Airbus Versus Boeing: Engineering versus MBA Culture

For around thirty years, Airbus and Boeing have competed duopolistically and we have seen repeated ebb-and-flow in terms of market share. In 1992, Boeing’s market share for commercial airplanes was around 70%. In 2023, Airbus market share (measured by order backlog) is at around 60%.

The brand name “Boeing” used to be connected with engineering-quality and safety, as demonstrated by an old Boeing merchandise. In light of recent repeated safety issues with Boeing planes, many American observers are finally learning that the once-glorious Boeing is in serious trouble. Ed Pierson, a Boeing senior manager, said in an interview that “I would absolutely not fly a Max airplane.”

A common account of what went wrong at Boeing is that at some point the management started prioritizing short-term profits over investments in safety of their aircraft. However, I argue that this is only a symptom of a deeper problem which is that Boeing lost the engineering culture that once gave it a reputation of safety and quality, while Airbus tried to maintain their engineering culture as much as possible.

Airbus is not an unusually innovative company but is a solid engineering company that produces relatively price- and fuel-efficient planes through focusing on the engineering problem at hand that has guaranteed safety so far. The case study of Airbus versus Boeing is indicative of the way technology companies with an engineering culture tend to outperform companies with an MBA culture and how the once-great Boeing was slowly but steadily overtaken by MBAs.

More specifically, I will argue:

1. Why an Engineering Culture is important,

2. How an MBA culture creeps into engineering culture at Boeing, and

3. Why Airbus kept its engineering culture.

Most of the historical narrative is taken from Airbus versus Boeing by John Newhouse.

Why an Engineering Culture is important

Companies with high profits are not consciously sacrificing the safety of its users or engaging in other forms of unethical behavior. Instead, I will argue below that high profits over a long period of time are usually the outcome of a company with a strong engineering culture.

For this blog, I contrast an engineering culture with a MBA culture. While a company with a MBA culture might also have strong profits in the short-term, they usually don’t last because the company stops making technological progress. They don’t get to produce more with less, but instead have to use financial engineering to do the same with less.

Many engineering cultures today have common elements that aim at accelerating technology development and financial returns. Facets such as “blameless post-mortem.” , rewarding engineering-related outcomes, and giving more power to individual engineers. 

Liberalization of the Airline Market

In 1978, US congress passed the Airline Deregulation Act. The new legislation allowed airlines to set their own fares and routes and liberalized the standards for the establishment of new airlines inter alia. Airbus and Boeing reacted differently to this change in legislation.

Boeing expected that the liberalization would lead to the commodification of airplanes and expected that their fleet would be able to serve most customer demands. Thus, Boeing started focusing on cutting costs and increasing factory efficiency. The measure was not entirely misguided as industry experts describe how Boeing’s factories have changed little since WWII and were still operating with obsolete principles.

Airbus, in turn, continued to invest in building out their fleet and R&D, while also working on improving their bottom line. Given Airbus dominance today, these efforts seem to have paid off.

In 1995/1996, a Boeing-commissioned study showed that Airbus used its resources more effectively. While both Airbus and Boeing could fulfill half of the world’s airplane supply, Airbus could do so with 12-15% lower costs than Boeing while using less than half of the area for factories (Airbus: 22-23 million square feet; Boeing: 55 million square feet).

Airplane Manufacturing is a Judgment-based Business

There are numerous trade-offs for airplane manufacturers in deciding what planes to produce: range of the airplane, building a new plane with billions of dollars in R&D or updating an existing plane, or how many to produce to minimize waiting times, and about technological improvements to make or not.

These decisions require engineering-input and good judgment because aircraft manufacturing does not have the traditional feedback loops that are inherent in most of the tech industry. There is no OODA loop for aircrafts because the gap between observing and acting is in the timeframe of when aircraft orders come through and what you’re observing is life or death.  

Conjecture #1: Margins are derived from an engineering culture.

Selling commodified products usually leads to low margins, think of restaurants. While the commercial airplane manufacturing business has high barriers of entry, margins for selling engineering-heavy companies usually come from value created by engineers – either by thoughtful cust-cotting (design-to-cost) or by creating new and more efficient planes.

Financial engineering, on the other hand, is not proprietary and can easily be copied by competitors if successful. Moreover, financial engineering requires engineering input because it will eradicate crucial elements of engineering otherwise that are harmful in the long-run or execute things that are not smart. As we will see below, when Boeing attempted to reduce the impact of a market downturn by heavily discounting their planes, their factory production had to be halted once the market recovered and Boeing lost billions.

The early days of Boeing’s growth are illustrative of the conjecture and of the engineering culture that was once Boeing. In 1916, William E. Boeing founded what would eventually become Boeing. After WWII, Boeing found itself in fierce competition with other airplane manufacturing companies that were producing propeller-based airplanes. 

In 1952, Boeing decided to build a jetliner. At the time, propeller-based airplanes were cheaper and well-established and Boeing’s move meant taking more engineering risk than its competitors. From 1958 onwards, Boeing started the production of the world’s first jetliner, the B707, that was powered by jets and not propellers. The new jet-based aircraft led to shorter flight times and less turbulent flights. The early risk-taking enabled Boeing to build up a first-mover advantage and enabled its rapid ascent to the world’s leading commercial airplane manufacturer.

Under the leadership of William Allen (1945-1968) and Thornton Wilson (1969–1986), Boeing invested heavily in R&D for jet-based airplanes and started to dominate the nascent market. The bet on jetliners was somewhat risky and required judgment from engineers on its commercial and technological feasibility. 

Over time, it became clear that Boeing invested in the right technology and that their payoff was huge.

Outsourcing leads to permanent loss in (tacit) knowledge

In the late 20th century, Boeing started outsourcing substantial parts of their manufacturing to other countries. The wings of the 787 were developed in Japan which made it the first plane with critical major parts built outside the US.

Wing design is particularly demanding because aerodynamic flow is dominated by non-linear terms and needs to be balanced through structural weights and structural integrity, while ensuring fuel efficiency. It is considered to be a core competency of airplane manufacturers.

Boeing’s decision to outsource wing design and manufacturing was based on generous Japanese government subsidies that effectively reduced Boeing’s R&D risk, an expectation that Japanese airlines would buy Boeing planes, and access to (marginally) cheaper labor and funding. Outsourcing manufacturing to Japan was also seen as a signal to labor unions.

Airbus had a different policy. As Airbus leveraged government subsidies to fund research and development expenditures, keeping high-paying manufacturing jobs in Europe was expected from them. Additionally, Airbus had higher supplier standards and from 2005 onwards asked suppliers to minimize the involvement of countries such as India or China because of their history of IP theft and counterfeiting . Additionally, Airbus was more intentional about its core competencies and kept the development of inventions such as light-weight components within the EU supply chain.

Assembling Planes requires extensive Manufacturing Knowledge

Airbus deciding to keep most of its critical manufacturing in Europe proved to be a substantial advantage.

The argument for why outsourcing critical elements of manufacturing is bad from a long-term perspective goes like this: The manufacturing process requires tacit knowledge, experience, and experience curve effects that take years to build up. Once outsourced, this knowledge starts to fade and at some point there is no one left who understands how to actually build the product. Over a longer time period, the workers that used to build planes in the US retire and there is little inflow of talented manufacturing workers as there is both low labor demand and social status.

Additionally, the outsourcing process usually leads to a highly fragmented landscape of producers that focus on producing highly-specific components, which reduces costs in the short-term but lowers competition and redundancy in the supply chain substantially. Moreover, there is much less knowledge unified in each worker and assembling a plane becomes more challenging as a result.

Outsourcing critical components for one’s competitive advantage is dangerous because (1) one becomes reliant on the supplier and (2) the supplier could just decide to start building airplanes themselves because they have access to the most critical components. This never happened because suppliers feared Boeing’s revenge and non-US government interest was not strong enough to fund the initiative despite. Nevertheless, it remains a significant risk to American Dynamism.

A modern equivalent would be research engineers for ML labs. The combination of research and engineering practice matters tremendously in driving progress.

To illustrate the degree to which tacit knowledge matters, here are two quotes from Boeing engineers:

“‘Boeing developed much of the materials, manufacturing processes, tooling, tolerances and allowances, and other design features, which are then transferred to suppliers in Japan, Italy and elsewhere. Over time, institutional learning and forgetting will put the suppliers in control of the critical body of knowledge, and Boeing will steadily lose touch with key technical expertise.’” – Stan Sorscher, a Boeing engineer, from Boeing Versus Airbus

“‘If Boeing’s engineers no longer understand the technical aspects of the airplane’s design and manufacturability, how can they integrate? Integration (…) takes place at the individual engineer level, which is where Boeing is cutting. The front-line engineer is where the rubber meets the road, but Boeing has made it clear that engineers are merely ‘costs’ to the company, not assets.’” – Memorandum from Boeing Engineers on the “Boeing Brain Drain”, Boeing Versus Airbus

How an MBA Culture Creeps into an Engineering Culture

Studying companies that turned from an engineering culture to an MBA culture, it seems that the “MBAfication” process usually takes place over a period of years and appears incremental in the beginning and suddenly the engineering culture is gone.

Merging and Acquiring Trojan Horses

An underrated source of decay in corporate culture are ill-advised M&A transactions.

In 2011, AirBnB founder Brian Chesky was faced with a German competitor named Wimdu. Wimdu raised a similar amount to AirBnB from the Samwer brothers and was aggressively pushing for growth, hoping to be eventually acquired by Chesky’s company. Chesky refused to acquire Wimdu.

In an interview, Chesky explains that he visited their offices and realized that the company cultures would never work together and that Wimdu was built for the short-term and had no real interest in building a generational company.

Faced with a similar decision, Boeing acted less wise as their growth strategy was substantially based on M&A transactions. In 1997, Boeing acquired airplane and defense company McDonnell Douglas which increased Boeing’s market share to 70%. As part of the transaction, executives John McDonnell and Harry Stonecipher joined Boeing’s board and were among Boeing’s largest shareholders. Boeing CEO Philip Condit strongly supported the merger. As discussed below, Condit was a driving force in the MBAfication of Boeing.

In the “merged” company¹, McDonnell and Stonecipher had an immediate effect on Boeing. They wanted Boeing to pursue business activities with higher margins, especially defense contracting. They also urged Boeing to pursue a more cautious approach in investing into airplane R&D.

Stonecipher’s power was cemented in his role as Boeing’s President and COO from 1997 to 2001 and its CEO from 2003 to 2005. Besides the hard power Stonecipher could exercise in these positions, he was also known as a much stronger personality than Boeing’s Chief Executive at the time, Philip Condit.

This article describes the cultural change post-acquisition: “The resulting giant took Boeing’s name. More unexpectedly, it took its culture and strategy from McDonnell Douglas”.

Stonecipher was essential in imposing a strong focus on financial performance and said in a 2004 announcement as CEO: “The moment that we can’t make money in this [commercial aircraft] business, we will not be in it. The only thing I do, the only reason I’m hired, is to make money.” (Boeing versus Airbus, p. 257)

Diversification as a Symptom of MBAfication

Diversification into adjacent industries is probably the hardest and most pivotal choice for a business. While it can lead to strong revenue growth, it is hard to execute successfully. For instance, WeWork diversified too early into too many different industries, like education with WeGrow and housing with WeLive. Being a world leader in one industry is hard, but being a world leader in two or more industries is even harder.

From the mid-1990s onwards, Boeing started investing in diversification efforts in space, defense, and later, security and global services. Between the mid-1990s and mid-2000s, Boeing invested heavily in space, pouring more than $5 billion into its space division. The expected gains did not materialize and in July 2003, The Economist reported that Boeing wrote off $1.1 billion in its space business.

Similarly, Boeing was struggling to build up their defense business. In 2001, Boeing lost the bidding for the development of the F-35 fighter jet to Lockhead Martin. The contract in question was the largest DoD contract for airplane development in history.

Boeing became more successful in the space and defense business eventually. For instance, Lockhead Martin and Boeing formed a joint venture in 2006 which became the largest provider for rocket launch services for the US government.

Today, Boeing has a more diversified portfolio than Airbus. In 2019, Airbus made 77% of its revenue from commercial aircraft, 15% from defense and space, and 8% from helicopters. In the same year, Boeing made only 49% from commercial aircrafts, 30% from defense, space, and security, and 21% from global services.

What remains true is that Airbus is more focused on commercial airplanes and faces less distractions.

Diversification as distraction from commercial airplanes

Diversification had substantial costs for Boeing. Between 1990 and 2000, it became clear that Boeing had not invested enough in its commercial airspace division and was falling behind Airbus.

For instance, Airbus released the A320 as the first airliner with digital fly-by-wire technology in 1988. It took Boeing six years until they released the 777 in 1994 as its first airplane with the same technology.

While the 777 turned out to be a great success, Condit and Stonecipher decided to focus their resources on a stock buyback program worth more than $10 billion instead of investing it into building new planes. Instead of building new planes, they focused on building derivatives of successful planes and streamlining operations.

Between the mid-1980s and the early 2000s, Airbus implemented several improvements in their planes, like the use of carbon-fiber for wing components and digital fly-by-wire technology.

When Boeing realized that they did not keep up with these small but important engineering improvements; they planned a risky paradigm shift and rushed. In March 2001, Boeing VP Michael Bair announced the Sonic Cruiser: “We have focused on derivatives for several years, but when it’s time to do a new airplane, it’s time to do a new airplane.”

In late 2002, the Sonic Cruiser was canceled because airlines did not want a faster airplane but a cheaper one. The company finally decided to start the development of what is known today as the Boeing 787 Dreamliner. The Dreamliner was highly successful, especially because of its balance between fuel efficiency and still a high passenger capacity.

As a side note: Technology transfer within a company acting in adjacent markets can become challenging. For instance, Boeing came under scrutiny in various cases where it was unclear how much they separated military and commercial aircraft specs. A more serious problem was the controversy around the KC-X tanker contracting which led to the imprisonment of DAF executive Darleen Druyun.

Hiring practices: Promoting from the inside without sufficient exposure to other companies

Another common business practice is that companies prefer promoting from the inside over hiring from the outside which I consider to be a good idea for most companies and startups.

It can become a problem for generational companies that their managers grew up in a culture of exceptional success, which sometimes makes executives more complacent and/or produces managers who are not well equipped with the management tools they need to steer a company in turbulent times.

Boeing’s Chief Executive Condit (1996 to 2003) and sales leader Ron Woodard were among a newly emerging group of senior executives that were originally trained as engineers and long-time Boeing employees.

When the development of the B777 took longer and became much more expensive than originally thought, there was an opportunity for this new generation of managers to grab onto power.

Philip Condit was a successful engineering manager for critical planes such as the 777 before he became CEO. However, he was described as indecisive and did not invest enough in R&D and improving Boeing’s engineering capabilities.

Before Condit took office as CEO, there was a general awareness that things needed to change. Michael Little, quality control supervisor, said: “I do  not think we are world-class. We are a marvelous company and have been for a long time. But we haven’t changed much in forty years. We are still using techniques that were refined after World War Two. Condit says if we don’t do a lot better, we are doomed. We want to stay in the phone book.”

Condit was convinced that Boeing had to slash costs massively.

Woodard was described as rushing into decision, but generally agreed with Condit on what needed to be done. He said that “Bowing had done a lot of technology for the sake of technolgy. Technology fascinates engineers.”

Woodard took over as the president of commercial operations and went into a price war with Airbus where he focused on driving up sales without concerns for the costs of production. His stated goal was to gain market share by selling massively discounted planes and effectively burying Airbus.

This obsession with increasing sales without considering the costs of production led to adverse outcomes. In a pivotal moment, Boeing started to offer their planes at a discount en masse in 1996 due to a market downturn. When markets recovered in 1997, Boeing was overwhelmed with orders and was forced to halt production for three weeks; nothing comparable had happened in more than 20 years and Boeing had to write-off $2.6bn. Woodard was fired.

The firing of a senior executive was another deviation from past corporate principles, as few senior executives were let go and especially not with that much public attention.

While cost-cutting was certainly necessary at Boeing, this case study shows that engineering matters more than everything else in the long-run.

Conjecture #2: Engineering capabilities are the constraints for financial engineering.

In a later interview, Condit reflects on the arrogance that had crept into Boeing at the time. It shows how Boeing underestimated the engineering and commercial capabilities of Airbus and focused on cutting costs and reducing invetsments in a time where they started falling behind.

Condit: “One of the most dangerous places to be is first place. You tell yourself, ‘Our technology is better, our costs are better, and the other guy is cheating’ You have to be brutally honest with yourself. We should say what we knew – that Airbus is doing a lot of things superbly. That was not a great lightbulb going off in our heads.”

At the same time, Airbus was more successful and balancing engineering and financial success. One reason is that they had less backlog of old technologies and could start from scratch. Another reason is that Airbus hired executives that were better at balancing these two interests, partly because Airbus structure put less short-term financial pressure on them.

For instance, early Airbus gave power to engineers like Roger Beteille who rose to become Airbus long-serving COO. He was crucial for setting up work sharing agreements for the entities within Airbus and various engineering successes.

MBA Culture enters in times of Market Pressure to Cut Costs

Airline procurement processes have changed over time and the strategic priorities which are downstream of these processes changed in lockstep. Historically, airplane customers tried to keep the duopoly alive. For instance, airlines might delay orders until a competitor released their new competing airplane so they could compare it. Additionally, airlines often tried to get an offer from both Boeing and Airbus to leverage the counteroffer in negotiations.

In the 1990s and early 2000s, many airlines felt as if they were taken for granted and decided to buy Airbus planes instead. Boeing underestimated the willingness of airlines to pay the switching costs of using Airbus planes. For instance, in the early 2000s, the low-cost segment of aviation was driving airplane demand and easyJet had chosen Boeing as their preferred supplier in the past. In 2002, easyJet announced that they would change their preferred supplier to Boeing.

As a side note: Airline procurement is usually opaque to the broader market because many airlines negotiate Most-Favored Nation contracts with the airplane supplier. As a result, the suppliers have strong incentives to keep discounts private and protect the terms with confidentiality agreements.

Boeing was still not price-competitive with Airbus for many planes, which offered an entry door for MBAs.

The Airline Deregulation Act and price transparency through online price search engines like Booking.com in the 1990s increased competition and price sensitivity. Moreover, rising fuel costs made fuel efficiency an increasing factor of considerations for airline procurement decisions.

As in the case of Boeing, a somewhat common problem in engineering cultures is a lack of price discipline. However, I argue that it is much easier to bring price discipline to an engineering company without destroying the engineering culture than it is to bring an engineering culture to a price-obsessed company without engineers.

Why Airbus kept its Engineering Culture

How did Airbus build its engineering culture?

Looking at the early days of Airbus, it is not obvious that Airbus would ever succeed. 

In 1970, the Airbus consortium was established to challenge American airplane manufacturing giants, after the French, West German, and British governments decided to build a consortium three years earlier. The initial companies that formed the consortium were French Aérospatiale and the West German Deutsche Airbus.

How did Airbus go from what sounds like a recipe for disaster to one of the most successful airplane companies in history?

In 1972, just two years after its inception, Airbus released the A300 which was the world’s first twin-engined widebody jetliner. By 1987, the A320 was released and became the world’s second best selling airplane and, as mentioned above, was the first airplane using the digital fly-by-wire technology developed by NASA.

However, there’s still a long way to go from releasing a great airplane in 1987 to becoming the market leader today. This rapid progress can be attributed to the role of Airbus’ long-time CEO (1985 to 1998) Jean Pierson. When he took office, most insiders including Boeing executives saw Airbus as a European jobs project that could never threaten Boeing. Pierson increased Airbus global market share from 17% to 40% during his tenure.

Pierson expanded Airbus to the US and hired the former US aviation secretary Alan Boyd to run the division. He insisted that the American unit was run by Americans and ensured that they did not just continue to bring in German or French engineers.

A few years later, the US division brought in the majority of sales and closed a sale of 100 A320 jets to Northwest Airlines.

Pierson was also involved in building up a “one-cockpit fleet” with high levels of plane standardization and interoperability within the fleet, which lowered training costs. He decided to invest into building out the A320 program and decided to launch the A380.

A more extensive history can be found here.

Airbus did fewer Acquisitions and built its own culture

In 1970, Airbus did not have a cohesive culture. Pierson was crucial in building a more cohesive culture between the German, French, and Brits and ensured that government involvement into engineering was as limited as possible.

As a response to the McDonnell Douglas merger, Airbus restructured from a looser consortium of its founding companies to a single corporation to increase decision-making speed and access to independent financing. In 2007, Airbus finally got rid of their initial dual-CEO structure that had been set up to balance French and German interests.

Until the mid-2010s, the small-airline market had been largely unserved by both Airbus and Boeing because the development costs for airplanes were similar to developing large airplanes but the margins were much lower. In October 2016, Airbus acquired Bombardier which had built a successful fleet for small passenger numbers. Boeing tried to respond by acquiring Bombardier-competitor Embraer, but negotiations dragged on until the two parties agreed to form a joint-venture instead in April 2020.

Continued investments in R&D

While Boeing and Airbus have similar revenue (2021: $62.3 billion for Boeing and $59.3 billion for Airbus), their investment profile differs markedly. Between 2012 to 2021, Airbus continuously invested substantially more in R&D. In 2021, Airbus invested around $3 billion, while Boeing invested around $2.2 billion.

Similarly, Airbus prioritizes investments in R&D, while Boeing prioritizes investments in overhead costs – such as sales (SGA). As this article found: “Airbus spen[t] roughly $1.34 on R&D for every $1 spent on SGA – while Boeing spent closer to $0.59 on R&D for every $1 of SGA!”

Another key advantage for Airbus was that they did not confuse financial engineering with real engineering. Instead of focusing efforts on M&A transactions and share buyback programs, Airbus continuously invested in improving its fleet and reducing costs.

Conclusions

It is far from obvious that Boeing will not recover from its current crisis. However, it will have to face the extent to which its financialized culture has eradicated its engineering culture. Bringing engineering competence back is a hard task for everyone but there still is a lot of engineering talent left that has not been absorbed by great startups yet. However, the harm done by outsourcing, lack of R&D investments, and manufacturing knowledge loss is substantial.

Many of the factors that led to the MBAfication of Boeing can also be found in adjacent industries.

In my next post, I will argue that outsourcing, hiring MBAs for management positions, and a fragmentation of the market led to a crisis in American manufacturing. Hadrian is an exciting startup working on reviving American manufacturing.

On a final note, I owe many of the foundations behind management ideas expressed in this book to one of my favorite authors on management, Prof. Fredmund Malik.

Thanks to Zi C. (Sam) Huang for extensive collaboration and editing.

Suggested Readings

1. John Newhouse, Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business

Footnotes