“We’re not letting Boeing go out of business.” – Donald Trump, President USA
Something Stinks
Recently, in anticipation of a substantial Congressional bailout package, the Dow Jones Industrial Average (DJIA) surged by 11.37 percent, marking its best performance since 1933. Certain stocks from the Dow 30 rallied even more significantly.
For instance, Chevron stood out with a remarkable 22.74 percent rise, closely followed by American Express with a 21.88 percent increase. But can you guess which company clinched the third spot?
It was none other than Boeing, the quintessential symbol of corporate financialization and cronyism, which saw its shares soar by 20.89 percent.
On many levels, Boeing appears to be in serious trouble. Just that Tuesday, Fitch downgraded Boeing’s credit rating to BBB. In the words of Bill Ackman, head of Pershing Square Capital Management, “Boeing is on the brink [and] will not survive without a government bailout.”
The buzz that day suggested that the impending government bailout related to the coronavirus would allocate $60 billion to ensure Boeing’s survival. One would think that in the face of imminent crisis, humility would prevail, but it seems humility is absent from Boeing’s culture.
During an interview on Tuesday with Fox Business, CEO Dave Calhoun emphasized that Boeing intended to dictate the terms of its bailout. Specifically, under Calhoun’s direction, the U.S. government would not receive any ownership stake in the company:
“I don’t have a need for an equity stake. I want them [the U.S. government] to support the credit markets, provide liquidity. Allow us to borrow against our future.”
Despite this arrogance, investors seem eager to reward Calhoun’s boldness. On Wednesday, Boeing emerged as the top performer on the Dow, with shares climbing by 24.32 percent—more than twice the rise of United Technologies, which had a 10.87 percent increase. Then, on Thursday, Boeing once again led the charge, closing up 13.75 percent.
Interpret that as you wish, but it’s clear that something is amiss. The roots of Boeing’s current malaise can be traced back several decades…
Guided By Bean Counters
William Boeing, the visionary behind the company’s ascent in the first half of the 20th century, passed away in 1956. Little is known about him, and his biography remains largely unread. However, it seems the corporate culture he embodied faded significantly by the turn of the new millennium.
Upon his death, those around William likely continued to uphold his vision, passing on a strong engineering ethos to subsequent generations of management. Yet, three generations later, that connection to Boeing’s core principles had diminished.
Today, no current Boeing employee—whether in management, engineering, or administration—has ever encountered William Boeing. It is improbable that any of them have interacted with someone who did. Thus, the essence of William Boeing’s culture appears to have vanished from the company he founded.
David Calhoun, the present CEO, leads Boeing without a background in aviation engineering; instead, he is an accountant. While he may lack expertise in aerodynamics or jet propulsion, he possesses a skill emblematic of his profession…
Accountants at the helm of corporations often excel in prioritizing shareholder profits over industrial integrity. When an organization’s decisions are solely influenced by financial metrics, its foundational purpose begins to erode.
The troubles at Boeing began to unfold following its acquisition of McDonnell Douglas in 1997. As noted by Matt Stoller in his article What Happened at Boeing?:
“Unlike Boeing, McDonnell Douglas was operated by financiers rather than engineers. Even though Boeing was the buyer, executives from McDonnell Douglas wielded influence, leading analysts to coin the term ‘reverse takeover.’ The local joke was, ‘McDonnell Douglas bought Boeing with Boeing’s money.’”
“The merger ignited a conflict between the engineers and the bean counters; as one analyst noted, ‘Some board members would have preferred spending on a walk-in humidor for shareholders rather than investing in new aircraft.’”
Boeing’s Bean Counter Culture and Mass Financialization
Boeing’s decline reached a critical point in late 2018 and early 2019 when the new 737 MAX model was involved in two fatal crashes caused by system malfunctions, prompting aviation authorities globally to ground the aircraft. As cited by Stoller:
“Testing in 2012, with airflow nearing the speed of sound, enabled engineers to evaluate the plane’s aerodynamic response to extreme maneuvers. Upon review, significant issues became evident.”
“The old Boeing would have redesigned the control surfaces to rectify the aerodynamic flaws. Instead, the McDonnell Douglas- influenced Boeing opted for a software patch—flawed software, some of which was developed by outsourced engineers in India. The Federal Aviation Administration, having delegated much of its oversight role to Boeing, was left in the dark, and Boeing failed to communicate vital safety protocols to airlines and pilots.”
Meanwhile, as the 737 MAX was fraught with software issues and deployed worldwide, Boeing’s management was engrossed in the financialization of its operations—a strategy that enriches executives and shareholders while jeopardizing the core business.
Aerospace analyst Dhierin Bechai examined Boeing’s share buybacks and dividends in relation to cash flow between 2014 and 2019, revealing several noteworthy findings:
“Boeing expended around $60 billion ($59.994 million to be exact) on buybacks ($40.6 billion) and dividends ($19.4 billion) over recent years while generating approximately $55 billion in cash flow. Boeing returned all operational cash flow to shareholders, with the $5 billion excess attributable to 2019—when dividends and buybacks continued despite falling operational cash flow. Excluding this year, Boeing returned 92 percent of its operating cash flow and 113 percent of free cash flow to shareholders.”
It’s clear that the bean counters managing Boeing were rewarded for this widespread financialization. Coincidentally—perhaps—it was also the $60 billion requested in federal aid that matched the amount they distributed to shareholders.
This week’s $2 trillion federal bailout includes a $17 billion loan program designated for businesses critical to national security. Although Boeing isn’t explicitly named, the provision is notably beneficial for the company.
They will likely also tap into part of the $454 billion that the Treasury Department plans to use to help leverage $4 trillion in loans for corporate America.
This is yet another illustration of the intertwining of financialization, cronyism, and systemic issues. We appear to be in a precarious situation!
Sincerely,
MN Gordon
for Economic Prism
Return from Boeing’s Bean Counter Culture and Mass Financialization to Economic Prism
