Blain’s Morning Porridge May 31st 2024: A Tale of Two Corporates: Boeing and Aramco.
“Vengeance and retribution require a long time; it is the rule.”
Compare and contrast Boeing and Aramco. Boeing – an extraordinary example of corporate failure. In the Middle East, soon to be King, Crown Prince Mohammed Bin Salman of Saudi Arabia is using Aramco’s wealth to shake the current regional order.
Two stories to think about through the weekend.. Step back a moment and consider how Boeing, once one of the most admired companies on the planet, is now a symbol of extreme corporate failure, brought low by hubris and corporate greed. Compare it with Aramco – which is funding Saudi Arabia’s economic growth and the challenge to become regional hegemon, raising all kinds of geopolitical risks.
“If its Boeing I aint going…”
I was on the BBC early this morning and gift of gifts, one of the stories I got to blather about was Boeing. Regular readers will know I could make a career out of excoriating Boeing. I have famously described it as the Worst Company in the World. It became a text book example of how The Financialization of Companies unravelled much of the promise of how modern Stakeholder Capitalism would make the world a better, happier snugglier place… How so you wonder…?
A few billion years ago, around 2020, you could not open your mouth in finance without first considering all Environmental, Social and Governance (ESG) aspects of what you were about to say, and whether you might upset the Woke Taliban and find oneself cancelled.
However, ESG and Wokery have now proved to have been a shallow distracting veil behind which bad companies mouthed all kinds of fine sounding platitudes, while getting on with making themselves rich at our expense. Hypocrisy at its finest. The reality is while we talked and talked and talked about mental welfare at work, diversity and gender, saving the planet, and how corporate policies should align with populations, big business was leveraging up companies, milking dividends, doing corporate buybacks to boost c-suite bonuses, while not investing in new infrastructure, productivity, products or job creation..
Quell Surprise… Classic stuff… predatory capitalism at its’ inevitable evolutionary best.
But even the biggest dinosaurs get caught sometimes…
Last night the US Federal Aviation Administration (FAA) effectively slapped Boeing with a stop notice re increasing the production rate on B-737 Max airliners, unhappy with its ongoing safety improvements. Around the globe Airlines are screaming for new airliners, but for a host of reasons, deliveries are slowing. Much of that is down to bad corporate decisions – nearly all of which can be blamed on Boeing’s management over the long-term.
It’s a clear case of corporate failure. Company CEO, Dave Calhoun promised 5-years ago that safety was the company’s only priority after 346 people died in crashed. It didn’t happen. They nearly lost another plane when a door fell-off in flight in January. Calhoun failed to deliver. They are looking for a new CEO – he is already on his way out the door.
Let me give you a quick primer on Boeing:
Founded in 1916 Boeing became the biggest and most trusted manufacturer of airliners. It was run by engineers to the highest standards. Pilots used to joke; “if it’s not Boeing, I’m not going”. In search of manufacturing capacity to meet its burgeoning order book, it decided to acquire less successful plane maker McDonnel Douglas. The result was a disaster – very quickly McDonnel Douglas’ cost accountants captured the company, replacing the engineers on the board, and moving the corporate headquarters away from the manufacturing plants in Seattle. The new joke became “McDonnel Douglas bought Boeing with Boeing’s Money.”
The boards’ priority was simple. Maximise the stock price. That was important because they paid themselves in stock options! Boeing focused on cutting costs – leading to appalling labour relations, and spending the profits from successful programmes like the Jumbo Jet and the aging B-737 airliner on stock-buybacks. They borrowed from the market to finance… more stock buybacks. They used their market dominance to effect the company capture of the FAA – effectively regulating themselves.. an opportunity to further cut costs, particularly irrelevant stuff like safety.
And rather than invest in the design of a new single-aisle plane, they extended the 50 year old B-737 into the B-737 Max. It didn’t work. It was unstable and dangerous, but through some dodgy software “fixes”, Boeing sold it as the same old loveable, easy to fly B-737. 2 crashed, 346 people died, and after years blaming the pilots, Boeing confessed and promised to do better. Inexcusably, they effect got forgiven and protected from massive law-suits because the promised to do better. We should have worked out Boeing hadn’t changed and were lying about their reformed corporate behaviours when during the pandemic they sacked safety-inspectors while keeping cost-accountants on full salary.
Today, Boeing remans riddled with problems. They don’t have the capital to develop new aircraft. The now freed FAA has them in its sights. Airlines no longer trust it to deliver, or its quality. Labour relations and the safety culture remain questionable. An Italian airline recently found a construction ladder left in the tail of a new plane. “If its Boeing I ain’t going” is pilots, and many passengers’ mantra.
The issue for investors is an optimisation: Boeing survives because global airliner demand is so strong and its part of a duopoly with Airbus, but internally it remains riven. Everything really depends on what new culture emerges or is reinforced by whomever the new CEO is.
Aramco and the Middle East
Saudi Aramco, the world’s largest oil company, is raising more capital at a fascinating time. In the next few weeks its inevitable that Crown Prince Mohammed Bin Salman (MBS) will become King of Saudi Arabia. His ambition is to firmly establish Saudi as the undisputed leading power in the Middle East, levering that into global power.
Saudis’ economic strength is oil. It’s using its wealth to innovate a diversified tech led economy. Although some of the projects at the core of the reinvention of Saudi have already been scaled back due to escalating costs, and its purchase of global sports franchises is generally misunderstood, the plan is to fuel the economy with plentiful investment by the state SWF, The Public Investment Fund. As such, that’s a pretty effective use of the state’s wealth.
The long-rumoured Saudi recognition of Israel was part of the plan. Peace with Israel would enable a stable, strong, regional economy to bloom with Saudi as the economic powerhouse. It was already flexing its developing economic muscle in the geopolitical sphere – in recent years, and especially since the Ukraine invasion of 2022 – the Saudi and the UAE leadership have publicly stopped behaving as US client states, and shown themselves willing to stand with China and Russia when it’s in their economic interest.
Iran spiked Saudi plans on October 7th 2023 by supplying and directing the Hamas atrocities against Israel, correctly predicting the massive Israeli over-reaction and destruction of Gaza would create a pro-Palestine global backlash – which Saudi can’t ignore. It leaves Iran basking in the regional instability engendered by its support of Hamas and Hezbollah.
Crown Prince MBS, soon to be King, has previously shown he’s not to be trifled with. When elevated to King he will cause flux and realignment in the complexity of Gulf relationships. He will seek to clearly reinforce regional support against Iran to remove the pockets of Iran influence, like the Houthis in Yemen while seeking to be seen as a leader of a multilateral solution to Palestine and Gaza.
However, Iran is part of the China/Russia/North Korea axis. At a time when Saudi has semi-split with the US, and is engaging economically with China, it can’t be seen to be taking on Iran, a China client. While the Saudi’s have economic clout, trillions of dollars spend of its armed forces has not left Saudi as the most powerful or effective military force in the region. For it to threaten Iran it would need US support – which may well suit US purposes, but could be hostage to the unreliability of the US as an ally caused by the increased polarisation of US politics.
Whatever… watch for what follows MBS’ accession to the throne.
Out of time and back to the day job… Have a great weekend.
Bill Blain
Author of The Morning Porridge
Wind Shift Capital
