The Nationalization of Boeing Begins

Wall Street, labor, customers, and regulators all hate Boeing's management. Meanwhile a strike looms as Boeing's contract with the Machinist union is up. The government is finally stepping in.

Welcome to BIG, a newsletter on the politics of monopoly power. If you’d like to sign up to receive issues over email, you can do so here.

Today’s issue is about how the government is slowly taking control of Boeing, and how this move will intersect with a potential strike at the aircraft maker as its union contract is set to be renegotiated next month. Boeing workers are very angry at management, to put it lightly, but so is everyone else. We’ve never seen anything like this confluence of rank incompetence at such a vital firm, and political will to actually do something about it.

But before getting to this essay, I want to note an announcement bearing on the Microsoft-Activision merger, which went through after Judge Jacqueline Corley ruled against the FTC’s request for a preliminary injunction, but is now on appeal at the Ninth Circuit. Yesterday, Microsoft laid off 1,900 employees in its gaming division, citing the merger as justification. Layoffs are common after a merger, but in this case, it’s especially galling because Microsoft made a very specific political pitch that its purchase of Activision would improve working conditions. I’ll have more on this in the round-up on Sunday for paid subscribers. The TLDR is big mergers are pretty much always bad for workers.

And now….

Trashing the People Who Build Planes Hurts Quality

“I am angry,” said Alaska Airlines CEO Ben Minicucci to NBC News, expressing frustration with Boeing over the door that blew out during a flight in a Boeing 737 Max. “It’s not acceptable what happened, we’re gonna hold them accountable, he added. “And we’re going to raise the bar on quality on Boeing.”

Over the last week, multiple big Boeing customers have gone public over the aircraft maker, their main supplier, which is a stunning development in an industry characterized by a code of silence about problems. Alaska Air wants $150 million in reimbursements from Boeing for having to ground their planes. But it’s not just the airline with the door blow-out. United Airline CEO Scott Kirby, who runs one of Boeing’s largest customers, went on CNBC this week to publicly bash the jet maker, tracing the problems to the McDonnell Douglas merger in 1997. American Airlines CEO Robert Isom said Boeing people need to “get their act together.”

Other stakeholders weighed in as well. The head of the Allied Pilots Association, Capitain Dennis Tajer, blasted Boeing, commenting “What we can call for is for you to build safe, reliable aeroplanes and consistently time after time. But you have not.” Even Wall Street is frustrated, as Boeing’s stock is down 20% since the current CEO took over in early 2020. “We would not be surprised to see regulators, investors and customers push for a turnover in the ranks of senior management and the board of directors,” wrote a Bank of America analyst.

And then there’s the government. After the incident, the Federal Aviation Administration grounded Boeing planes, and this week it capped production of 737 Maxes until quality issues can be worked out, with the new FAA administrator saying they will put “boots on the ground,” aka inspectors in Boeing’s factories, for an indefinite time. Both the Republican and Democratic Congressional committee leads responsible responded positively, issuing a strong statement of support for more government regulation. The Senate is likely to hold hearings, with Boeing CEO David Calhoun, who is trained as an accountant, roaming Capitol Hill to answer questions.

The FAA’s actions are particularly concerning for Boeing’s management. As Jon Ostrower of the Air Current noted on Twitter. “The FAA is focusing their damage squarely on high customer & shareholder impact with caps on output and cash flows,” he said. “They are trying to compel the two most important Boeing groups to force a leadership change. The U.S. government won’t call for the decapitation of a private company, but they know how to make other stakeholders in Boeing’s orbit do just that.” Earlier this month, I argued for a nationalization and restructuring of Boeing, and it seems like a light version of that may be on deck.

Boeing leadership is under attack from every direction. And that’s not even taking into account a little noticed problem that could actual grind Boeing to a halt. That would be a strike, with the machinists who actually make the planes considering a labor action in September after their contract runs out. What are the labor issues? Aside from management destroying the company, workers haven’t had a raise in ten years, their pensions got stripped, their cost of living increases were at 1.5%, and their health care is significantly worse. There’s more, which I’ll go into below. But I’m told that most workers expect a strike to happen.

What we are seeing is something unusual in American capitalism, where the credibility of an immensely powerful and politically connected firm has collapsed. To understand what a turn-around this dynamic really is, you need look no further than a joke from President Barack Obama when Boeing was riding high. In 2012, Obama spoke at a Boeing plant. “Given the number of planes that I’ve been selling around the world,” he quipped, “I expect a gold watch upon my retirement."

Obama was trying to get a laugh from the audience, but it’s also true that a long-standing role of the American President is to sell Boeing jets to foreign airlines. Obama personally announced the Lion Air deal and the Ethiopian Airlines deal for the 737 Max planes, both of which later turned into tragedies. Decades earlier, in 1993, President Bill Clinton called King Fahd of Saudi Arabia to ask him to buy Boeing planes in return for U.S. actions in the first Gulf War. As one of Clinton’s advisors put it, Boeing was the “de facto national champion and you can be an out-and-out advocate for it.”

Most recent administrations have been close with the aerospace giant. Obama’s chief of staff Bill Daley and his Commerce Secretary John Bryson served on Boeing’s board before joining the administration. In 2019, Boeing gave $10 million to the Obama Presidential library, and Obama in return dropped in to a corporate leadership retreat, which took place after the Lion Air crash. (The year before, George W. Bush, whose administration was enmeshed in multiple Boeing scandals, had given the corporate pep talk to the Boeing leadership at their retreat.)

Trump was, if possible, even more solicitous of Boeing than Obama. Trump allowed Boeing’s CEO to sit in on a call between the Air Force general and a Boeing rival, Lockheed Martin, in a conversation about the F-35 program. Trump appointed Boeing exec Pat Shanahan to run the Pentagon in 2019. Shanahan had to resign over domestic violence allegations, but after his Trump administration service, Shanahan became the President and CEO of Spirit AeroSystems, which made the door that blew out on the Alaska Air flight.

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So what happened to crush Boeing’s credibility now, given that the incident that took place with Alaska Air was not nearly as bad as the Max crashes in 2018 and 2019? One thing I’ve learned in dealing with monopolies is that Americans will put up with unfairness, but not incompetence. It isn’t Ticketmaster’s high fees that drew the wrath of the government, but the firm’s inability to sell tickets during the Taylor Swift tour. And now Boeing looks more incompetent than it is essential, which is saying something. Because Boeing really matters, and its executives just don’t seem to get that. It’s evident that even after the Max crashes, CEO David Calhoun still refused to fix the fundamental disdain for engineering and construction embedded in the finance-first culture. The incompetence is actually impressive, Boeing executives cut quality, slashed labor, offshored work, have monopoly power, and still lost money. Boeing leaders are even bad at being greedy.

Of course, as I’ve written for years, these problems are longstanding. After the McDonnell Douglas merger in 1997, which was approved by the Clinton Federal Trade Commission, Boeing management began destroying the company. The 737 Max crashes came from a fundamental design flaw that the old Boeing would have fixed by reengineering the plane, but the new Boeing tried to patch with bad software written by $9/hour Indian programmers. The Alaska Air door blow-out is less a fundamental design questions, and more basic operational incompetence like tightening screws.

Interestingly, the Alaska Air fiasco is a result not of a merger but of a corporate break-up. Industrial corporations like Boeing need to be big, because fitting together a bunch of parts into an airplane requires a level of operational integration. But in 2005, Boeing sold some of its manufacturing plants in Wichita and Oklahoma to a private equity firm, forming Spirit AeroSystems, which turned from an internal supplier to an external supplier for Boeing. There was not supposed to be a real difference functionally. Boeing got some cash for the sale, moving assets off the balance sheet, but now it has to negotiate for something it used to do internally. As it turns out, it’s now far more bureaucratic to mesh the operations of two companies.

One anonymous worker wrote a blow-by-blow description of what happened, stating that there were so many quality problems with Spirit products that it became routine to see that firm commit fraud. In this case, Spirit was caught screwing up the door, but instead of reworking the rivets, “it *just painted over the defects*. In Boeing production speak, this is a ‘process failure’. For an A&P mechanic at an airline, this would be called ‘federal crime’.” The problem boils down to different teams at Boeing and Spirit lying to each other and passing the buck over who has to inspect a poorly installed plug door.

This account is consistent with an excellent story in the Air Current which does a blow-by-blow on what happened.

The haggling over who is responsible for fixing issues that reach final assembly, and ultimately who pays to fix any issues, underscores the long-running strategic tension between the two companies. The delegation of those repairs, one knowledgeable person said, adds both time and needless complexity as Boeing factory staff wait for Spirit staff to plan and implement fixes, slowing down the entire process all under the same roof.

On Sept. 7, the rivets in question were found to be painted over and the underlying issue with their improper installation not addressed. It is not clear at this point who specifically painted over the rivets, but Boeing quality control sent the fasteners back for rework to Spirit, which itself assigns the work to contractors for the company, not its own direct employees.

In essence, Boeing both merged with McDonnell Douglas to consolidate power, and then spun off a supplier to make its balance sheet look better. And that supplier in turn outsourced work to contractors, so now contractors of contractors are building Boeing aircraft and no one in power knows how anything works. The Boeing-Spirit split was the worst kind of break-up, taking apart teams that should be collaborating, presided over by neoliberal financial engineers who have a fundamental contempt for reality.

All of which brings me back to the labor questions. The anonymous worker who posted the account of what happened said something that I’ve also heard, which is that there is still, 25 years later, deep resentment over the McDonnell Douglas merger. “There are many cultures at Boeing,” this person wrote, “and while the executive culture may be thoroughly compromised since we were bought by McD, there are many other people who still push for a quality product with cutting edge design.”

The engineers and workers at Boeing, in other words, really want to build quality aircraft, but are prevented from doing so by the suits. This is consistent with what I’ve heard from labor negotiators who dealt with Boeing in the early 2000s; the executives absolutely despised their union and attempts from the workers to preserve quality processes. Next month, the Machinists are going to start negotiating with Boeing over pensions, health care, and salaries. But the subtext will be the absolute rage towards the executives who ruined their once-great company.

The old-timers at Boeing complain about what the McDonnell Douglas merger did, not just worse compensation, but things like cuts to staffing, buying out a lot of the experienced workers, refusal to hire people over a certain pay grade, and inventing lower pay grade jobs to try and replace or run out more senior people. And injured pride.

In November, Lee Hepner noted how the United Autoworkers recently forced domestic automakers to reopen a factory, showing that labor policy is industrial policy. The people who make things usually want to make them well. And this applies to Boeing as much as it does any other firm. The fundamental problem with Boeing’s internal culture is that the executives who run the place simply do not respect the design, production, and testing of aircraft, and they despise the people who actually do it.

That situation is clearly no longer tenable. Because this time the workers and engineers are joined by, well, the rest of us, including the CEOs of United Airlines, Alaska Airlines, and pretty much every other Boeing customer, as well as the head of the FAA, both parties in Congress, and anyone who has to fly anywhere. At the end of the day, the Reagan-era neoliberal era is crashing into reality, showing that a finance-and monopoly friendly model of corporate governance just cannot build airplanes that work.

All of this anger at Boeing is setting up for an interesting moment when a new contract negotiation and strike happens. We’re now in uncharted territory, because I haven’t seen such support for the U.S. government to take such an aggressive approach to a giant corporation in my lifetime. I doubt most of us have. So that means everything is now on the table, until Boeing is fixed. And that could take awhile.

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Thanks for reading. And keep those tips on monopolies flowing, they are essential to this work.

And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller