Natasha Frost Jan 3rd 2020
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Late in the summer of 1997, two of the most critical players in global aviation became a single tremendous titan. Boeing, one of the US’s largest and most important companies, acquired its longtime plane manufacturer rival, McDonnell Douglas, in what was then the country’s tenth-largest merger. The resulting giant took Boeing’s name. More unexpectedly, it took its culture and strategy from McDonnell Douglas—even its commercial aviation department was struggling to retain customers.
Reporting on the deal, the New York Times made an observation that now seems prescient: “The full effect of the proposed merger on employees, communities, competitors, customers and investors will not be known for months, maybe even years.” Nearly 20 years later, one such effect has become the aviation story of the year, or perhaps the decade—the crashes of two 737 Max jets and the loss of 346 lives, not to mention the still-rising associated costs of around $10 billion.
In a clash of corporate cultures, where Boeing’s engineers and McDonnell Douglas’s bean-counters went head-to-head, the smaller company won out. The result was a move away from expensive, ground-breaking engineering and toward what some called a more cut-throat culture, devoted to keeping costs down and favoring upgrading older models at the expense of wholesale innovation. Only now, with the 737 indefinitely grounded, are we beginning to see the scale of its effects.
“The fatal fault line was the McDonnell Douglas takeover,” says Clive Irving, author of Jumbo: The Making of the Boeing 747. “Although Boeing was supposed to take over McDonnell Douglas, it ended up the other way around.”
- A turbulent path to an uneasy union
Since the start of the jet age, Boeing had been less a business and more, as writer Jerry Useem put it in Fortune in 2000, “an association of engineers devoted to building amazing flying machines.” For a time, this served it well: An engineers’ company made planes to make its engineers proud, whatever the cost. Employees enjoyed watertight contracts, thanks to an assertive, family-like union, and an attitude to aviation that put design and quality above all else. In the process, it produced some of the world’s greatest planes. The 707, for instance, was the first commercially successful jet; the 727, launched in 1963, allowed airlines to reach airports in the developing world or with shorter runways. The company’s philosophy, as one close observer described it to researcher Edward Greenberg, was “go-for-it-and-damn-the expenses—but not damn the quality.”
Throughout the 1960s and 1970s, the company, and the US aviation industry more generally, found itself in an especially sweet spot, Greenberg told Quartz. It was “the golden age,” he said, “because the airlines—since the government actually controlled where planes could go, (assigning) landing rights in a variety of places—didn’t have competition on those routes. Any costs that the engineers at Boeing wanted to add to the plane—because it was real cool engineering, or made the plane faster or safer—didn’t matter to the airlines and they could just pass on the costs of all of that in ticket prices.”
As engineers first, managers second, Boeing’s bosses answered to airlines: The plane that would become the 737, for example, was first ordered in 1964, after Lufthansa boss Gerhard Holtje found a need for a craft that could carry around 100 passengers on short, intercity European routes. By the plane’s third incarnation, in 1981, Boeing was onto a winner.
With the dawn of the 1980s, however, Boeing’s traditional way of doing things seemed increasingly out of touch. Deregulation under US president Ronald Reagan had changed the economics of the industry, Greenberg said. “The idea was that if you had more competition, it would drop prices for consumers. Suddenly, airlines are looking at this and saying, ‘Oh my God, we can’t pass on the cost by continuously raising ticket prices.’ That put pressure back on Boeing, and on Airbus eventually, to become cost-conscious.”
As costs climbed, the company’s stock price slumped. Everything seemed to point towards one solution: a leaner operation with more digitalization and a new openness to outsourcing and partnering. At the same time, management was desperately searching for more diverse ways to remain financially aloft.
If, figuratively speaking, Boeing was suffering from engine trouble, McDonnell Douglas was in an out-and-out nosedive. The Missouri-based aerospace company was formed in 1967 after the merger of McDonnell Aircraft Corporation and Douglas Aircraft Company. By the 1990s, while its military wing remained robust, its commercial operations were waning. In 1996, Boeing took approximately 60% of the industry’s new commercial aircraft orders. Airbus, the European consortium, lingered far behind it, at 35%. McDonnell Douglas took the remaining 5%. Even its military operations had seen brighter days: The year before the merger, the Pentagon rejected its bid for new fighter jets, turning to Boeing and the Lockheed Martin Corporation instead. Boeing might have been struggling, but McDonnell Douglas seemed destined for failure.
In 1996, Boeing acquired Rockwell, a smaller aerospace and defense manufacturer, for around $3 billion. Now, it had its sights on McDonnell Douglas. These decisions, made by Boeing CEO Phil Condit, were made with a close eye on the company’s bottom line ahead of a hotly anticipated commercial-jet boom. An ambitious program of cost-cutting, outsourcing, and digitalization had already begun. For Boeing, acquiring McDonnell Douglas held many attractions. On the one hand, it would be a victory lap of sorts, to finally take over the remnants of its oldest rival. On another, it was a prime opportunity to pick up McDonnell Douglas’ valuable military expertise and diversify its own offerings away from the turbulent commercial aircraft market, with its cycle of booms and busts.
And then there was Airbus. In less than a decade, the European company had more than doubled its annual deliveries—an upwards trajectory Boeing executives feared meant the loss of its position as the foremost commercial plane manufacturer in an increasingly expensive world.
After the intended merger was announced, antitrust regulators on both sides of the Atlantic considered their options. Airbus and Boeing were already one another’s only significant competitor. McDonnell Douglas’ very existence served a certain purpose—it appears to have made the market more competitive, in helping to drive down prices—but it remained in the doldrums. Regulators noted McDonnell Douglas “no longer [constituted] a meaningful competitive force in the commercial aircraft market,” and that, without a full line of large and small jets, it had no real plan to stave off the “grim prospect” of collapse. Without a takeover, there is every indication that the company might have failed all by itself.
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