter that took over. McDonnell’s executives ended up running the company and its culture became ascendant. Scores of cut-throat managers battle-hardened in the company’s perform-or-die culture were brought in. A federal mediator once likened the partnership to “hunter killer assassins meeting boy scouts.”

The self-effacing and introspective Bill Allen, Boeing’s genteel CEO through the post-war era and the man behind the 707 gamble, described his company’s ethos as “to eat, breathe, and sleep the world of aeronautics.” But a new generation of leaders was emerging who brought new priorities and a new vocabulary. It was no longer about making great airplanes; it was about “moving up the value chain.” What it was really about was maximizing shareholder value.

Now looming like a colossus over Boeing was the figure of Harry Stonecipher, McDonnell’s CEO. The blunt, hard-nosed son of a coal miner, Stonecipher was known for vicious cost-cutting, emails written in all caps – and for jettisoning executives who didn’t hit financial targets. But Stonecipher was a ‘winner’: McDonnell’s stock price had risen fourfold under his tenure.

What predictably ensued was nothing short of a complete transformation of Boeing from being a company run by engineers to one that prized financial profit over all, and was willing to cut all manner of corners to reduce costs and boost returns. The quality of the product was, to put it mildly, severely compromised.

Downstream from these changes are the spectacular failures we all know about: the outrageous cost overruns, delays and production issues in making the Boeing 787, which ended up being temporarily grounded for battery fires that regulators attributed to flaws in manufacturing, insufficient testing and a poor understanding of an innovative battery; the abject failure of the jimmy-rigged 737 MAX, which saw two deadly crashes and, most recently, a harrowing incident in which a sealed-off emergency exit blew out mid-air in an Alaska Airlines flight, leaving a gaping hole in the fuselage.

It is possible to see Boeing’s merger with McDonnell as simply an unfortunate mistake, and the rise of the likes of Harry Stonecipher as simply an instance in which the wrong person found his way to the top; and the outsourcing and cost-cutting as simply a misbegotten strategy. But this would miss the wider trends at work in the American corporate landscape at the time. Boeing was hardly alone on this path.

The writer David Foster Wallace once wrote that “America… is a country of many contradictions, and a big contradiction for a long time has been between a very aggressive form of capitalism and consumerism against what might be called a kind of moral or civic impulse.”

What is evident is that starting roughly in the 1970s, this “aggressive form of capitalism” became ascendant in the US and for a long time overwhelmed – and is arguably still overwhelming – the “moral and civic impulse.” However, to view this as simply a moral failing is to miss the greater economic pressures at work.

The ‘70s were, in the words of historian Judith Stein, the “pivotal decade” that “sealed a society-wide transition from industry to finance, factory floor to trading floor, [and] production to consumption.” America had emerged from World War II with unquestioned manufacturing supremacy, but within a few short decades, US companies had begun falling behind. Whereas Japan, Germany, and, later on, China invested heavily in their industrial bases in the post-war period, the US came to emphasize innovation at the expense of capital investment. The 1970s were when nascent industrial powerhouse Japan pulled off its so-called ‘revolution of quality,’ which went a long way toward putting American manufacturers on the back foot.

Bloated and increasingly uncompetitive American companies needed a way forward – and that way forward can most succinctly be summed up as a switch in resource-allocation strategies from value creation to value extraction. Whereas the highly vertically integrated American companies of old practiced a ‘retain-and-reinvest’ approach, the new regime was one of ‘downsize-and-distribute,’ to use a phrase coined by economist William Lazonick.

This can be described, depending on one’s point of view, as either maximizing the value of the company or asset-stripping it for the benefit of executives and shareholders – with a corresponding hemorrhaging of the workforce.

The intellectual underpinning for this change in approach came from economist Milton Friedman’s Chicago School, whose theory that executives had a “fiduciary duty” to maximize shareholder returns fell on fertile ground. A company, Friedman argued, has no social responsibility to the public or society; its only responsibility is to its shareholders. The idea that a company essentially exists to maximize value for shareholders has become so engrained in the fabric of our thinking that we are scarcely aware that it was ever any other way.

If, as Stein asserts, the US went from “factory floor to trading floor,” it necessarily meant a step up in prominence for Wall Street analysts and a step down for the factory managers – or, in Boeing’s case, the engineers. So what did the denizens of Wall Street want? They wanted to see the unwieldy industrial giants generate a better return on their assets – in finance lingo, they wanted a higher RONA (return on net assets).

Now, a naive observer might assume that the path to achieving this lies in using one’s assets more efficiently to generate more money. But there’s another way to increase RONA that proved a lot easier: generate (roughly) the same amount of money with fewer assets and lower costs. A constant numerator divided by a lower denominator gives a higher number. Outsourcing does exactly that: it removes assets from the balance sheet and that is precisely the path Boeing and many others went down under the ‘downsize-and-distribute’ model. The problem in Boeing’s case was that the supply chain for building an airplane is so complex that it made it practically impossible for the company to maintain quality standards.

Boeing’s embrace of this new regime can be described as nothing short of whole-hearted. The figures are staggering. Over the past decade, it has directed an incredible 92% of its cashflow back to shareholders in the form of dividends and buybacks.

Since 1998, the company has spent a staggering $63.5 billion on share buybacks. This, according to financial analyst Scott Hamilton, is equivalent to about four wide-body and five or six narrow-body airplane programs at today’s costs.

But Wall Street doesn’t need airplanes, it needs dividends. Hamilton recounts how at the company’s annual shareholder meeting in April 2020, CEO David Calhoun gave conflicting signals about a new airplane program and also about a return to a dividend policy. The following day, Melius Research gave the quintessential Wall Street view in a note for clients: “We struggle to see how the business case for a new airplane closes favorably these days.” It was a vote for dividends. In other words, today’s profits trump the company’s future.

It is perhaps not surprising that such a system arose in the US given the vastly complex, interrelated, and often contradictory economic forces pushing and pulling in the 1970s and extending forward over subsequent decades. We have mentioned America’s economic competitiveness waning, but the other side of that equation was that this was happening all while the US continued to wield the world’s reserve currency at a time of increased financialization.

Historians and economists will have to parse through the implications of a currency gaining in stature precisely at a time when a country’s manufacturing base recedes, but such a circumstance could hardly fail to push the entire system into the arms of Wall Street.

Harder to comprehend, meanwhile, is how the generation of leaders exemplified by the likes of Harry Stonecipher seemed to have completely embraced this transformation of the American economy.

In an interview with the Chicago Tribune in 2004, he said: “When people say I changed the culture of Boeing, that was the intent, so that it’s run like a business rather than a great engineering firm.”

What is startling about this is not so much Stonecipher’s actions at Boeing, but that he felt free to absolutely lay bare his motives. Had he been out of sync with the zeitgeist of the time, he may have still pursued the same aims out of whatever personal motives – such as greed – but, fearing opprobrium, would have done so much more furtively. That he felt he could unabashedly broadcast the destruction of Boeing’s finely hewn, decades-old culture says as much about the country as it does about the man.

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