Why The Boeing 737 Max Has Been Such A Mess

Five years ago, 346 people were killed in two plane crashes that happened five months apart in Indonesia and Ethiopia. Both planes were Boeing 737 Max eight seconds. Then this past January, Boeing came inches from yet another catastrophe as a door plug blew off an Alaska Airlines 737 Max nine plane at 16,000ft shortly after taking off from Portland, Oregon. Nightmare scenario for passengers. The clothes on one child sucked out. This was no surprise. Unfortunately, the company has struggled might

ily with manufacturing and we've had over 20 production quality defects. You know, it's hard to keep up with all of them. No one was seriously injured in the accident, but the blown off panel produced a force so strong that some headrests and seatbacks were ripped from the cabin. Fortunately, no one was sitting in the two seats next to the panel. I saw the picture, everybody saw the opening, but what I really saw was the empty seat. I imagine every human being who would see that understands the

severity and the consequence. There was a time when people said, if it's not Boeing, I'm not going now. There are passengers who avoid or are scared to get on Boeing airplanes. The Department of Justice has opened a criminal investigation into the Alaska Airlines incident, and the Federal Aviation Administration said it found dozens of problems after auditing Boeing's manufacturing process. It just raises issues about the production at Boeing. What's going on? There have been a series of problem

s over the last few years, and we just need to get our arms around that. Boeing announced major management changes. Ceo Dave Calhoun, who was brought in to get the company out of the Max crisis in 2019, just announced he'll be stepping down at the end of 2024. We have another mountain to climb. Let's not avoid what happened with Alaska Air. Let's not avoid the call for action. We will get through that. And I've committed myself to the board to do exactly that. Boeing's stock has also been on a d

ecline. It hit an all time high in 2019, before the Max crash in Ethiopia plummeted during the pandemic, and is down over 25% so far in 2024. My sense is until you get an all clear, the stock will probably be stuck in a range. And you know, the key question, really, I mean, the multi-billion dollar question is when does the all clear and we just don't know yet. CNBC explores how the 737 Max crisis unfolded, and what the future holds for Boeing's best selling jet. The official 737 christening cer

emony took place in the new final Assembly building on January 17th, 1967. The first Boeing 737 debuted in 1967. Over the last few decades, strong demand for the twin engine narrowbody jets led to many evolutions. Of the 737 family, there have been over 10,007 37 seconds made, and it's flown over 30 billion passengers. The plane is so popular that Boeing estimates a 737 takes off, or lands every 1.5 seconds. If you've flown, you've likely flown at some point in your life on a 737. It's one of th

e most commonly used aircraft by airlines around the world. The commercial aircraft market is dominated by Boeing and Airbus. Together, their planes represented over 75% of aircraft flying last year. The two compete on various types of jetliners, especially narrow body planes like the 737 and A320, which account for close to 60% of the global fleet. In 2011, Boeing was under pressure after Airbus launched an upgrade to its existing narrow body plane called the A320neo, which stands for New Engin

e option. The plane was more fuel efficient and could save airlines money. American Airlines and exclusive Boeing customer at the time, was ready to place a big order with Airbus and told Boeing it would have to move quickly to win the airline over. Boeing took a lot of shortcuts in developing this aircraft, and those shortcuts literally bit Boeing in its behind. Designing a new airplane could take up to a decade and billions of dollars in investment. Boeing decided to re-engine the 737 with a n

ew engine variant, which was more fuel efficient and called it the 737 Max. It's a very simple reason why Boeing was looking at Re-engining, essentially the 737, which had already been around for decades. It's cheaper. So instead of building a plane or designing a plane from scratch, what they did was made some changes to the existing aircraft to get planes to market faster and then not to lose out on orders to their rival, Airbus. It offers four different sizes of the aircraft the Max, seven, e

ight, nine, and ten. The Max eight received FAA certification in 2017. During development, Boeing engineers observed the nose tendency to pitch up during a specific extreme maneuver. This led to the design of a software called the Maneuvering Characteristics Augmentation System, or MCAS, which would push the airplane's nose down in the Max eight crashes in Indonesia and Ethiopia. Mcas was activated after receiving inaccurate sensor data. It repeatedly pointed the nose downward until it struck th

e ground. Pilots on both flights fought to override the system, but both ended in fatal crashes. Pilots of all Max planes were not made aware of MCAS existence until two weeks after the first crash. It wasn't until after the second crash, nearly five months later, that those planes were grounded. The grounding lasted for 20 months, the longest in aviation history. A report from Congress found numerous design, management and regulatory failures by both Boeing and the FAA. It detailed what it call

ed a deeply disturbing picture of cultural issues, and said that it will take a long time and serious efforts to thoroughly resolve. In the five years since, Boeing has spent billions trying to recover, but its reputation took another damaging hit after January's Max nine door incident. It's a different set of lessons drilling holes wrong, not putting in bolts right in. In one one sense, the quality issues are much more simple where the the MCAS issue, the control system issue that they had on t

he max before was in many ways more insidious, because it was just a fundamental design flaw in the airplane. When the first series of accidents occurred, killing 346 people, Boeing was almost in denial of any problems. The most recent problem, Boeing, to its credit, stepped up to the plate and they said, look, this is a problem. We have to investigate it and we have to fix it. And they've owned it. While Boeing and the FAA have responded more aggressively to the Max nine issue, reports and audi

ts of the accident are uncovering new problems. Preliminary reports said the door panel that flew off the Max nine appeared to be missing four key bolts. Boeing has also said that there is not paperwork that has documented the door plug getting opened and getting closed, while wrapping up manufacturing on that plane. The FAA production audit found multiple instances where both Boeing and fuselage maker spirit AeroSystems allegedly failed to comply with manufacturing quality control problems. The

fuselage of the 737 Max aircraft is made by a company in Wichita called spirit AeroSystems. No relation, by the way, to Spirit Airlines. There were issues beyond what happened on the January 5th flight. There were planes with mis drilled holes. There were parts of the fuselage that were not up to standard. Spirit AeroSystems used to be Boeing. Wichita. Boeing spun off its Wichita unit as spirit AeroSystems to improve profitability. That puts the financial squeeze on spirit AeroSystems to build

the fuselages for the lowest possible cost. Clearly, this has come with some intangible cost in terms of quality control. About 70% of Spirit's revenue last year came from making parts from Boeing. It's their biggest customer, and then about 25% is coming from Airbus. Boeing is now looking at purchasing spirit. Some say like it'll give them a little bit more control or a little bit more visibility into its supply chain. Experts also suggest the change in workforce post-pandemic could be affectin

g. Quality. And it's not a Boeing specific issue, particularly post-Covid getting experienced labor. There was a lot of retirement. You think, well, you have a workforce that maybe wasn't experienced where there are several variables going on within an experienced workforce where, you know, quite innocently, they just left something off and it wasn't caught by the system. That's where you worry, because that should have been caught by the system. And then the big question is, if that wasn't caug

ht, what else hasn't been caught? Boeing has also been under pressure to ramp up production. The company has delivered 1,462 Max aircraft, but has 4,752 unfulfilled Max orders. This has caused a number of issues for the airlines. Some of Boeing's biggest customers are having to scale back their growth plans a little bit. United is pausing pilot hiring for a couple of months. Southwest Airlines is having to cut some of its flight schedules for 2024 because the planes are arriving late. I'm disapp

ointed that the manufacturing challenges do keep happening at Boeing. This isn't new. I'm disappointed in that. Southwest and United have the most Boeing 737 Max planes in their fleets, so the grounding of these planes has had a ripple effect. Airbus, meanwhile, has been slowly chipping away at Boeing's market share. Boeing had a big increase in net orders from 774 planes in 2022 to 1,314 planes in 2023, but Airbus had over 2,000 orders last year. It has delivered more planes and received more o

rders for the fifth consecutive year in a row. In the late 1990s, Boeing merged with McDonnell Douglas. It was an aircraft manufacturer which made commercial planes like the MD 11 and MD 80, as well as space and military aircraft. There is a belief that the focus at Boeing has shifted since this merger with McDonnell Douglas to profitability, as opposed to, uh, engineering excellence. I think one of the big, you know, indicators of that was moving the corporate headquarters away from any of the

big manufacturing sites. After the 1997 merger, Boeing moved its corporate headquarters after 85 years in Seattle to Chicago and more recently to Arlington, Virginia. 27 years later, experts and CEOs are still blaming that merger for the more recent issues. My assessment is, you know, this goes all the way back to the McDonnell Douglas merger, and it started a change in culture. If I were. Making recommendations to the company, I would say, yeah, sure. Management should be located in the Puget S

ound region, their biggest manufacturing site, and in fact, they should be sleeping on the factory floor at this point to get everything kind of back in order. Many of Boeing's other programs have also faced problems. They've faced cost overruns, and they've faced quality control problems. Profitability, of course, matters, but you're not going to be a profitable company if your customers don't believe you have the products they need to buy. And airlines have been opting for Airbus airplanes a l

ot more recently than Boeing. Boeing had already been under pressure to deliver more airplanes. It has a backlog of over 6,000 total orders, and its leaders don't want to lose more market share to Airbus, which had a backlog of over 8,000 planes at the end of 2023. You really only have two suppliers of large commercial airplanes, and Airbus can't do it all. Will Boeing turn itself around? Yeah. Most certainly it will. Um, it's going to take time, though. The eyes of the airline world are focused

on Boeing and the FAA to make sure the 737 Max's in production are produced without flaws. Two months after the Alaska Airlines panel blew out, the National Transportation Safety Board chair criticized the company for its lack of cooperation in the Max nine probe. Boeing CEO has said that he's very serious about addressing the quality control problems and that it's their main priority right now, but customers are waiting for their airplanes. The 737 Max nines have returned to the skies, but the

Max seven and ten have yet to be certified and are years behind schedule, facing more rigorous testing requirements. After the other Max issues. We've considered multiple manufacturers. We look at every aircraft. Other manufacturers are also having issues with aircraft and delivery. And so Boeing having some production issues. We've enhanced our oversight of Boeing's production process. In fact, we did that in 2022. And so that will continue. And we might even bring it up a little bit. I'm disa

ppointed. And especially because Boeing is they're not only our most important partner, they're one of the most important companies in the country. They're important to the United States. Some of Boeing's best customers have expressed frustration at the company for the delays. We've heard from United Airlines, for example, saying, you know, stop building the Max ten, a plane that isn't even certified yet and build the ones that you can deliver to us, and we can fly tomorrow. Southwest's CEO. Thi

s is a CEO that runs an all Boeing 737 airline, one of Boeing's best customers, saying that Boeing needs to become a better company. That's very strong language coming from Southwest Airlines. Boeing has replaced the CEO of its commercial airplane business, Stan Deal, with Stephanie Pope, and will now begin a CEO search to replace outgoing CEO Dave Calhoun. I want somebody who knows how to handle a big, long, long cycle business like ours. It's not just the production of the airplane, it's the d

evelopment of the next airplane. It'll be a $50 billion investment. Despite significant management changes, experts still say it will be a long road for Boeing to get back to its once excellent reputation for safety over profits. Product life cycles can be decades, and you have an investor base that wants returns. You know, maybe this week, if not this quarter, and the two are misaligned. So I think investors have to be willing to take a little back seat while the company is focusing on quality

compliance. You can't force the financials on top of everything else. So how long does it take? My guess is it's going to take a while. What's a while? Probably a couple of years. Boeing has a very proud history. I certainly hope to see Boeing regain the mojo, the magic that the company once had. Because to be very honest, if Boeing doesn't regain that focus, not only is Airbus going to, I think, win more orders, but Boeing becomes potentially weaker against other new entrants such as Comac from

China. We are at the early stages of responding to, in my view, an Overexercised supply chain and an Overexercised Boeing factory, and we're going to calm it down. We're going to get ahead of all of the issues that either the FAA and way more importantly, our own people bring to our attention, and we'll get ahead of it. That will happen.