Boeing's Troubles With 737 MAX Jets Could Disrupt Its Business Model

May 7, 2019
Originally published on May 7, 2019 6:00 pm
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The Boeing Company always relied on its lucrative commercial airplane market. That's the bulk of its business. But the cash reserves allow the company to bid aggressively for Pentagon contracts. Now, as NPR's Tom Bowman reports, the troubles with Boeing's 737 Max jets could spill over into its defense business.

TOM BOWMAN, BYLINE: Boeing has recently tacked up some big wins on defense programs. It will build the new 2C jet trainer for the Air Force, also a helicopter - and that new Navy refueling drone, another Boeing project - all told, billions and billions of dollars in sales.

RICHARD ABOULAFIA: Yeah. Over the past couple of years, they've had an amazing score of victories.

BOWMAN: That's Richard Aboulafia, an analyst at Teal Group, an aerospace and defense consulting company.

ABOULAFIA: To a very great extent, it was subsidized by the commercial side of the company, particularly the 737.

BOWMAN: Because a lucrative commercial side accounts for about two-thirds of its business, says Loren Thompson. He's an analyst with the Lexington Institute, a think tank that gets funding from defense contractors.

LOREN THOMPSON: Because the cash flow is so strong on the commercial side, it makes it easier for the defense part of the company to bid aggressively for opportunities.

BOWMAN: Meaning that cash flow allows the company to undercut its competitors and win the contracts for things like that jet trainer, helicopter and refueling drone. Thompson says Boeing has long had a pretty solid plan.

THOMPSON: Boeing's strategy for the last 20 years is to have one foot firmly planted in the commercial world and the other in the defense business.

BOWMAN: Allowing the company to be nimble.

THOMPSON: What that means is at any given time, they are often transferring money back and forth between the two sides of the company in order to bid competitively for opportunities.

BOWMAN: Now the commercial side of Boeing has taken a big hit with the grounding of the 737 Max after two deadly crashes in Ethiopia and Indonesia. The company says it will fix any problems to the 737 Max, but Aboulafia of the Teal Group says that may not be enough.

ABOULAFIA: The technical fix to the Max is not an issue at all. Getting regulators on board both at home and abroad is a bit more challenging, but that can be done. It's quite likely that the biggest challenge they face is restoring confidence in the general public.

BOWMAN: And without that public faith and more buyers, the longtime Boeing strategy could suffer. Again, Loren Thompson.

THOMPSON: The entire foundation of Boeing's business strategy at the present time is predicated on the assumption that commercial demand for its jetliners will remain strong. If the 737, its most popular aircraft, is impaired, well, then obviously that ripples across the entire strategy in terms of what options the company has.

BOWMAN: That could mean, says Thompson, that Boeing will be less aggressive in its bids and maybe face more competition from its main rival in projects that include wings, Lockheed, as well as other smaller companies. Still, some analysts like Todd Harrison of the Center for Strategic and International Studies doubt the 737 Max troubles will have any impact on Boeing and its defense business. In an email to NPR, Harrison says, besides the new aircraft Boeing will build, there's something else. The Air Force just awarded Boeing a 10-year contract worth nearly $6 billion to upgrade the KC-46 refueling tanker. That's not all. In recent weeks, the Pentagon added more F-15 and F-18 warplanes to the budget - both built by Boeing.

Tom Bowman, NPR News, Washington. Transcript provided by NPR, Copyright NPR.