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Another 737 MAX down.

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Hi,

Welcome to Big, a newsletter about the politics of monopoly. If you like it, you can sign up here. Today I’ll discuss how a merger in the 1990s ruined Boeing, and why the government will have to step in to save the company.

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Let’s start by admiring the company that was Boeing, so we can know what has been lost. As one journalist put it in 2000, “Boeing has always been less a business than an association of engineers devoted to building amazing flying machines.”

For the bulk of the 20th century, Boeing made miracles. Its engineers designed the B-52 in a weekend, bet the company on the 707, and built the 747 despite deep observer skepticism. The 737 started coming off the assembly line in 1967, and it was such a good design it was still the company’s top moneymaker thirty years later.

How did Boeing make miracles in civilian aircraft? In short, the the civilian engineers were in charge. And it fell apart because the company, due to a merger, killed its engineering-first culture.

What Happened?

In 1993, Clinton’s Deputy Secretary of Defense, Bill Perry, called defense contractor CEOs to a dinner, nicknamed “the last supper.” He told them to merge with each other so as, in the classic excuse used by monopolists, to find efficiencies in their businesses. The rationale was that post-Cold War era military spending reductions demanded a leaner defense base. In reality, Perry had been a long-time mergers and acquisitions investment banker working with industry ally Norm Augustine, the eventual CEO of Lockheed Martin.

Perry was so aggressive about encouraging mergers that he put together an accounting scheme to have the Pentagon itself pay merger costs, which resulted in a bevy of consolidation among contractors and subcontractors. In 1997, Boeing, with both a commercial and military division, ended up buying McDonnell Douglas, a major aerospace company and competitor. With this purchase, the airline market radically consolidated.

Unlike Boeing, McDonnell Douglas was run by financiers rather than engineers. And though Boeing was the buyer, McDonnell Douglas executives somehow took power in what analysts started calling a “reverse takeover.” The joke in Seattle was, "McDonnell Douglas bought Boeing with Boeing's money."

The merger sparked a war between the engineers and the bean-counters; as one analyst put it, "Some of the board of directors would rather have spent money on a walk-in humidor for shareholders than on a new plane." The white collar engineers responded to the aggressive cost-cutting and politically motivated design choices with the unthinkable, affiliating with the AFL-CIO and going on strike for the first time in the company’s 56-year history. "We weren't fighting against Boeing," said the union leader. "We were fighting to save Boeing."

The key corporate protection that had protected Boeing engineering culture was a wall inside the company between the civilian division and military divisions. This wall was designed to prevent the military procurement process from corrupting civilian aviation. As aerospace engineers Pierre Sprey and Chuck Spinney noted, military procurement and engineering created a corrupt design process, with unnecessary complexity, poor safety standards, “wishful thinking projections” on performance, and so forth. Military contractors subcontract based on political concerns, not engineering ones. If contractors need to influence a Senator from Montana, they will place production of a component in Montana, even if no one in the state can do the work.

Bad procurement is one reason (aside from more and more high-ranking military officials going into defense contracting work) why military products are often poor quality or deficient. For instance, the incredibly expensive joint strike fighter F-35 is a mess, and the Navy’s most expensive aircraft carrier, costing $13 billion, was recently delivered without critical elevators to lift bombs into fighter jets. Much of this dynamic exists because of a lack of competition in contracting for major systems, a practice enhanced by the consolidation Perry pushed in the early 1990s. Monopolies don’t have to produce good quality products, and often don’t.

At any rate, when McDonnell Douglas took over Boeing, the military procurement guys took over aerospace production and design. The company began a radical outsourcing campaign, done for political purposes. In defense production, subcontractors were chosen to influence specific Senators and Congressmen; in civilian production, Boeing started moving production to different countries in return for airline purchases from the national airlines.

Engineers immediately recognized this offshoring as a disaster in the making. In 2001, a senior Boeing engineer named L. Hart Smith published a paper criticizing the business strategy behind offshoring production, noting that vital engineering tasks were being done in ways that seemed less costly but would end up destroying the company. He was quickly proved right.

The first disaster was Boeing’s 787 Dreamliner, a test case in how to attempt to cut costs and end up driving up expenses. The company went over budget by something like $12-18 billion. As Sprey and Spinney put it, “You don't have to be wearing a deer-stalker hat to deduce that the rotten practices bred by DoD procurement have finally infected the executive suite of Boeing's commercial division.” Aside from the offshoring of key capacity, the 787 had significant engineering problems, including electrical systems that caused battery fires on the planes.

In 2005, Boeing hired its first ever CEO without an aviation engineering background, bringing in James McNerney, who got his training in brand management at Proctor & Gamble, then McKinsey, and then spent two decades at General Electric learning from Jack Welch how to erode industrial capacity in favor of shareholders. He brought these lessons to Boeing, and hurriedly launched a 737 version with new engines, the 737 Max, to compete with a more fuel-efficient Airbus model.

The key decision was, rather than fix the fundamental aerodynamic control problems caused by the new engine, to bandaid the existing 737 software, while pretending that flying the 737 Max was just like flying old ones. That way, airlines would be able to buy the plane and not have to retrain their pilots, as pilots must be re-certified any changed flight procedures but don’t have to be recertified for new models with unchanged flying qualities. Unfortunately, the aerodynamics of the 737 body didn’t fit with the Max’s bulkier engine, which was obvious during the first wind tunnel tests.

The testing in 2012, with air flow approaching the speed of sound, allowed engineers to analyze how the airplane’s aerodynamics would handle a range of extreme maneuvers. When the data came back, according to an engineer involved in the testing, it was clear there was an issue to address.

The old Boeing would have redesigned the plane’s control surfaces to fix the faulty aerodynamics, but the McDonnell Douglas influenced Boeing new one tried to patch the problem with software. And it was bad software, some of written by outsourced engineers in India paid $9/dollar an hour. The Federal Aviation Administration, having outsourced much of its own regulatory capacity to Boeing, didn’t know what was going on, and Boeing didn’t tell airlines and pilots about the new and crucial safety procedures.

This disregard for engineering integrity and safety had come from the Wall Street driven financialization of the 1990s, through General Electric’s McNerney, but also from military procurement culture. Current CEO Dennis Muilenburg, for instance, has presided over a series of problematic projects in the defense division, from the X-32, the losing entry in the F-35 joint strike fighter contract, to the long-troubled Airborne Laser system. Muilenburg has handled the 737 Max problem the way a defense official would, through public relations and political channels rather than the way a civilian engineer would, which would be through an aggressively honest review of engineering choices.

The net effect of the merger, and the follow-on managerial and financial choices, is that America significantly damaged its aerospace industry. Where there were two competitors - McDonnell Douglas and Boeing, now there is one. And that domestic monopoly can no longer develop good civilian aerospace products. Hundreds of people are dead, and tens of billions of dollars wasted.

Boeing now has a rocky situation ahead of it. Buyers in the international market have little trust in the current leadership of the company, and it will face significant liability from victim families and from airlines who bought the jet, as well as mass cancelations of orders. There is a criminal investigation into the company, as there should be. This like likely to have significant and severe financial consequences.

The right policy path would be Congressional hearings to explore what happened to this once fine company, followed by a break-up of the company into a civilian and military division, or if possible, find a way to create multiple competitors out of this fiasco. Muilenburg should be fired, his compensation clawed back, and the Department of Justice should clean house and indict every relevant executive who empowered what looks like fraud at the core of the 737 Max fiasco. Congress should expand the FAA inspectors so they can once again do their job. With a new leadership team in place, Boeing could fix the 737 Max and begin planning great aircraft again.

In other words, we should put safety conscience civilian engineers back in charge of both building planes and regulating them. Otherwise, planes fall out of the sky.

Thanks for reading, and if you enjoy this newsletter, please share it on social media, forward it to your friends, or just sign up here.

cheers,

Matt Stoller

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https://www.amazon.ca/Emerging-Turbulence-Stories-American-Workplace/dp/1442248548

Emerging From Turbulence Boeing and the American Workplace Today
September 15, 2015

Boeing’s 100th anniversary this year is marked by a new book;
Workers, whose lives changed with a fierce pursuit of profit, speak out

TACOMA, Wash. – “If you don’t perform, you don’t stay on the team.” With these words in 1998, Boeing’s then-new president, Harry Stonecipher, sent a chill through the global airplane manufacturer’s thousands of employees.

What followed in the years after were radical changes that put Boeing on a new road with enormous consequences—good and bad—some of which are still unfolding today. As the company, founded in 1916 by William Edward Boeing, turns 100 years old this year, a new book, Emerging From Turbulence: Boeing and Stories of the American Workplace Today (Rowman & Littlefield; October 2015) takes a piercing look at those last two decades.

We hear many grand stories from America’s corporate bosses about the necessity and benefits of a relentless pursuit of profits in the global marketplace. In Emerging From Turbulence readers are introduced to the missing piece in those stories: the experiences of the employees who toil in the trenches every day.
 
Thirty-six workers voice their own views of Boeing and its future in a book that authors Leon Grunberg and Sarah Moore created from two decades of study of Boeing Commercial Airplanes in Washington state. Their research at the airplane manufacturing headquarters included company-wide surveys and recent in-depth interviews with 85 employees.

Grunberg, professor emeritus of sociology, and Moore, professor of psychology, at University of Puget Sound, gained national recognition in 2010 for their book Turbulence: Boeing and the State of American Workers and Managers, co-written with Edward Greenberg and Pat Sikora, of University of Colorado, Boulder.

This new book takes another tact: giving voice to Boeing’s workers—present, former, and retired—and using accumulated data to assess what lies ahead. The resulting work identifies a noticeable shift in the workplace culture of large corporations and gives warning of a disturbing undercurrent in the “grand hurrahs” shouted for America’s global corporate success.

 

Edited by Don Hudson

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MORE DAMAGE CONTROL OR ?????

Boeing changes executive in charge of the 737 Max factory

The executive who manages the Boeing 737 Max program and the Seattle-area factory where the now-grounded plane is built is retiring. A Boeing spokesman said Thursday Lindblad's retirement was long planned and is unrelated to two Max accidents.

Eric Lindblad has been in the job less than a year

CBC News · Posted: Jul 11, 2019 5:40 PM ET | Last Updated: an hour ago

The executive who manages the Boeing 737 Max program and the Seattle-area factory where the now-grounded plane is built is retiring.

Eric Lindblad has been in the job less than a year, taking over as Boeing struggled with shortages of engines and fuselages from suppliers.

A Boeing spokesman said Thursday Lindblad's retirement was long planned and is unrelated to two Max accidents.

Lindblad will be replaced by Mark Jenks, a vice-president overseeing possible development of a new mid-size plane. Jenks previously managed the Boeing 787 program

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More schedule reality.  American Airlines and United cancel Boeing 737 Max flights through Nov. 2 as planes stay grounded

Published 30 min ago
Key Points
  • American removed the Boeing 737 Max from its schedule until Nov. 2.
  • The airline previously expected to reintroduce the plane to its schedule in September

United, which has 14 Max jets in its fleet, announced Friday it was removing the jets from its schedule and has canceled thousands of Max flights since the grounding through Nov. 3.

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Ryanair to cut flights after 737 Max delays

Ryanair has said it will be forced to cut the number of summer flights it operates next year blaming further expected delays before the Boeing 737 Max is allowed to fly again.

The airline said it could be as late as December before regulators clear the aircraft to return to the skies after two fatal crashes.

It was awaiting delivery of 58 planes before next summer but it now expects to receive just over half of those.

It could also close bases as a result.

The airline said it was in talks with airports about which of its hubs could suffer cuts.

 

"We are starting a series of discussions with our airports to determine which of Ryanair's underperforming or loss making bases should suffer these short term cuts and/or closures from November 2019," the airline's chief executive, Michael O'Leary, said in a statement.

Ryanair added that it would talk to its staff and unions about the planned closures, which it said were "directly caused" by the delays delivering the 737 Max.

The airline is now expecting to carry 157 million passengers in the year to March 2021, five million fewer than it had been planning for.

 

Airline analyst Chris Tarry told the BBC that the move to cut routes was "entirely predictable" after the 737 Max was grounded.

He said the plane was "unlikely, even with a following wind, to return to the skies before the end of the year".

There's a finite number of aircraft that Ryanair can use, he said, explaining that the airline would use those planes on the most profitable routes.

Another airline expert, John Strickland, said the grounding was likely to have an effect on the airline's growth plans. At present Ryanair has around 455 planes but it plans to expand its fleet to roughly 600 by 2025.

"A lot of it is about limiting growth rather than cutting back," he said.

"In the summer they would have expected to grow strongly, having additional bases and additional routes."


Analysis:

By Theo Leggett , BBC international business correspondent

Grounded Boeing 737 Max planesImage copyright Reuters

It's looking increasingly unlikely that the 737 Max will be flying again before late autumn - and quite possibly not before next year. So should we be surprised?

In a word, no. The stakes are too high, and this is one decision the regulators simply can't afford to get wrong.

The Federal Aviation Administration has already faced heavy criticism for allowing the aircraft into service in its original form, with flight control software that has been implicated in two separate accidents and the loss of 346 lives.

A repeat would be simply unthinkable - and for the sake of its own reputation the FAA not only needs to be thorough but to be seen to be thorough.

So its analysis appears to have gone well beyond the fresh software developed to solve the original problem - and is now addressing a range of other potential issues.

Boeing does desperately want to get the 737 Max flying again and resume deliveries to customers - it's running out of parking space at its Renton factory for a start. Airlines also need the new plane.

But the message from the FAA has been consistent: it will lift the ban on flying "when we deem it is safe to do so".

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·        Boeing 737 Max grounding hits Southwest’s pilot hiring

Published 44 min agoUpdated Moments Ago

Leslie Josephs@lesliejosephs

         

Key Points

    1. Southwest is putting off some pilot hiring as the Boeing 737 Max stays grounded.

    2. The planes have been grounded since mid-March after two fatal crashes.

    3. The airline says it made the decision because it is unclear when the planes will fly again.

    4.  

       

      Southwest Airlines Boeing 737 MAX aircraft are parked on the tarmac after being grounded, at the Southern California Logistics Airport in Victorville, California on March 28, 2019.Mark Ralston | AFP | Getty Images
    5. The Boeing 737 Max grounding is starting to affect pilot hiring as the planes remain out of the skies for a fifth month.Southwest Airlines said it delayed hiring for two classes of new pilots, which have about 25 apiece, and postponed captain upgrades for two other classes of current pilots because it isn’t clear when the Max planes will fly again.

    6. Dallas-based Southwest is the biggest U.S. operator of the Boeing 737 Max with 34 in its fleet of around 750 aircraft.Airlines have already delayed thousands of flights and have removed the planes from their schedules through the fall with no sense from regulators when the planes will be allowed to fly again. Aviation officials worldwide grounded the planes in mid-March after two fatal crashes claimed a total of 346 lives.

    7. “All of these classes were scheduled to take place in either September, October, or December of this year to support our previously anticipated delivery of 37 MAX 8 and 7 MAX 7 aircraft in 2019,” said Southwest in a statement. “Once we have more clarity on the return-to-service date of the MAX, and future MAX delivery timelines, we will look towards reinstating classes, as needed, to support the expected growth of our fleet.

    8. ”Southwest operates an all-Boeing 737 fleet and had about 9,100 pilots as of the end of last year, according to a company filing.

    9. Other airlines are also grappling with the affects of the grounding, which has coincided with the summer travel season, U.S. airlines’ busiest time of year. United, which reports second-quarter results after the market closes on Tuesday, and American in the past week removed the planes from their schedules until early November, several months later than previously expected. Southwest removed the planes from its schedules until October.Boeing has developed a software fix for a system that investigators implicated in the two crashes — one in Indonesia in October and another in Ethiopia in March. But regulators have not indicated when they expect to approve the fix along with a package of pilot training updates and materials.American and Southwest will update investors on the impact of the Max grounding when they report second-quarter results on July 25. American last week said it expects the Max grounding cost it $185 million in pretax income in the three months ended June 30, but that fuller planes likely drove up revenue for each seat it flies a mile, a key industry metric.European budget airline Ryanair on Tuesday cut its passenger growth forecast for next summer, saying it expects to have fewer Max planes flying by then than it expected.

    10. Rival Delta Air Lines doesn’t have any Boeing 737 Max planes and told investors last week that it has benefited slightly from its competitors’ constrained fleets due to the grounding. Delta’s stock hit an all-time high of $62.90 on Tuesday.

       

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