Sept. 13, 2021, © Leeham News: Tomorrow night the US PBS network broadcasts an hour-long special examining the Boeing 737 MAX crisis.
I sat for a long interview for the investigation, which was a combination of reporting by Frontline and the New York Times. I haven’t previewed the show, so I don’t know how much of my interview—if any—survived the editing. But one area of the focus of the interview was how Boeing came to develop the MAX.
Following the crashes of Lion Air and Ethiopian Airlines five-month-old MAXes, one of the allegations that emerged was that Boeing rushed the development of the airplane.
It’s true that Boeing decided within two days to launch the MAX program. It’s not true that development was “rushed,” in the most common use of the word. Boeing developed what became known as the MAX in parallel with an entirely new airplane concept that would have replaced the 737 Next Generation airplane. It’s what Boeing does: study two or more concepts as engineers and the executives decide what the next airplane will be.
The basic design was on the shelf, ready to go when Airbus forced Boeing’s hand on the cusp of a huge order from American Airlines for the A320ceo/neo family. When Boeing learned of this, the decision was rushed, within two days, to launch the re-engined 737 rather than a new airplane design.
In my new book, published Sept. 1, Air Wars, The Global Combat Between Airbus and Boeing, I outline just how the MAX came to be and how Airbus maneuvered Boeing into launching the program. The book is available globally on Amazon here.
Here is an excerpt from Chapter 1, one of three chapters about the neo-MAX development.
By 2010, Airbus officials had some hard decisions to make. And some in the executive ranks were “terrified” to make it.
The A320 single-aisle family was selling well, with more than 7,000 program orders. The heart and soul of the Airbus, the family consisted of the 125-passenger A319, the 160-passenger A320, and the 190-passenger A321. The A319, once a strong selling airplane, held its own compared with Boeing’s 737-700. But sales of both aircraft had fallen off in favor of the larger A320 and Boeing’s 737-800. The -800 carried 12 more passengers than the A320, and its larger wing gave it more range. Boeing held a sales advantage over these two airplanes.
Airbus’s A321 had a clear market preference over Boeing’s 737-900ER. The A321 carried more passengers. The -900ER (for Extended Range) could fly farther. But airlines, especially those catering to leisure markets, preferred capacity to range. The A321 outsold the -900ER by about 3:1.
Airlines in 2010 were still recovering from the Global Financial Crisis of 2008. Losses were enormous, and some airlines went out of business. Others sought ways to cut costs, and one of the highest costs was fuel. Boeing was flirting with offering a new airplane to replace the 737. It also studied re-engining the 737. Airbus favored a lower-cost solution: re-engining the A320 with the GTF and an engine offered by P&W rival CFM International, called the LEAP.
However, if Airbus went this route, investing up to $2 billion in the process (with about half picked up by the engine manufacturers), would Boeing offer the new airplane? If so, Airbus would be forced to follow. Having committed to the re-engined A320, all this money would be down the drain. Airbus would have to develop a new airplane, costing at least $10 billion.
John Leahy, the chief operating officer-customers for Airbus, initially scoffed at re-engining the A320, at least publicly, but he had come around. Supported by Barry Eccleston, the president of Airbus North America, strategist Christian Scherer, his top lieutenant Kiran Rao and others on the Toulouse staff, Leahy now advocated the re-engining route. The family would have more range and substantially lower fuel consumption than the A320 or 737NG. New engines also meant lower fuel emissions. Activists in Europe were gaining ground in targeting commercial aviation as a polluter. Airbus was ramping up its “green aviation” efforts.
Tom Enders, the CEO of Airbus, was skeptical. What if Airbus committed to the re-engining and Boeing went with a new airplane? What if Airbus got it wrong? It was a multi-billion-dollar gamble.
Unbeknown to Airbus, officials worried about the wrong airplane. Airbus believed Boeing was going to offer a new single-aisle design. To be sure, Boeing had shown concepts of such a plane to customers. And no firm decision had been made internally by Boeing what direction it would go. But some within Boeing were pushing hard for a new twin-aisle concept called the New Light Twin. Those within Boeing at the time said years later this was the favored solution.
This twin-aisle airplane concept carried 180 to 225 passengers with a range of up to 4,500nm. It was a composite with a novel elliptical or ovoid shape. This airplane would rely on ground-breaking production techniques, which in many respects was key to the entire business plan. It would have single-aisle economics. What’s more, a key benefit to the airlines was that twin aisles allowed a rapid turnaround at airport gates. It was a family for three airplanes.
Leahy was convinced Airbus could force Boeing’s hand into forgoing the new airplane and instead decide to re-engine the 737. Leahy and his strategic team believed a re-engined 737 would be inferior to the re-engined A320. They believed an “A320RE” (re-engine) would at long last give Airbus a clear advantage over the 737NG and a 737RE. For a lot of technical reasons, they were convinced a 737RE could not be competitive with the A320RE.
Leahy now had to persuade Enders and the executive board. He said that what was needed was a significant order from a key Boeing customer to shock Boeing into making this move. The dynamics in the U.S. at the time were stacked against Airbus, however. American, Delta, Southwest, and United were all key Boeing customers. Each had large 737 fleets. American had signed a deal in the mid-1990s to buy exclusively from Boeing.
Southwest owed its very existence to Boeing. When Southwest was a three- or four-airplane operator facing financial calamity, Boeing helped the airline stay in business. The odds of Southwest buying from Airbus were virtually nil.
Delta and United flew A320s. But Delta, like American, had been an exclusive Boeing customer. Its Airbuses came into the fleet after it acquired Northwest Airlines. With the merger came Northwest’s management, who eventually took over at Delta. They liked Airbus but did not like becoming launch customers of new technology engines. It was a view that in retrospect would prove prescient.
United’s A320 fleet was ordered by a long-gone management team. Although the merged airline was branded United, in reality, Continental was the surviving carrier. The remaining executive team mostly came from Continental. It was the third U.S. airline to become an exclusive Boeing customer by contract. The Continental management, now in control at United, wasn’t receptive to Airbus.
American’s predicament presented just the kind of opportunity that Leahy relished. By 2011, American was in a dire financial condition. It also had one of the oldest fleets of any carrier. It had some 300 aging Boeing MD-80s, purchased initially from the McDonnell Douglas, beginning in the 1980s when MDC was an independent yet struggling commercial airplane manufacturer.
Eccleston was friends with American’s chairman, Gerard Arpey.
“I had known and done deals with Gerard Arpey and some other American folks in my other careers in the past, mostly at Rolls-Royce,” Eccleston recalled. “I got to know Gerard really well, and I was quite close to him and his wife personally. I used my relationship with Gerard and with Tom [Horton] to at least initiate a debate. That debate mostly involved having nice dinners at the Mansion at Turtle Creek [a posh Dallas restaurant and hotel] once every quarter or so to sort of stay in touch.”
In early 2011, Eccleston’s conversations with American heated up.
Eccleston recalled it became apparent that American was nervous about Boeing getting to know too much about this discussion. Talks progressed to the point of nearing a deal by the spring. It was time for Leahy to become personally involved. A confidential lunch meeting was arranged in Ft. Lauderdale in March with Horton and a few key staff members. Eccleston agreed with a restaurant to open privately for lunch to be sure it remained confidential. By the end of the meal, Leahy concluded American was serious, and a deal could possibly be done. It was a blockbuster, too: more than 400 ceos and neos.
“It became apparent to us that there was a deal to be done and that Tom Horton (American’s president) would be able to convince Gerard to set aside his concerns about working with Airbus. This was going to be a great airplane, and it was going to be a great deal. It would transform American’s future. They would show a lot of confidence in the future by placing an order of around 200 airplanes.” An equal number of options would be part of the package, but then a big wrinkle appeared.
“Suddenly, one day, American called up,” according to Eccleston. “Horton says, ‘So, how would Airbus feel if we ordered Airbus and Boeing, and we took both?’”
“Why would American say that?” Eccleston asked in wonderment.
“You remember when we had this agreement back in 1997 about exclusivity [with Boeing], and we were one of the three airlines?” Horton said.
“Yes, I’m aware of that, but that went away when Boeing bought Douglas and the European Union (EU) said that’s dead. So, as far as I’m concerned, Tom, you don’t have to worry about that.”
Horton replied that there were some people in the room at the time with Crandall and Ron Woodard when the exclusive agreement was signed. “They feel it’s kind of a commitment to Boeing, and they’re nervous about walking away from that.”
It was clear that American was very concerned that if they just bought an Airbus, then Boeing was going to get really, really upset, Eccleston recalled. Horton pressed Eccleston about the Airbus reaction if American also ordered the 737.
Eccleston’s assessment that Boeing would be “really, really upset” was on the mark. “The next thing was, and this is really weird, I had a call from Horton saying, ‘Boeing said if American bought Airbus with or without Boeing, Boeing was going to sue American for breaching the exclusivity.’ We would like to ask Airbus if you would indemnify us against that,’ Horton said.”
Airbus quickly rejected the suggestion.
The next thing Eccleston heard was that Boeing showed up in American’s headquarters in Dallas with half a dozen people, most of whom were lawyers, to prove how serious Boeing was about suing them. “It really upset American. It really upset Tom. It kind of upset Gerard, who is a very mild-mannered man and doesn’t upset easily,” Eccleston recalled.
In the end, the deal included Airbus and Boeing. But for the latter, it was a near thing. Had it not been for Arpey’s call, Boeing would have missed out on a huge American order.
Why did American open the door to Airbus with the exclusive Boeing deal in place? “Boeing was asleep at the switch,” recalled an American official, still with the carrier in 2020. American had been asking Boeing for an upgrade to the 737NG in response to the A320neo. Boeing didn’t believe American would leave the exclusive agreement. Thus, the opportunity for Airbus. “It caught a lot of people by surprise. Boeing was pressed into doing something,” an American insider said years later. “Some didn’t want to have their hands tied to the 737RE.”
American’s precarious financial condition was also a factor for Boeing, recalled a Boeing insider. Airbus and Boeing agreed to backstop the financing of 230 airplanes. “There was a lot of debate if we should even be doing the deal because of their financial condition,” the Boeing insider said. Indeed, on November 29, just five months after the record-setting $40 billion order, American filed for Chapter 11 bankruptcy. The filing eliminated the financing commitment if the purchase contracts were later “assumed,” a legal term that means the orders survived the bankruptcy. American assumed both contracts.
American fleet planners found the neo economics compelling, especially compared with the aging MD-80 fleet, said the American insider. But Boeing, he relayed, was confident American would not order from Airbus, and it didn’t up its game, offering only more 737-800s and a batch of -900ERs. American simply had no interest in the latter airplane.
Arpey was the bearer of bad news in 1994 when he called Leahy about the looming exclusive Boeing deal. Now he called Boeing to tell them Leahy was at American’s headquarters ready to sign a deal for 400 aircraft, a former Boeing employee recalled seven years later. If Boeing wanted a piece of this deal, Arpey said, Boeing needed to get on an airplane and get down to the airline’s Ft. Worth, Texas, headquarters, said the former employee.
This was a Tuesday. Boeing salesmen spent all day and night Wednesday coming up with a re-engined 737 program, terms, and conditions. Jim McNerney, then the CEO of The Boeing Co., stepped in and decided to launch the re-engined 737, killing Albaugh’s dream, and that of many others, of an entirely new airplane.
On July 20, 2011, American announced the dual orders at the newly opened Admirals Club at the Dallas/Ft. Worth Airport. Arpey, Horton, Airbus CEO Enders, and BCA’s CEO Albaugh were present. Leahy, Eccleston, and a host of others from Airbus, Boeing, and American were there as well.
Airbus succeeded in forcing Boeing to re-engine the 737. Leahy had his deal from a major Boeing customer. The future for the A320neo was now secure. The prospect of Boeing launching a new airplane was dead, for now. For Boeing, the decision to drop a new airplane in favor of the 737RE would prove to be a fateful one because the 737RE would eventually become known as the 737 MAX