Boeing is too big to fail — but that doesn’t mean pain isn’t ahead

The stunning news about Boeing cutbacks has been brewing since the 737 MAX grounding, but it gathered momentum this past spring.

The 737 MAX crisis had been made magnitudes worse by the airline industry’s collapse very early in the pandemic. Boeing, especially its Commercial Airplanes division, had landed in a perilous situation. Its shares had fallen 63% in a month.

In mid-March, the company said $60 billion was needed to save the aerospace manufacturing industry, a mix of direct federal funding and government-backed loans. This sector supports 2.5 million jobs and 17,000 suppliers, according to Boeing.

President Trump said, “Yes, I think we have to protect Boeing. We have to absolutely help Boeing.”

“There’s too much at stake,” industry analyst Richard Aboulafia of the Teal Group told my colleague Dominic Gates. “There is the risk of collapse. I’ve criticized Boeing for years for giving way too much to investors,” he continued, but the danger of “chaos from mass unemployment, a collapsed transportation network and even damage to our national security is too overwhelming. Something has to be done.”

Yet Boeing didn’t take a taxpayer bailout — at least not one that might have required giving the federal government an equity stake in the company.

Instead, the Federal Reserve’s “decision to use its near limitless balance sheet to purchase corporate bonds eased liquidity so much that it was a game changer for the company,” according to Bloomberg. This allowed Boeing to sell $25 billion in bonds, to build a war chest twice that size to protect against years of disruption.

This maneuvering in the spring didn’t stop further fallout. This week, Boeing said it would cut more than 19% of its workforce, almost double its previous workforce reduction plan that ended in September. That round sliced 12,600 Washington state jobs.

More shoes will drop, and no doubt most painfully in the Puget Sound region. The consequences to the economy won’t be a “turn out the lights” era — Seattle is much more diversified than the 1970s “Boeing Bust” version — but they will still be serious. And they would add to pandemic-driven troubles in other sectors.

Is Boeing too big to fail?

It is the nation’s largest exporter by dollar value, the only producer of passenger airplanes, one of the largest defense contractors, an important space contractor, the anchor of a huge advanced manufacturing ecosystem, and China is rising as a commercial airliner rival. All of this argues that it is.

Companies shouldn’t be allowed to become so big, so systemically critical, be they banks or Boeing. They shouldn’t be allowed to essentially self-regulate, as Boeing did in handling the FAA’s job by approving the 737 MAX, or banks did with their toxic derivatives that helped bring on the Great Recession.

Boeing can be rightly criticized for tax avoidance strategies that allowed it to pay no federal taxes for three years in a row; counterproductive stock buybacks; lush executive compensation; union-busting, and short-term rewarding of Wall Street, all made more destructive by its size.

Bigness breeds arrogance. Thus, after two deadly 737 MAX crashes and with evidence of company blunders accumulating, then CEO Dennis Muilenburg defiantly refused to admit problems with the airplane’s systems during an April 2019 news conference. The MAX is still awaiting the FAA to clear it to fly again.

But here we are. In theory, at least, Boeing is indeed too big to fail. Allowing that outcome is not in the national interest.

In practice, that doesn’t mean Boeing would necessarily come out of the MAX and pandemic crises as the clever bean-counter Chicago company, much less the engineering-focused Seattle company of old that gave us such wonders as the 747 and the Apollo lunar rover. With Boeing burning through $55 million a day in the third quarter, even its massive war chest might not be enough.

If the pandemic continues to ravage the airline industry and a bleak competitive outlook against Airbus drags on, being too big to fail might require nationalization.

This wouldn’t be the first time such a dire remedy was required.

In the 1960s, the once-mighty New York Central and Pennsylvania railroads merged. The resulting fiasco, the Penn Central, filed for bankruptcy protection in 1970. It was the largest bankruptcy in American history, and the railroad system in most of the Northeast and Midwest was in danger of collapse.

Penn Central executives were out of options and in a weak bargaining position.

In 1973, Congress passed and President Richard Nixon signed a bill nationalizing Penn Central and certain other bankrupt Northeast railroads. The result was Conrail, a federal corporation.

After 1980s Staggers Act deregulation, Conrail began to show a profit, and it was privatized in 1987. In the late 1990s, Conrail was split between Norfolk Southern and CSX.

This is an extreme scenario and we should be wary of “the pandemic changes (fill in the blank) forever” forecasts. The election might bring in a new administration that believes in science and restores American leadership in this crisis.

But Boeing’s troubles, part self-inflicted, part bad luck, are severe. And avoiding a calamitous outcome will require all the right moves and no small amount of good luck.