Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
- Airbus charges and write-offs since 1999: more than €33bn April 8, 2024
Pontifications: Two books examine GE’s fall from grace
Lights Out: Pride, Delusion, and the Fall of General Electric
By Thomas Gryta and Ted Mann
Mariner Books, $17.99, 361 Pages
The Man Who Broke Capitalism, How Jack Welch Gutted the Heartland and Crush the Sole of Corporate America—and How to Undo His Legacy
By David Gelles
Simon & Schuster, $28.00, 264 Pages
Aug. 1, 2022, © Leeham News: Two recent books about GE and its most prominent CEO, Jack Welch, offer different focus and fascinating insight.
By Scott Hamilton
One, Lights Out, is a detailed chronicle of the Welch era and those who followed. This book goes into much more detail than Gelles’, which is more of a biography of Welch than a corporate history—although obviously, there is pollination of both.
Gelles, a reporter for the New York Times, goes into some discussion about Boeing and the Welch-influenced people who came to lead Boeing, notably Jim McNerney and David Calhoun. But don’t expect Gelles’ book to take a deep dive into how Welch’s tutelage of McNerney and Calhoun affected Boeing. The discussion is superficial. This is, after all, a book focused on Welch.
Damning picture
Gelles paints a damning picture of how those executives who left GE to become CEOs at other companies by and large wrecked shareholder value (the GE mantra) at their new posts. Ironically, Gelles, for all his criticisms of McNerney, points out that when it came to shareholder value, McNerney increased it at Boeing in contrast to other Welchies.
Lights Out, on the other hand, barely mentions Boeing, and McNerney only is mentioned in passing. Calhoun only gets mentioned once. But the GE story is much more detailed in Lights Out than in Gelles’ book. This might be expected when you realize the authors are business reporters for the Wall Street Journal, while Gelles’ employer is for a generalist audience.
Gelles’ story is more personal about Welch, going to his childhood and giving us a close look at just what formed his personality. He makes a good case about how boards of directors not only sought out GE executives to run their companies, but other firms emulated the GE business model. Lights Out is more of a corporate story.
Culture
Gelles writes about the culture at GE and how it permeated other companies, including a superficial review of the impact on Boeing. Lights Out doesn’t specifically make this connection, especially since Boeing is figuratively a footnote. But by reading either or both books, the culture and business practices at GE are very familiar to what emerged at Boeing as the GE practices were introduced first by Harry Stonecipher, also a GE alumnus, beginning in 1997 and followed by McNerney and even non-GE CEO Dennis Muilenburg. This is not a compliment.
A more cutting look at GE’s culture comes from an older book, Lessons from the Titans, co-authored by a principal of Melius Research, Scott Davis. Davis recounts how GE tried to get him fired for writing a negative research note while employed by Morgan Stanley. It’s something Boeing tried in 2007 or 2008 with a new reporter for Flight International before he reported for work because Boeing was upset with his previous reporting on the 787 development difficulties. The cultural parallels between GE and Boeing recounted in the three books are stark.
Lights Out and the Welch book are worth the read. Lights Out is a bit of a slog. Gelles leaves you wanting more. The choice is yours.
Air Wars
My book, Air Wars, The Global Combat Between Airbus and Boeing, tells the story of 33 years of competition between the two rivals and the impact on both of John Leahy during this 33 years. The book is a quasi-biography of Leahy and a follow-on of sorts to the 1982 book, Sporty Game, which at the time was considered the definitive history of the competition between Boeing, McDonnell Douglas, Lockheed and Airbus, which at the time was only 12 years old.
Air Wars is rated 4.5 out of five by readers on Amazon and 4.3 on Goodreads. The book also was rated among the top 10 reads in 2021, including the prestigious Royal Aeronautical Society.
Royal Aeronautical Society
Named to the Top 10 List of Aerospace Books for Christmas Choices, 2021
Puget Sound Business Journal
(Seattle area.) No. 1 on the Christmas list of aerospace books for 2021.
BookAuthority
No. 1 on its list of Best New Aerospace eBooks to read in 2022.
Chris Sloan, The Airchive
“A worthy successor to ‘The Sporty Game,’” the 1982 book by John Newhouse, considered at the time to be the definitive book about the competition between Boeing, McDonnell Douglas and the emerging Airbus.
Jim Sheehan, Aviation Industry Consultant
There is so much model and OEM information that it is for sure going to become required reading for anyone who wants to understand the last fifty or so years of commercial aviation.
Loved all of the quotes and stories.
Dan Catchpole, Aviation Writer
Air Wars is a tour de force look behind the curtain of Boeing and Airbus’ global competition and, in part, a biography of Airbus’ head salesman, John Leahy, the man who forced Boeing’s hand to re-engine the 737. Longtime aerospace analyst and journalist Scott Hamilton takes readers through the twists and turns of the decades long battle between the two companies.
Dan Reed, Aviation Writer
Using John Leahy’s long and monumental career as a vehicle for telling readers about the 51-year battle between Airbus and Boeing is both an interesting and inspired choice by the author.
Air Wars is available in paperback and eBook form at Amazon and in paperback at Barnes & Noble.
Neutron Jack’s core premise is that the employee is the enemy and at all times 10% of them need to be fired, even if you just fired 10% of them.
He, and the promulgation of this mentality under the cover of “shareholder value” has done more to destroy American industry and the middle class than almost any other single factor.
Employees were deemed liabilities to be disposed of at every opportunity. Institutionalizing a culture of fear through punitive performance review processes, rating quotas and internecine warfare among managers ensuring that even a group where all the employees were exceptional had to suffer the same quota based review rating distribution destroyed the concept of loyalty to company.
may he rot in hell.
Not to mention that today, most “Shareholder Value” is created with share buybacks. Not actual production. That used to be an illegal form of stock price manipulation but the regulation was ditched under Saint Ronnie.
PS. Enjoyed AirWars…
…
Thanks Scott for these excellent book reviews, including Lessons of the Titans. I was not aware of those books even though I have a high interest in the subject.
Lets not forget at least for Boeing started them down the glorious GE path and that was no other than Harry Stonecipher, another Welch wanna be…then McNerney and the others. Basically one ex GE leader after another except for Muilenburg which I was hoping would right the ship but somehow became another GE leader.
I was a rank and file GE employee from 2006
to 2011. Welch’s “rank and yank” was long gone by then, but it was already clear that the old culture of systematic self assessment had given path to one of “blame the prior administration”. Welch may have put Immelt in some difficult positions, but it was clear even 15 years ago to those below the rungs of power that Immelt was making some very big mistakes in addressing those challenges and that any rank and file efforts to point out these mistakes would not be looked upon kindly.
sadly “Rank and Yank” is still enormously common in the rest of industry.
I watched it destroy a company I loved and 18 years later that company is still suffering.
any large company needs some standardized form of rating employee performance vs expectation to ensure the best get rewarded and the least good get help to be better, but the arbitrary quotas, numerical rankings and punitive aspects are pure poison for any company.
There’s now quite a lot of literature about how Boeing have got it wrong, how GE have got it wrong, etc.
Open question: is the situation salvagable?
My worry is that, fundamentally, as a species, we’re just rubbish at sustaining complex enterprises, usually because no one looks at the value of the enterprise but only at the cost of operating it. How many things have we done that, once it’s got past the difficult pioneering phase and settled down to Business as Usual phase, have gone on to be needlessly destroyed by bosses or politicians who fundamentally have no idea how the enterprise they’re running works?
This book sounds like it’s a good account of another egregious example of this kind of decline.
Matthew – Apple Inc is an interesting example of your question – “is the situation salvageable?” Apple rose meteorically as an innovator. In the early and mid-90s they made that transition you mention, from the pioneer phase to the cost-cutting shareholder-centric behavior under Gil Amelio. I really thought they were goners, and the stock fell like a stone.
Apple salvaged their situation by bringing back a visionary leader with charisma and fierce attention to product design.
Obviously, Boeing has not done that; their Board won’t do that; and seriously, Boeing can’t do that – it has no potential new leader with charisma and attention to detail, waiting in the wings.
Another thing is that Boeing has marinated a huge management structure in the cost-cutting philosophy for 25 years. Apple could fix its problem at the top. Boeing’s problem goes to the bone.
> Boeing has not done that; their Board won’t do that; and seriously, Boeing can’t do that – it has no potential new leader with charisma and attention to detail, waiting in the wings. <
I sense that commenter Stan S knows that situation much better than I do,
but I'd contend that what BCA needs to do is very apparent to anyone not "in it".
Is "charisma" what's primarily missing at mcBoeing? I do not think so: I'd start, if I were that company's mgmt, by quietly trying to rehire their fired seasoned engineers with attractive compensation packages. What needs to be done at mcBoeing truly is not rocket science.. not that I think it will happen.
777- Alan Mulally?
@ Stan S
Apple products have generally been synonymous with quality: that helps a lot when other mistakes are being made.
Boeing, unfortunately, decided at some point that quality was of subordinate importance, thereby flushing its reputation… and that’s a very difficult pit to climb out of.
Don’t have fresh numbers but the 777-300ER and 737MAX seem to be able to hold on to high utilization and reliability rates. The Douglas reverse take-over of Boeing changed it forever?
The 777-300ER is a magnificent, quality aircraft from a bygone era.
The 737 MAX is a disaster of monumental proportions.
I know you’re referring to technical defect rates today, after the return to service.
However, whether or not 737MAX has high utlisation rates now is somewhat imaterial from a different point of view. It’s had a years long grounding, which still isn’t fully over. Flying 100% of the time today is never, ever going to make the MAX availability anything other than disasterous, for the airlines that had them before and during that grounding.
The lesson for airlines there is that, perhaps, it’s best to let someone else get new Boeing designs early, let them suffer all the intro-to-service problems, and only order any at all if they look good and Airbus can’t supply an equivalent. Even then it’s a slightly suspect strategy; 787 hasn’t exactly been a 100% bed of roses for anyone.
With all the manipulations coming to light
one may need to revisit those numbers.
See airframe valuation and the methods Boeing developed to pimp valuation of their products.
( GAAP seems to be designed to aid in such endeavours.)
Stan, your mention of Apple is indeed interesting.
I think another interesting example is Leahy, in Airbus. It’s pretty clear from Scott’s book that Leahy was a pretty charismatic, ambitious kind of guy, and is largely responsible for Airbus’s current position. And he wasn’t even in charge of the company, he was “just” the salesman (I’m using the word just with extreme but admiring cheek!). It goes to show that the necessary charisma doesn’t have to be at the top, but the top does have to be prepared to recognise it when they see it and let it flourish, like Airbus did with Leahy, and Apple did with the return of Jobs.
Rolls Royce have got three major things coming in all at once in Ultra Fan; GTF (not a new idea, but one this size is new); CF fan blades (again, not a new idea, not by a long shot, but they seem to have waited until an ideal moment to achieve thin root sections); and variable pitch fan blades (similar again). They’ve carried all this R&D through some very difficult times – the problems with the 787 engines, and Covid – but they’ve stuck with it where some other companies may have quit and hunkered down. From a short / near term company financials positions, that’s a pretty damned big deal, and someone somewhere has done a remarkable job of keeping the company on an even keel, and keeping everyone on board with the program.
Where as from GE we here, in comparison, barely a squeak. If they’re doing any big-step R&D, they’re being awfully quiet about it, and are probably many, many years behind the curve. I fear the worst for GE.
Rolls Royce look to be on the cusp of having a marketable Ultrafan engine with all these advances, and they are going to have a very good chance of cleaning up. If they’ve made even only a 5% gain on the last gen engines (they’re talking about 15% over older generations) there’s likely a lot of airlines that would see re-engining as cost effective, even on older airframes. Would RR offer a new engine to A380 operators? Would Airbus do a new aircraft to use the new engine? Can existing A350/XWB customers upgrade? Will A350 / A330neo economics get a big step improvement, blowing everything Boeing has to offer out of the water (apart from 787 with the same RR engine)? Do airlines get this simply because of RR’s total-care-power-by-the-hour deals, airlines getting fuel savings and RR getting big gains because of the performance terms in the contracts?
A maxim I like is, “Develop, or die”. Business is a evolutionary process, and resting on laurels is a fast way to go out of business.
Given the impact on flight characteristics I dont see how any reengine would be possible that is not directly supported by Airbus. The fleet size of the A380 does not warrant such an aftersales reengine.
For now Airbus seems to be content with tightening the screws on the 777-X competition by adding more seats and hence lowering seat mile costs of the A350. Its still too early to say how that option fares.
I dont see the business case for reenginening the A330-Neo at this time as Boeing could respond with a reengined 787.
Whatever clean sheet Boeing develops next, it will probably force Airbus hand though.
In terms of business case, such moves are indeed unprecedented. But then again, with three big improvements all coming in at once in a new engine, the performance increase may also be unprecedented (or at least, good enough for it to be worthwhile).
We may see some novel moves in the industry. Fuel prices are high, and looking to stay that way. The drive for economy and environmental friendliness is taking on increasing financial significance. For a large wealthy airline like Emirates, a new engine for their A380s really could be a big enough project for RR to get their teeth into. It has been noted that the test engine for Ultrafan basically looks like an A380 engine in size and performance, ready to go; the barriers are almost certainly related to certification work, not technical design work.
I thought RR dropped the variable-pitch fan.
And GE (through CFM) is going to be flight-testing an SROR engine with a recuperating heat recovery system in 2-3 years. I don’t think you can categorize that as resting on laurels.
https://aviationweek.com/special-topics/sustainability/cfm-details-open-fan-plan-next-gen-engine
Re: variable pitch; Ah, yes. I agree – recent photographs aren’t showing any sign of a variable pitch fan.
Re: GE; well, it all seems to be running a long way behind were RR appear to be, and definitely in a completely different market segment (these are developments for narrow body). I don’t really see how they can stay in the wide body game, if they’re not developing a new wide body engine.
I think GE bought a gearbox manufacturer (the one used by P&W?)?
GE’s 2nd quarter report, in the section for GE Aerospace, uses the phrase “Our deep history of innovation and technology leadership”, yet also manages to completely omit any mention of any specific R&D program, or say how much Aerospace is spending on R&D.
However, the overall R&D spend is quite large – >$600million in the quarter – but that’s not broken out per division. They’re either being awfully quiet – which seems odd and would, I think, be nearly unprecedented – or the group is spending large sums of R&D in other company segments. If you look at their “Future of Flight” webpage, the compact core and open fan are tucked away, at the bottom, below a paragraph about a foam wash. Not exactly trumpeting imminent progress…
It’s also important when assessing culpability to mention the large shareholders who hired these soul-less men to increase shareholder value at the expense of the long term viability of the company. It’s this philosophy that allows them to do anything immoral, but “legal,” thanks to the elimination of any oversight. If I may quote one of our recent Presidents: Let’s let business do, what business does best – MAKE MONEY!
Should one also blame an electorate every time some dud gets voted into public office?
It often happens that voters often don’t get what they voted for.
It is actually possible to increase shareholder value without destroying a company — there are lots of examples of that. The problem here is that BA seemingly decided that quality was no longer important, it got badly burned as a result, and it’s now licking its wounds in an existential pit. Could large shareholders have foreseen that BA management would do this?
the problem is the definition of shareholder value.
to GE/McBoeing types, shareholder value is purely short term stock price, which is brought about by accounting tricks, cost cutting and stock buybacks.
to sane people, shareholder value is long term enduring value, which is brought about by consistently delivering quality and innovation over a period of years.
the first sign of decline for any company is when new management cuts the R&D budget. but the Wall Street Casino _LOVES_ it.
I agree. Long term shareholder value places a premium on quality and investment in R&D to keep the product line competitive.
Short term shareholder value cares only about the cash flow generated and immediately returned to shareholders within the next couple of quarters.
The GE/Welch/Boeing philosophy is obvious: only the short-term matters, give every nickel to the shareholders NOW, and the future is the concern of the “next guy”.
Sadly, since their enormous stock options seem to vest quickly, their compensation gives them a powerful bias toward this short-termism.
Meanwhile the longterm future of US commercial aviation hangs in the balance.
@Bryce. Large shareholders have such tremendous resources that they generally don’t have to pay close attention to one particular investment. And they are golfing…
Generally, the largest shareholders in any major corporation are investment banks that are actually only holding the shares — as components of ETFs and mutual funds — for smaller third party investors. Most of those holdings are actually owned by 401(k) accounts, pension funds, etc. Without even knowing it, it’s likely that millions of ordinary Americans have some BA stock in retirement funds.
In reading “Air-Wars” I for one was left with a single, overwhelming impression of the industry which can be summed up in one word: dismal.
it is an intrinsic problem of US style capitalism.
It requires continuous “easy” expansion while consuming (vast amounts of) resources. The process has more affinity to looting than to creation of value.
Limit expansion and it starts to self digest.
I.e. painting this as a Jack Welch specific/initiated process is unsuitable to analyze and cope with the fall out.
What Uwe said. A few well-connected types loot a company, leaving the *impression* of value, while claiming to be “saving” it.
It’s SOP here.
I think US companies which innovate and create new technologies do create value.
But then there is also a school of management that takes over an existing enterprise and sucks all the cash and life out of it under the guise of “efficiency”. This is the style that Jack Welch and GE adopted and spread like a virus through US industry.
Did they invent this? No, certainly there were other carriers of the virus, experts in corporate restructuring, hedgefunds, slash and burn capitalists. But it does seem pretty clear that the specific strain of the virus that infected Boeing jumped directly from GE.
Came across this 2019 Dominic Gates article by chance — describes the creative “financial engineering” at BA, and very relevant to the current discussion. It also mentions Scott Hamilton 😉
“For Boeing, juggling cash flow often means ‘another “Houdini moment”‘ ”
Of note:
“But how can it be sustainable to keep pulling money from future quarters? Doesn’t that inevitably mean less cash flow later?
““We all ask, when is it going to stop?” the Boeing insider said. “But somehow, every quarter, the well gets refilled.”
“Strauss, of Barclays, said that, “Yes, at some point in the future, the game is up.” ”
https://www.chicagotribune.com/business/ct-biz-boeing-cash-flow-accounting-tricks-20190212-story.html
Learn & train everybody short term cash flow is all that really matters. Or let others do that.
Then avoiding investment, shortcutting regulations, forcing suppliers, buying own stock, killing pensions, let go senior engineers, sell assets, are all ways to improve free cash flow.
I’ve summarized it in one word in the past : “draining” a company.
GE under Jack Welch became experts at massaging the numbers to always hit their projections for earnings.
The company was sanctioned several times by the SEC for fraudulent accounting practices.
Harvard Law School Forum on Corporate Governance:
All but banned in the US during the 1930s, buybacks were seen as a form of market manipulation. Buybacks were largely illegal until 1982, when the SEC adopted Rule 10B-18 under the Reagan administration to combat corporate raiders.
Buybacks are often associated with long-term value-destroying behaviors, including several means of personal gain and enrichment, poor timing of investment decisions, and excess leverage.
As attractive as buybacks may be as a method to return cash to shareholders, they are a powerful tool that can lead to serious dangers.
A common criticism of buybacks is that they can be used by management to manipulate earnings per share (EPS), which could be used to inflate their own compensation metrics and hit quarterly guidance targets.
https://corpgov.law.harvard.edu/2020/10/23/the-dangers-of-buybacks-mitigating-common-pitfalls/
Seeing as this is a Pontifications article, Scott may be willing to permit this interesting news here (also on Reuters):
Airbus has unilaterally and proactively cancelled the entirety of Qatar’s remaining A350 order, as opposed to the piecemeal cancellations that had been occurring to date.
https://onemileatatime.com/news/airbus-cancels-qatar-airways-a350-order/
Presumably, Airbus has a new customer waiting in the wings: Emirates or Air India, for example.
I’m quite sure that Qatar will be absolutely delighted if their deadly regional competitor, Emirates, gets high performance A350’s at knock down prices, with short term delivery, that Qatar had originally ordered. Not!
Indeed!
I have visions of AAB trembling with rage…trying to suppress an aneurysm.
I’ve seen some pictures of some shabby looking paint, but I’ve no idea what is really going on. Airbus don’t seem to have too many troubles selling A350s, so there can’t be any dreadful, no-fly AoG issue across the entire fleet. Surely this cannot be just a personality problem, can it?
It certainly sounds like Airbus have had enough, and have crossed Qatar off their happy holidays card list. Long term that could be a bad thing for Qatar. Reminds me of the lengths British Airways had to go to, pleading with Leahy to sell them some aircraft.
And more news — an ominous sign of the times in which we currently live, in which supply chain issues appear to be getting worse rather than better:
“Six airBaltic Airbus A220s grounded due to lack of spare parts”
https://www.aerotime.aero/articles/31804-six-airbaltic-a220-planes-grounded-spare-parts
This is a bit of a puff piece, but if you like reading about the A330neo, as I do:
https://www.flyingmag.com/delta-pilots-show-us-the-a330-900neo-flight-deck/
Some very interesting and useful innovations described in the video in that link 👍
“FAA acting chief to meet inspectors before final Boeing 787 signoff”
“The purpose of acting Administrator Billy Nolen’s visit “is to ensure that the FAA is satisfied that Boeing has taken the appropriate steps to improve manufacturing quality and to guarantee the autonomy of workers who ensure regulatory compliance on the company’s assembly lines,” the FAA said.”
https://www.nasdaq.com/articles/faa-acting-chief-to-meet-inspectors-before-final-boeing-787-signoff
‘China’s C919 poised to challenge Boeing, Airbus’:
https://asiatimes.com/2022/08/chinas-c919-poised-to-challenge-boeing-airbus/
Well, after Nancy’s recent adventures in Taiwan, the prospects of MAX sales (or, indeed, any BA sales) in China in the near future have sunk to a new low level.
Biggest question now: will the US administration block sales of CFM engines to China? And, if the answer is yes, then how long will it take COMAC to come with an alternative?
I’ll answer your question with a question: how have mcSanctions been working out for the West, so far?
Also: will the PD-14 fit on that sucker? 😉
McSanctions: we’re very much on the same page.
PD-14: very feasible candidate. It produces 30,865 lbs of thrust, whereas the LEAP-1C produces 31,000 lbs — minimal difference (0.4% shortfall).
Contrary to the common McNarrative here in the west, China and Russia are still very (and increasingly) chummy. There may be a little discord at present regarding the CR929, but the relationship, in general, is thriving.
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[This entire comment is deleted as violating Reader Comment rules: off topic and unrelated political clap trap.
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