Can Boeing Rely on their Place in the Duopoly to Overcome the 737 Max-8 Crisis?

In today’s post the focus will be on the continuing crisis at Boeing, which started when two planes fell from the sky killing 346 people in total. In the business press recently, it has been suggested that Boeing may need to move to a ‘Plan B’ very soon before this crisis envelops the company, with a number of possible alternatives being put forward. However, in this post we will focus on the duopoly in the large jet airliner industry and seek to understand just how secure it is.

In October 2018 a Lion Air Boeing 737 Max airplane crashed into the Java Sea shortly after taking off from Jakarta, killing 189 people. On the 10^th March 2019, a 737 Max plane flying under Ethiopian Airline colours crashed shortly after take off from Addis Ababa, killing all 157 people on board. Following the two crashes, that were connected by a failure of the Manoeuvring Characteristics Augmentation System (MCAS), all 737 Max planes were grounded and remain grounded to this day. Boeing initially announced that the planes would be back in the sky by June 2019, then that was November 2019, and now it has been announced that it will be ‘sometime next year’. The initial thought process was that the MCAS system needed to be overhauled, but recently there have been revelations of further issues with the planes that have contributed to the continued grounding of the fleet. The headline-grabbing issue however is the MCAS system, which was a technological response to an issue created by seeking greater fuel efficiency from the engines. The Boeing 737, as a model of airplane, stretches back to 1967 with the plane building on the designs of the 707 and 727. The plane has been redesigned a number of times since then, with the suggestion being that redesigns were deemed better for the business rather than a new plane, because of the competition provided by the European-based Airbus, the second member of the duopoly. The current iteration of the 737, the Max-8, has heavier engines to increase fuel efficiency. However, the result of this is that the increased weight and positioning of the engine now forced the nose of the aircraft up slightly. This could potentially force the aircraft to stall and crash, so Boeing introduced the MCAS system which would force the nose of the plane downwards to compensate for the increased weight of the engines. However, that system relies on data from one of two sensors to calculate the position of the nose – in the two cases above, that data was incorrect. Acting on incorrect data, the MACS system forced the nose downwards incorrectly. In response, the pilots pulled the nose of the aircraft upwards to compensate for the nosedive. However, the MACS system then received data that the aircraft’s nose was above level, and continued forcing the nose of the aircraft downwards – the result being that the planes were forced into the ground by the repetitive nosedive instigated by the MACS system.

Since the crashes the entire fleet has been grounded and recently Boeing announced a net loss of $2.94 billion for the second quarter of this year, and an after-tax charge of $4.9 billion to compensate the airlines who cannot use the aircraft. Despite President Trump claiming he could fix the problems at Boeing, mostly be ‘rebranding’ the planes – the airline, remarkably, has already tried to do this – there is no solution in sight (consumers are being made aware of how to identify the planes, with engineers stating that neither they nor their families will fly on one ever again). It was suggested in the Financial Times that one potential solution would be to scrap the idea of the 737 Max becoming a commercial aircraft once it is cleared to fly, and instead move the aircraft into the freight sector instead (with the sentiment being that it will be easier to get freight pilots on board rather than commercial consumers). This is probably the best case scenario at this point for Boeing, but there are much larger questions and issues that this current period for the company raises.

Former employees at Boeing have been quoted in the media as stating that the investment into the 737 Max was not adequate, and that this related to ‘the culture [being] very cost centred, incredibly pressurised’. It is being suggested that the push for cost-savings lead to the narrative being promoted that any changes from the last version of the 737 to this were ‘minor’, thereby reducing the need for new and costly certification and increased training – the pilots for the new 737 were, essentially, not up-to-speed with the new MCAS system. Boeing have countered this claim with a statement declaring that technological updates get the same scrutiny as an all-new aircraft, although the suggestion from employees is that ‘there was a lot of interest and pressure on the certification and analysis engineers in particular, to look at any changes to the Max as minor changes’. There are a number of reasons for why Boeing may have taken this approach. The company has long since been established as the market leader, with one commentator arguing that overconfidence was to blame. Peter Atwater argues that there were three particular issues. First, there was extreme overconfidence within and surrounding Boeing, with the firm increasing profits year on year and Wall Street analysts and the associated media describing Boeing as ‘killing it’. This overconfidence can and probably did lead to a lack of scrutiny, both internally and externally (from regulators). Second, the negative effect of this crisis is exacerbated by an inherent confidence dynamic within the industry: back-to-back crashes have caused consumer confidence in Boeing to plunge, and it is questionable whether they can regain that consumer loyalty, although Atwater makes the point that consumer do not really have a say in what plane they fly (unless they are particularly cautious and invested). Last, whilst consumer confidence in airline travel is at a high currently, any sort of a recession will diminish this confidence and therefore airlines will not need the aircrafts – this potentially leads to Boeing having a large number of aircraft that they cannot sell. These issues, and then attempting to guard against these issues, can result in massive inefficiencies which, in the aircraft industry, can result in tragic consequences. Yet, is there a claim that the duopoly will save Boeing and that everything, once the aircraft is cleared to fly again, will go back to normal?

It is widely agreed that the aircraft industry, in relation to large jet aircraft, is dominated by Boeing and Airbus (here, here, here, and here). In 2018, Airbus delivered 800 planes whilst Boeing delivered 806 although in reality Airbus is a way off the size and clout of Boeing – in 2018 Boeing recorded revenues of $101 billion against Airbus’ $71 billion, with Boeing recording $10.4 billion against Airbus’ $5.68 billion in profit. Competition in the marketplace is being actively reduced by the duopoly, with Airbus acquiring a controlling stake in Bombardier’s C-series, and Boeing forming a joint venture with the Brazilian company Embraer this year. However, it is being suggested that a smaller player in the marketplace – Chinese company Comac – represents a genuine threat to the duopoly. It is being suggested that Comac, with the sponsorship of the Chinese Government, have received more than $7 billion in public funding already and have more than 1,000 order from Chinese airlines and could spread into the BRICs nations and other emerging marketplaces.

The impact of this is that Boeing may have more trouble on its hands than it expects and will need a solution to the 737 Max problem very soon. Atwater’s suggestion of moving the aircrafts into the freight sector is probably their best option, although they will continued to be buoyed by US subsidies and exclusive access to the non-public US marketplace. It is will be fascinating to see whether an increasingly aware public will be able to influence the direction of the duopoly, but the reality is that the consistency of Airbus and the impending threat of Chinese manufacturers has put Boeing under pressure and, essentially, it cracked. A lot of people lost their lives due to this however, and the noises coming from the press about the continuing investigation into Boeing’s conduct regarding the certification process is hardly inspiring – whilst it may be unprecedented and a number of subpoenas have been issued, the fact that the Federal Aviation Administration (FAA) would likely be implicated too for delegating the certification process to Being itself, means that any chance of there being anything close to substantial punishment for this chain of events is staggeringly low.

Keywords – Boeing, Aircraft, Airbus, Duopoly, Business, @finregmatters