
Airplanes and Accounting Games: The Coming Boeing Collapse? - cjbest
https://mattstoller.substack.com/p/airplanes-and-accounting-games-the
======
Alupis
1) The problems with the 737-MAX are fixable and will be fixed (either in a
new airplane name by branding, or with time as people trust the new MAX
variant again)

2) We can't discount all the revenues generated by defense spending, both by
the US and abroad. That's a non-trivial amount of Boeing's income.

3) The US Gov't may not allow Boeing to fail for National Security reasons.
Both as a major Defense Contractor, and as the sole producer of domestic
airliners. (that is, if Boeing is even in a position to fail)

I think the 737-MAX issues are bad, but not bad enough to destroy the company.
The 737 airframe has been the workhorse for decades, and I don't see that
changing soon. Major airlines operating the 737 variants will just continue to
use the perfectly good 737-700,800 and 900 variants until something new and
fixed comes out.

~~~
codingslave
"1) The problems with the 737-MAX are fixable and will be fixed (either in a
new airplane name by branding, or with time as people trust the new MAX
variant again)"

The public doesn't trust these planes. It doesn't matter how fixable they are.

Secondly, its not a software problem, the plane is structurally deficient. A
problem they tried to solve with software. These planes cannot fly without a
computer adjusting them to keep the balance, something that is not true of any
other major aircraft. The problem can be solved with software, but its more
like a bandaid.

EDIT:

Heres a quick explanation of the plane:

The 737 engines used too much fuel so to make a more attractive plane for
poorer countries, Boeing decided to install more efficient engines with bigger
fans, creating the 737 MAX.

Boeing used a 737 airframe for economic reasons (it was way cheaper, didn't
require pilot retraining), but needed more ground clearance for bigger
engines. The 737 design cant be practically modified to have taller main
landing gear. The solution was to mount to engines higher on the plane. This
made the plane more unstable, so they slapped the software solution on. This
"fixed" the problem, but then the plane was more complex to fly, which led to
the crashes. But Boeing didn't want a plane that required retraining, so they
hid the complexity of the software solutions, which led to crashes because the
pilots didn't know what was going on.

~~~
FlyMoreRockets
> These planes cannot fly without a computer adjusting them to keep the
> balance...

First I have heard of this issue, though I haven't been following it closely.
Citation, please?

~~~
ping_pong
If you haven't been following closely, then do a modicum of your own research
first before you ask for citations.

The MCAS is exactly the cause of the issues and was the software that caused
the crashes because it behaved unexpectedly to the pilots. The whole reason
why Boeing leaned on software was because their sales pitch was that this new
plane was essentially the same as a 737 so it didn't need any extra training.
But this was false. They needed this MCAS because the mechanics of flying the
plane were vastly different, I think because of the location of the engines,
etc. That's the whole issue, where Boeing lied to the FAA and sold the 737MAX
as a drop-in replacement for the 737 when it really wasn't. So if you don't
even know this then you need to start from scratch and do your own research.

~~~
function_seven
Everything you wrote it true, but doesn't support the statement:

> _These planes cannot fly without a computer adjusting them to keep the
> balance._

I haven't seen anything suggesting that. If MCAS was completely ripped out of
the computers, these planes still can be flown, right? The pilots would need
to be trained on the differing characteristics, but it isn't inherently
unstable like some military jets are.

~~~
sokoloff
The planes would still _physically_ fly without MCAS. (They are not unstable.)

The planes could not _legally_ fly without MCAS, because they fail a required
stick force linearity certification requirement. (FAR 25.173)

------
tptacek
I got to the part about Blackstone having two board members, a "private equity
vector for financializing corporations" "experienced in dealing with corporate
crises". That's one way to describe them; the simpler way would be "one of the
world's largest investors in corporate equities". Is it at all weird for one
of the US's largest investors to have board members at one of its largest
publicly traded companies?

"The board of Boeing is a group of people who know how to cut corners on
safety". Is this in evidence? They're the CEOs or former CEOs of Amgen, Duke
Energy, Allstate, Aetna, and Medtronic, along with 2 Admirals and a couple
ambassadors.

~~~
perl4ever
I believe you're confusing Blackstone with Blackrock.

Blackrock has ~$7 trillion in AUM.

Blackstone is an "alternative" asset manager with <$0.5 trillion in AUM. An
order of magnitude smaller.

The Wikipedia pages on each even say "not to be confused with <the other one>"

~~~
tptacek
Thanks for the correction!

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ralph84
Money quote:

> I’m not a financial analyst and I haven’t gone through the numbers in detail

~~~
calcifer
You're doing some creative quoting right there. The context for that sentence
is:

> Boeing also said on its conference call some customers have _stopped making
> advanced payments_. [...]

> I’m not a financial analyst and I haven’t gone through the numbers in
> detail, but I’m going to go out on a limb and assert that this is not good
> news.

I'd say you don't need to be a financial analyst to realize _customers not
paying you_ is not a good thing.

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ggm
Is it just me, or is it weird how little reference there is to Airbus or Comac
or Bombardier? If you want to talk about financial issues for an aircraft
manufacturer, and their accounting model and risk, surely you need to talk
explicitly about the comparable at-scale entities in the same market?

I think the underlying one-paragraph hit which I paraphrase as: _the way the
cost of the hole they are digging is buried into future sales is not making
the author comfortable_ is something which really demands discussion of Airbus
accounting. If they also do this, if the entire industry is using future
profit models to justify up-front capital and operational spend, Then its not
just risk in the US markets, it's worldwide.

(at some level it's worldwide anyway: the investor model these days can't stop
at national borders unless the investment itself is regulated, which may be
possible in the case of Boeing, I don't know)

~~~
peteradio
I think the issue is that the cracks start to appear only after future
projections badly miss, like when finished planes get parked. Did that happen
with Airbus?

~~~
ggm
I think the decision to tank on the 380 was a sign, yes. I think Airbus is
carrying a large debt, as a result of under-achieved sales on the unit, and a
huge sunk cost. I have read stuff implying it barely got above its investment
costs including R&D, before it stopped. The Max is possibly a bigger hole. the
787 was a huge hole, because of the battery fire.

Comac, I wouldn't know. Bombardier is now in J-V land which may be recognition
of the limits of what they can do with their own money.

I could also say it reaches into Rolls-Royce. Engine leasing is funding engine
development: if they stop future sales, because people select GE engines, are
they actually in profit purely on the operational charge model of the engines
sold?

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thesumofall
Those are pretty big accusations with very little proof. They use a perfectly
legal accounting method and anyone interested can largely figure out how much
risk Boeing takes by investing in new programs

~~~
Pfhreak
Perfectly legal doesn't make something not an accounting game. One can do
things legally and still be doing them disreputably.

~~~
thesumofall
True, but the article gives also zero proof that anything disreputable has
been going on in terms of accounting. While maybe not as straightforward, it
does also not sound illogical to spread development costs across the early
sales phase of an aircraft.

~~~
hurricanetc
The author tosses around some strong and unfounded accusations but my takeaway
was that this accounting practice is ethical but risky. Case in point...
Boeing isn't manufacturing or selling the 737-MAX as of this moment. If their
accounting practices rely on them selling planes to recoup costs and they
aren't currently even manufacturing the planes I think it is fair to ask what
the financial health of the company really truly is.

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seibelj
Monopolies are caused when the government prevents competition through
licenses, excessive regulation, patents, etc. Starting a new bank is an
astronomically hard and impossible endeavor, whereas it was pretty easy to do
in the 1800s. It’s hard to start an aerospace company, a convenience store, a
restaurant, and so on. The only easy companies to start are tech companies!
It’s absurd!

~~~
kolinko
How did government help Google or Microsoft or eBay achieve monopoly?

~~~
FlyMoreRockets
I think OP's point is that government helped by not being in the loop.

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georgeecollins
The amazing thing to me is how much less per year Boeing burns than Uber.

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sheeshkebab
I can’t tell difference between Boeing, airbus, or embrayer planes when I fly
- as I suspect most others who fly. They all feel amazing and personally
floored every time I realize I’m up in the air moving hundreds mph.

~~~
bgee
embrayer => embraer?

Is that a typo or just a different spelling (in Portuguese)?

~~~
mprovost
Portuguese doesn't have the letter "y"!

~~~
lagadu
Yes it does, it's part of the new orthographic agreement.

~~~
mprovost
Yes, k, w, and y were added for foreign loan words. Embraer is an abbreviation
of "Empresa Brasileira de Aeronáutica" which doesn't contain any foreign
words. I wanted to point out that it's unlikely that a native speaker would
add a gratuitous "y". It's a common letter in Spanish and most people are
surprised that it's not used in Portuguese.

------
codingslave
Real Synopsis:

Boeing 737 Max aircraft have aerodynamic and engineering design flaws

The sensors that can detect potential problems were not reliable. There are
two sensors but the Boeing design only used one of them.

Boeing cut corners to save money

To save even more money, Boeing allowed customers to order the planes without
warning lights. The planes that crashed didn't have those warning lights.

There were pilot training and maintenance log issues.

Finally, according to the Seattle Times, the regulators got into bed with
companies they were supposed to regulate

Conclusion:

This company should go out of business and the MBAs that cut costs on this
plane thrown in jail for murder

~~~
alexis_fr
> MBAs thrown in jail for murder

All I see in the currently best civilization of the world is MBAs not getting
jailed when a mass crime is committed. HSBC for managing the drug cartel’s
money in USA, Volkswagen for deceit on pollution, Boeing/FAA for collusion
(although it could change, but doesn’t seem likely). Is it just an
evolutionary mistake and in a few generation we’ll accept to treat company-
baked criminality as a sum of individual criminal acts deserving prison, or is
there a stable factor where whatever level of development we reach, company
managers get away with it?

------
achow
HBR has a case study on the exact same topic - dated 2017

[Accounting Turbulence at Boeing] Unlike its rival Airbus, Boeing used a
practice called program accounting to record its commercial aircraft expenses
since the 1980s.

[https://hbsp.harvard.edu/product/118020-PDF-
ENG](https://hbsp.harvard.edu/product/118020-PDF-ENG)

~~~
Majromax
Seeing it listed like that, it's easy to spot where it appears in Boeing's
current financial statements
([https://investors.boeing.com/investors/financial-
reports/def...](https://investors.boeing.com/investors/financial-
reports/default.aspx)). From 2019Q3-10Q, the 787 'inventory' asset includes
about $20b in deferred production expensing (plus $2.2b in tooling), and the
737MAX inventory contains $1.5b in deferred production and $0.5b in tooling.

Combined, that represents a significant fraction of Boeing's $132b in total
(gross) assets.

------
Pfhreak
Is Boeing a reasonable company to consider nationalizing?

Genuinely curious -- it seems like it's in our interest to ensure that Boeing
is around, that they are sustainable, that workers continue to view Boeing as
a good job, that they have the right motivations of safety vs profit, etc.

~~~
Alupis
I don't see how making the US Federal Government get involved in running an
airplane manufacturer would re-align those any of those interests.

~~~
duncanawoods
Avoid the sick moral hazard of privatised profits but socialised losses.

~~~
Alupis
It's a tired example, but I've yet to meet the DMV or USPS employee that just
wants to excel at every aspect of their work.

~~~
duncanawoods
Navy Seals are government employees and call centers with staff-turnover
measured in days are private. Employee motivation does not depend on the
ownership structure but their work, treatment and reward.

~~~
Alupis
Are you advocating pushups and multi-mile ruck-marches as punishment for not
meeting production goals at USPS? Or rigorous try-out testing including
sitting in 50*F water all night without sleeping for the guy at DMV that hands
you a number?

Comparing government workers that rarely can be fired with specially motivated
unique individuals is far from fair.

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kmbfjr
Boeing isn’t too big to fail, it is too important to fail.

The author raises a valid point that the financial engineers on the board beed
to go.

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ilovecaching
Does this make any of you fearful about getting on a plane? I mean, with all
this airing of dirty laundry and scrambling I feel like mistakes are more
likely now than ever, plus no new planes = we are stuck on old hardware, and
when those planes do go back into service they will have been outside
collecting rust.

~~~
mark-r
"outside collecting rust" seems a little harsh. Aren't planes designed to be
outside 24/7 under conditions a bit more strenuous than being parked?

~~~
dvdkdndjc
Well not necessarily more strenuous. Parked they’re exposed to the ground
level weather, which might be harsher than in the air.

\- Less water

\- Less sodium if parked near a sea

Chemically it seems better to be above the clouds then bellow them.

~~~
cesarb
I read somewhere that the most strenuous thing to an aircraft's structure is
pressurization cycles, which properly parked aircraft aren't going through.

