Boeing's Downturn and Capitalism

The next most important thing about a free market is that it’s a system of profit and loss. And the loss part is just as essential, indeed in some respects more essential than the profit part. - Milton Friedman

Boeing hasn’t been doing well for years. They’re falling behind Airbus on next generation aircraft, they’re having problems hitting schedule delivering their existing models (even after reallocating money that should have been put towards designing new planes!), they’ve had 2 high fatality crashes, paid 9 figures in settlements / fines, and now their manufacturing defects led to the blowout of a door plug.

They’ve clearly lost their way.

This has revitalized the perennial debate about if capitalism is leading to deaths, injuries, and risk because the companies selfishly value their money over these concerns. Before setting out, let’s be clear on what we’re discussing here because this is getting dangerously close to politics, which isn’t something this blog covers. Today’s goal isn’t to advocate for any particular system. It’s show that under any system, extreme short sidedness is counterproductive.

Does Boeing Benefit From These Safety Lapses?

Unfortunately, the world isn’t as simple as system A good system B bad. Everything has tradeoffs, and it matters what we subjectively value and seek to optimize for. That said, we’re considering the critique that self interested market actors are eschewing safety for profits. Have they been enriched by these choices?

Of course not. Let’s review the recent results of their accidents and delays:

1. Customers canceling orders or planned orders
2. Extreme negative sentiment and concern among passengers
3. Customers losing money, part of which comes directly at Boeing’s expense
4. 346 people died
5. A major, high profile incident (the door plug) that resulted in increased regulatory scrutiny / the grounding of their fleet

Overall Performance

Regardless of what financial system is actually best, clearly even the most selfish, financially motivated person isn’t actually coming out ahead here. Just take a look at their stock price:

Zoomed in, begins with the second 737 MAX crash:

At time of writing, NYSE: BA is down a staggering 53% over 5 years, amounting to a market cap loss of over $250B. This is with the backdrop of high inflation and high general returns from the stock market, both of which would make us expect valuation to increase all else equal. I don’t want to over simplify, for instance Covid clearly had its impact on this chart. There are other considerations at play. But we certainly aren’t seeing financial benefits during the substandard safety record. So if they were somehow benefiting, it’s in spite of much larger issues that are drowning out the gains entirely.

Were The MCAS Shortcuts Worth It?

This becomes even more clear when we consider specific incidents. For those that don’t know, the 2 fatal 737 MAX crashes were attributed to a new system in the plane called MCAS. While this variant of the 737 was still quite similar to previous models, it was also quite different. Planes aren’t as simple as cars. When you change engines, adjust their position, adjust fuselage length slightly, or make any other seemingly minor change it can result in substantial changes to the flight characteristics of the aircraft.

In your car, you’d be able to tell if the engine power changed or even differences in the weight distribution. But in planes center of gravity matters on more axises. There’s also the concept of center of lift, the relationship between center of gravity and center of lift matters immensely, and to top it all off these effects all vary depending on the exact configuration of the plane! Being a pilot is complicated. So when you change the plane, you need a lot of new training for pilots. Not only to learn new things, but also to ensure pilots drop any habits that are desirable on other planes but bad on this one.

Training is expensive. Not for Boeing, but for their customers. Customers have to consider total cost of ownership though, so it’s relevant in deciding to buy the plane and thus indirectly impacts its price. To address these costs Boeing created MCAS. Oversimplifying, it used computer trickery in the fly by wire system to make the plane handle more like the previous model. This does reduce training, and that’s a good thing.

However, new systems that reduces training requirements still themselves require training. If the plane isn’t actually doing what it’s told, which is the purpose of the system, the pilots obviously need to be aware. They also need to know what the system is doing and how it can fail so they can detect anomalies the computers don’t. The reason we have humans in the loop is as the last line of defense. When computers fail, they don’t know that they’ve failed and they tend do extremely stupid things as a result. Human intuition can still do much better than the computers in such situations. But if the humans don’t understand their machine, they can’t make the right choices.

Employees at Boeing convinced regulators, through deception, that the system was simple enough it didn’t require training on it. If Boeing had just done this training and not pushed the envelope even further, things probably would have been fine. The costs would have been marginal, and instead of crashes there is a good chance we would have just seen incidents. Aviation is pretty on top of fixing issues before they get worse, so there’s a reasonable likelihood the bugs would have been caught and addressed before anyone died.

The results of working to avoid any training at all?

• Hundreds dead
• All planes grounded for 20 months (estimated direct cost of $20B; indirect $60B)
• Estimated $18.4B loss for 2019 with 183 canceled orders
• $2.5B in direct expenses for fines / settlement
  • $1.77B in damages to customer airlines
  • $243.6M in fines to government
  • $500M in fund for victims

Surely it would have been more profitable to just train the pilots. Even if we consider doing this in many instances, not just for MCAS, surely all of that training would still have been cheaper! This clearly was just a stupid strategy that the market, courts, and regulators are all rightfully punishing them for. After all, without these losses what would incentivize them to do better going forward?

An Actual Example of What’s Alleged

To show that I’m being fair and not just writing a thinly veiled laissez faire opinion piece, let’s cover an example where what is being alleged (putting profits ahead of safety) happened and actually led to increased profits for the company. In the 1970’s Ford produced a subcompact car called the Pinto. It became known for a safety issue caused by a design flaw in the fuel system that led to fires in some rear-end collisions.

This was well known and understood by Ford’s engineers. In fact, the company did the math and determined it would be cheaper to pay for the legal costs of the small number of accidents than the cost of fixing, so they elected not to fix it. Unlike Boeing’s shortcut, this didn’t result in expensive chaos. The only real blowback I’m aware of was the reputational aspect of the resulting public debate and the fact that to this day it’s used as an example of this concept. So, it seems like they profited from this safety reduction.

There’s a really good discussion to be had here that I encourage you to ponder. How much do we value safety? Obviously not infinitely. To be infinitely safe, well we wouldn’t build the car at all. But where the line lies is non-obvious. It’s an important topic for our society to get better answers on for all sorts of topics. The most recent high profile example being how to respond to pandemics. Did Ford make the right choice? Should it even be their choice?

Cooperation Is Often Good For You

One of the benefits of markets is that, in the general, they promote voluntarily exchange. That is to say, no is forcing me to buy something from you. If a sale is made, it’s because both of us believe we’re better off with the result of the trade than we were before the trade. Otherwise, why would we do it¹? That principle scales and even is baked into our DNA. Humans are social animals because, in the general, we’re better off cooperating and playing by the rules than we are trying to do everything on our own.

Even if a decision is motivated purely out of financial self interest, consider the wider consequences of the decision. It doesn’t just happen now, and it isn’t in a vacuum. Even if doing something selfish right now is a clear win, is it a good long term decision? By cutting this corner, angering that customer, or allowing something bad to happen, did you actually even benefit? Or, is this a short sighted, unforced error of the kind Boeing has repeatedly made over the years?

Maybe you do still come out ahead on money in some measures, but what about the other problems that are harder to measure? Maybe your reputation makes it harder to hire and retain talent. Maybe you end up drawing the ire of regulators or the public. If you’ve found a loophole to make money at the expense of the public’s safety, there’s a high chance that will get shut down. When the regulation comes, it’s likely to be over corrective not under corrective. The cost of that over correction may be larger than the gain from this decision was, and with all the negative PR to boot.

This is all to say, whatever the laws should be and whatever your personal values are, it’s self evident that our world requires on a certain level of cooperation that’s incompatible with maximizing only your interests. In capitalism, an individualist, profit driven system, it’s easy to lose sight of that and shoot yourself in the foot. But for all it’s faults, I don’t think an honest of reading of the situation can lay the blame at the feet of capitalism.

It’s just bad management.

1. I am well aware that there are exceptions where you are literally, or effectively, forced into transactions. Sometimes for legitimate reasons and sometimes not. But, no matter where our personal preferences lie it’s deliberately missing the point if we’re arguing against that most of the time we’re not being forced. ↩︎