Merry Christmas, Boeing shareholders: Your lame-duck CEO Dennis Muilenburg has been put out of his lucrative misery, to be replaced by board chairman David Calhoun, late of the glorious institutions Blackstone, Nielsen Holdings, and General Electric, where he was famed in the 1990s as the youngest heir apparent to “Neutron” Jack Welch. The stock will likely now end 2019 (implausibly enough) on a positive note, as you can be sure Calhoun has your short-to-medium-term interests at heart … if nothing else! (Readers of our Boeing coverage might recall Calhoun as the board member who declared most emphatically, following the deaths of 157 in the Ethiopian Airlines crash that led to the plane’s grounding, that the board’s decision not to ground the Max after its first deadly self-hijacking in October 2018 was neither regrettable nor wrong.)
As for the larger aviation industry, better luck next catastrophe. Last week the broader public got a good look at what one can expect from a Calhoun regime, when the company’s board of directors made two grave decisions: to abruptly shut down the assembly lines of the grounded 737 Max jets, which could utterly destroy many of Boeing’s most loyal suppliers; and to keep the dividend unchanged at approximately 2.05 a share or an annualized aggregated $4.8 billion. A lot of industry watchers were perplexed that Boeing would do the two things in concert: As longtime industry consultant Scott Hamilton tweeted, “@Boeing approves quarterly dividend of $2.05 per share. I’m sorry, but I find this really, really bizarre under the circumstances.”
With an end to the interminable Max grounding nowhere in sight, the production suspension itself didn’t on its surface quite seem as strange. The idled commercial airplanes have been piling up on expensive real estate for more than nine months. But the cost savings to be reaped from avoiding the extra rent and maintenance costs of the grounded fleet seemed frankly infinitesimal next to the terrifying possibilities involved in a total shutdown of production. But in an email to The New Republic, a former Boeing executive who is something of an amateur historian of the company’s corporate governance offered this insight:
It was almost certainly not senior management making a recommendation to the board that production be halted. Rather, it was a board initiated decision to protect the dividend instead of using free cash flow from other programs to continue 737 production.
Whether or not anyone actually articulated the decision in these terms, the Boeing board nevertheless voted to halt the assembly lines during the same meeting in which they decided to keep the quarterly dividend unchanged. How they reconciled these decisions almost doesn’t matter—you have to save $5 billion on paper to spend $5 billion on paper, after all. What we do know is that none of the thousands of companies that supply the 737 Max assembly line with its million-plus parts seem to have been given a heads-up on the coming shutdown, and that the media would once again blame Muilenburg’s overall deer-caught-in-the-headlights-ness for the ensuing chaos. But in halting production in this sudden and slipshod manner, Boeing has chosen to treat the 737 Max manufacturers almost as shabbily as it treated its passengers. And thanks to the illuminating back-of-the-envelope calculations of industry analysts like Dhierin Bechai of the outfit AeroAnalysis, we know the 737 Max assembly line itself was sustained by down payments on the plane’s backlog of thousands of orders and wasn’t actually draining resources from the less-troubled divisions of the company.
Boeing has a long history of paying out dividends to shareholders in both good times and bad—one that predates even its current sociopathic leadership. But between 2011 and 2019, those dividends grew at an almost violent 22 percent annualized pace, even as the company simultaneously spent tens of billions more on the gratuitous pursuit of buying shares of its own stock. But the grounding of the company’s preeminent profit generator for what looks to be at least a year if not longer, following a campaign of psychotic corner-cutting and whistleblower-silencing that killed 346 people, is an existential crisis the likes of which even the crisis-plagued Boeing has never experienced.
Bechai calculates that at the time of the Ethiopian Airlines 737 Max crash that triggered the worldwide grounding in mid-March, Boeing had about $33.4 billion in cash on hand from carriers to fund the production of new planes, a hoard he expects to run dry sometime early in the first quarter of 2020. Boeing has since added $14 billion to its debt load this year, and it has been widely reported that at least part of that money was funding production of the Max while the grounding shut down the flow of down payments. Bechai believes 737 Max production has been sustained thus far exclusively by its own deposit payments and that there’s no way the board would have dipped into its cash reserves to fund the assembly line unless they’d gotten some assurance that a return to service was imminent. By contrast, halting the assembly line will allow Boeing’s commercial airlines division to return, on paper anyway, to a positive cash-flow situation—which in turn makes the dividends look consummately prudent, at least on paper.
Literally everyone The New Republic has approached on the vexing question of why Boeing keeps coughing up dividends throughout this fiasco has said the same thing, using almost the exact same words: Boeing has been extremely effective at pacifying Wall Street. Throughout this nightmarish year, Boeing’s stock has remained rock steady and may yet end the year with a modest gain. “Investors”—“people” even—“rely” on those dividends. If Boeing slashes or suspends its dividend, it will send “shock waves” throughout Wall Street.
It’s certainly the sort of havoc that most normal companies might seek to avoid. But whatever psychological trauma might theoretically accompany a temporary pause in the quarterly distribution of these dividends will be eclipsed many times over in the coming weeks by the genuine, nontheoretical, and nonpsychological existential shit storm Boeing has unleashed upon the thousands of companies that supply the 737 assembly lines with parts. The company’s 2019 dividends could have funded most of the $5.3 billion that Bechai estimates Boeing remitted to its 737 suppliers this year; another quarter or two of dividends could have sustained the suppliers until the Max is recertified.
Instead, some of these companies will go bankrupt. Virtually all will be forced to ax workers. Boeing’s biggest supplier—a former Boeing plant in Wichita that the company sold to a private equity firm during the mid-2000s as part of its deranged drive to ramp up an idiotic financial metric called Return on Net Assets—seems to have been caught completely unawares by the move. Every industry expert contacted by The New Republic about the matter agreed that shutting down production altogether, only to ramp it up again when the 737 Max is ungrounded, would be much more expensive than merely slowing down production, especially given the outstanding contractual agreements involved. That said, no one was able to cite any specific numbers in this scenario, because no one had contemplated the possibility that Boeing would opt to do something so abrupt and arbitrary.
Perhaps the whole story isn’t getting told. Greg Travis, a software developer and pilot, has long argued that the lethally dysfunctional MCAS software that self-hijacked both the downed Lion Air and Ethiopian planes would have to be scrapped in favor of a physical augmentation to the plane’s airframe. This would be the only way to robustly compensate for the aerodynamic instability that was created when the Max’s massive engines were affixed to the 737’s ancient airframe. Others have theorized that there could be an element of Lehman Brothers Syndrome occurring, with Boeing attempting to force an industrywide economic crisis to speed up the FAA’s recertification process.
Whatever the case, the underlying disease is highly reminiscent of the experiences of Air Force Colonel Ralph Tollefson during the 1980s, when he was appointed to serve as an ersatz taxpayer ombudsman for McDonnell Douglas. Just before Tollefson’s tenure began, McDonnell Douglas was awarded what was meant to be a $42 billion contract to produce a new line of cargo jets—at the time, a company-saving boon. Soon after production began, Tollefson started to doubt whether the factory was capable of producing a single acceptable plane. Everything was in chaos, nothing was up to code; he found 40 pounds of junk stuffed in the wing of one prototype, and someone had gotten the brilliant idea to fire all 5,000 of the plant’s managers and force them to reapply for their jobs a few months before the scheduled maiden flight. The company ended up blowing its deadline by just over five years.
“It was like dealing with an alcoholic,” Tollefson said of the assignment. Nevertheless, McDonnell Douglas executives spent the next few months ceaselessly assuring him that all was well, completion was weeks away, and that every specification would be met. At the same time these assurances were being made, the company was frantically hitting up Tollefson’s colleagues in Washington for emergency cash. “They were in self-denial,” he said.
These two aviation eras are straddled by the same sort of dysfunction. In more recent days, a claim made in a Wall Street Journal editorial on last week’s Max shutdown offers a tinge of the surreal, especially in light of everything we know about Boeing’s Crisis Year: “There’s no evidence that Boeing put its bottom line over human lives,” it insisted. There are, of course, thousands upon thousands of pages of evidence demonstrating exactly that, and a fleet of grounded planes offering its own silent testimony. That same spirit of self-denial, however, is flying sky high.
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December 24, 2019 at 12:40AM
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Boeing Axes CEO as Company Hits New Heights of Self-Denial - The New Republic
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