Future strategy: What should Boeings strategy be going forward? Develop an alternative strategy and recommendations for Boeing.

Competitive environment: How does their new strategy compare and address what is going on with competitors and the overall industry? Conduct an external analysis.

BOEING 737 MAX: DETHRONED BY COMPETITIVE RIVALRY? Saurabh Bhattacharya and Arpita Agnihotri wrote this case solely to provide material for class discussion. The authors do not intend to ilistrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other ldentifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact lvey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G ON1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to publishcases@ivey.ca. Copyright @2020, Ivey Business School Foundation Version: 2020-03-05 Between October 2018 and March 2019, The Boeing Company (Boeing), one of the largest commercial jet aircraft manufacturers in the world, faced allegations about two deadly crashes. Both involved the Boeing model 737 MAX 8 airplane. 2 Boeing's 737 MAX series consisted of four plane models, of which the 737 MAX 8 was the most popular. 3 The first plane crash, on October 29, 2018, involved PT Lion Mentari Airlines Flight 610 from Indonesia; the second crash, on March 10, 2019, was of Ethiopian Airlines Flight 302 from Ethiopia (see Exhibit 1). In total, the plane crashes killed all 346 people on board both aircraft. 4 Both crashes were believed to have been caused by a design flaw in the aircraft. This flaw led to the malfunctioning of the angle-of-attack (AOA) sensor, which in turn sent incorrect data to the Maneuvering Characteristics Augmentation System (MCAS) stall-prevention software. 5 According to media reports, Boeing never tested the AOA sensor on board the 737MAX8 planes for failure. 6 While aviation experts called this malfunctioning of the AOA and the MCAS a fundamental design flaw, Dennis Muilenburg, CEO of Boeing, did not agree. Muilenburg stated, "We haven't seen a technical slip or gaffe in terms of the fundamental design and certification."7 Of additional concern, Boeing did not offer training for pilots on the 737MAX8 aircraft, which was first launched in 201778 Within three days of the Ethiopian Airlines crash, more than 50 nations took steps to ground all 737MAX series aircraft. 9 Airlines such as Norwegian Air planned to seek compensation from Boeing for losses due to grounded flights. 10 Some airlines considered terminating their contracts with Boeing and signing a new one with Airbus SE (Airbus), 11 a France-based commercial and military aircraft and aviation equipment manufacturer. Airbus had long been Boeing's primary competitor; experts mentioned that the 737MAX series was developed as a competitive response to Airbus when American Airlines, an exclusive Boeing customer for decades, was planning to order a large number of aircraft from Airbus in 2011. 12 In August 2019, Muilenburg was confident that the 737 MAX could be back in service by October 2019. 13 He was, however, concerned about regaining the support and trust of airlines and passengers. 14 According to experts, one critical way of regaining trust would be rebranding the 737MAX series. However, Muilenburg rejected any such strategy. 15 Should Muilenburg worry about the competitive advantage that Airbus may gain due to this crisis? How can he retain airline customers? Should Muilenburg consider repositioning the 737MAX ? Page 2 9B20M035 BACKGROUND Founded in 1916 in Chicago, Boeing was the world's largest aerospace company. It supported airline customers across more than 150 countries. 16 By early 2019 , the company manufactured the 737,747,767, 777, and 787 series of airplanes. New product development included the Boeing 787-10 Dreamliner, the 737MAX, and the 777X. On June 30, 2019, Boeing had in total 5,500 unfulfilled orders (see Exhibit 2). Boeing's net earnings consistently increased between 2016 and 2018 (see Exhibit 2). Due to the decline in deliveries of 737 MAX planes, Boeing's revenue for the second quarter of 2019 declined by 35 per cent to $15.75 billion 17 in comparison to the same quarter one year earlier. 18 In comparison to the second quarter of 2018 , Boeing's revenue from commercial aircraft sales declined by 66 per cent to $4.72 billion in the second quarter of 2019. In the same period, revenue from defense and space increased by eight per cent to $6.61 billion. The number of plane deliveries made by Boeing in the second quarter of 2019 was 90 , compared to 194 in the second quarter of 2018.19 BOEING 737 MAX: RESPONSE TO AIRBUS A320 The 737 MAX series was developed in response to the world's best-selling aircraft, the Airbus A320 (A320), which was also the most fuel-efficient, single-aisle aircraft. 20 The A320 was available in four sizes (A318, A319, A320, and A321) with a seating capacity of 100 to 240 passengers. 21 The decision to manufacture the new 737MAX series was made in the summer of 2011 , when American Airlines ordered 260A220 aircraft. 22 In 2017, after designing and testing the 737MAX aircraft for six years, Boeing delivered the first of the series, the 737MAX8 aircraft. 23 By early 2019 , Boeing had received about 5,000 orders from more than 100 customers worldwide for its single-aisle 737MAX aircraft, which was available in four different sizes (737 MAX 7, 737 MAX 8, 737MAX9, and 737 MAX 10) with a seating capacity of 150 to 232 passengers. 24 It was expected that Boeing would take at least seven years to complete the orders. 25 After the two fatal crashes, some industry experts demanded the permanent grounding of 737 MAX planes, while Muilenburg emphasized the difficulty of building a plane in the first place. 26 A new clean-sheet aircraft (i.e., building an aircraft from scratch) was first envisioned by Boeing in 1964 and first delivered in 1968.27 By 2010 , Jim Albaugh, then-president of Boeing, and Mike Bair, then-head of the 737 programs, wanted to completely replace the Boeing 737 family. In 2010 , when Airbus decided to completely re-engine the A320, Albaugh stated, I think Airbus will find re-engining the A 320 more challenging than they think it will be. 28... When they [Airbus] get done, they will have an airplane that might be as good as the Next Generation 737. We think we can continue to make incremental improvements to the 737 to make sure that it is a more capable airplane than even the re-engined A320. I don't think we will re-engine. 29 However, in early 2011, when news emerged that American Airlines planned to purchase Airbus A320 planes, Bair explained, "Engineers had figured out how to reengine the airplane with either the Pratt \& Whitney GTF or the CFM LEAP-X." 30 He added, "We can absolutely put a different engine on this airplane." 31 In response to this, James Bell, then-CFO of Boeing, implied substantial cost savings for his clients by highlighting that the cost of re-engining was about 10 per cent that of building a new airplane; in 2011 , a 737 class plane cost about $10 billion to $12 billion. 32 Boeing rushed the 737MAX design to American Airlines without waiting for design approval from its board of directors, which would take an additional month. 33 In July 2011 , American Airlines placed two separate orders for aircraft. Airbus received an order for 260A320 aircraft, and Boeing received an order for 200737MAX aircraft. 34 737 MAX 8: DESIGN FLAWS The 737 MAX 8 was a refined version of Boeing's very successful 737-800. It used the same body design as the 737-800 but added a larger, more fuel-efficient engine closer to the front of the plane. However, Boeing engineers observed that under certain conditions, due to the unique location of the engine, there was an increased chance of the plane pitching upward too steeply, causing the aircraft to stall. 35 To compensate for the risk of an additional upward pitch caused by the larger engine, Boeing installed MCAS software in the 737MAX8 at an elevated AOA. Two AOA sensors in the aircraft's nose were responsible for detecting when the pitch was too steep. The sensors relayed this data to the MCAS, which automatically elevated the wings on the aircraft's tail, known as a horizontal stabilizer, to push the nose down and prevent the plane from stalling. 36 However, Boeing never tested scenarios related to AOA sensor malfunctions and MCAS responses. 37 In the Lion Air Flight 610 crash, either one or both AOA sensors gave erroneous information to the MCAS. This caused the stall-prevention system to repeatedly push the aircraft's nose down, even though the aircraft was not actually stalling 38 Although the captain and first officer of the Lion Air Flight 610 battled with the flight controls, they eventually lost control, and the aircraft plunged into the Java Sea, off the coast of Indonesia. The same issues happened with Ethiopian Airlines Flight 302.39 According to The Wall Street Journal, Boeing ensured that the design and build of the 737 MAX was such that it required minimal regulatory scrutiny and minimal training for pilots. 40 This was done to accommodate customers like Southwest Airlines, to whom Boeing promised "... to keep pilot training to a minimum so the new jet could seamlessly slot into the carrier's fleet of older 737s.".41 Rick Ludtke, a former Boeing engineer, stated that the company committed to paying Southwest Airlines \$1 million per plane if its pilots required additional training because of its design. Ludtke added, "We had never, ever seen commitments like that before." 42 The cost of a simulator machine required for training pilots on the 737MAX upgrades was $15 million, which was in addition to the expenses an airline company had to bear toward the training. 43 According to analysts, even if aviation regulators ordered Boeing to train pilots, Boeing had very few simulators for training pilots on the 737MAX upgrades. For example, it had only one simulator in the US. 44 Ludtke was of the view that competitive pressure and Boeing's desire to build an aircraft requiring minimal training hours on simulators were critical to understanding Boeing's cost reduction attitude and its compromise on safety. 45 When airline pilots, like Bryan Lesko, asked Boeing officials if there were any major new system upgrades in the 737MAX, the company repeatedly said "No."46 Boeing was also alleged to have provided certain airlines with better protection from the erroneous MCAS and AOA situations, in lieu of extra payment 47 Dan Carey, president of the American Airlines pilot union, claimed that a Boeing executive tried to convince pilots after the Lion Air crash that the same tragedy would not happen to them. The executive explained that they had installed cockpit indicators that would inform them of any potential problem before takeoff. However, Boeing denied making any such statement. 48 According to pilots and industry officials, most pilots who flew the 737MAX (including the pilots of the fatal Lion Air and Ethiopian Airline flights) received little to no training on the MCAS system. The onboard aircraft manual did not mention the system in detail, and there were no visible cockpit warnings when a sensor malfunctioned. 49 Immediately after the Lion Air Flight 610 crash, several American pilots registered complaints with the National Aeronautics and Space Administration, voicing safety concerns about the 737MAX8. One pilot stated that the manual for the 737 MAX 8 was "... inadequate and almost criminally insufficient." 50 Some pilots also complained about the aircraft suddenly nosediving. One pilot questioned how Boeing and federal authorities "... allowed pilots to fly the planes without adequate training or fully disclosing information about how its systems were different from those on previous 737 models.".51 Page 4 99B20M035 737 MAX GROUNDING: ADVERSE IMPACT ON CUSTOMERS By March 2019, all major countries in the world, including the US, Canada, the UK, Germany, Singapore, China, and India, had grounded the 737 MAX 8.52 The overall impact on the aviation industry due to this grounding was contained by the fact that the delivered orders of 737MAX8s were relatively small. In the US, major airline companies, like American Airlines, Southwest Airlines, and United Airlines, operated just 72 of the total 737MAX8 aircraft, among a combined fleet of about 2,400.53 Chris Higgins, aerospace analyst from the Chicago-based investment information and services company Morningstar Inc., stated, "Customers may be tempted to cancel orders on the MAX but they would most likely forfeit the cash advances they already made to Boeing., ,54 Boeing received its first order cancellation in July 2019, when Flyadeal, a Saudi Arabian discount carrier, canceled an order of 50737 MAX series planes. The airline instead signed a deal with Airbus for the more fuel-efficient A320neo model. 55 Another Middle Eastem airline, Flydubai, which was forced to ground its entire fleet of 14737MAX8 planes after receiving directives from the UAE aviation regulator, also contemplated buying A320neos. Sheikh Ahmed, Chairman of Flydubai, stated, "The step triggered a disturbance and a number of shrinking of routes." He added, "Until today we don't have a definite date when this aircraft [ 737MAX series] will be flying. I cannot just not do anything about it. "56 Canadian airline companies, like Air Canada and WestJet Airlines, also warned that their financial performance was affected by the global grounding of 737 MAX 8 planes. Air Canada operated 24737 MAX series aircraft out of its fleet of 392 aircraft. 57 Overall, airlines in Asia suffered the most because of the grounding, as airlines from the Asian continent had made the largest orders for the 737 MAX series (see Exhibit 3). Several airlines, such as Flydubai, demanded compensation from Boeing. 58 According to Seth Seifman, analyst at JP Morgan, "Boeing will probably owe something to the airlines. If the grounding lasts two to three months, it's possible Boeing could face roughly $1 billion to settle legal claims by the airlines." 59 RESPONSE TO THE CRISIS: BOEING Corrective Safety Actions by Boeing Boeing worked to limit the extent to which the MCAS could tip the nose of an aircraft downward. The idea was that pilots should be able to counteract the nosedive by pulling back on the control box in the cockpit. 60 Changes were made in the MCAS software, allowing it to tip the nose down only once when the AOA sensors reported any upward pitch data, rather than doing so repeatedly, thus making it easier for pilots to regain control. 61 Boeing also worked on manually upgrading the 737MAX8, a process that took one hour per plane. As Boeing worked on these software- and design-based upgrades in the 737 MAX 8 planes, it hoped to get approval from the FAA on the upgrades as well as on a new 30 -minute training program it had designed for pilots of the 737MAX8.62 Rebranding 737 MAX Boeing faced the challenge of convincing the public about the safety of the 737MAX series planes once it was re-certified. 63 The company had used the term "MAX" for marketing, which experts said should be dropped going forward. David Reibstein, a professor of marketing at the Wharton School, stated, "There is no question in my mind they should be rebranding it. If it is improved, call it as something different. Don't hide from it. It gives people confidence that the airplane is changed." .64 Nevertheless, he acknowledged that such an exercise by Boeing would be treated by the media with skepticism. He stated, "The press will be Page 5 9B20M035 all over it, and they will expose it, but Boeing should probably do it. In terms of consumer perception, I think it is really critical." 36 In June 2019, International Airlines Group, the Spain-based parent company of British Airways, Iberia, Aer Lingus, Vueling, and LEVEL, signed a letter of intent to acquire 200737MAX planes. Boeing appreciated the public support it got from IAG. LAG, nevertheless, did not use the term "MAX." They instead referred to the ordered planes as 737-8 and 737-10. Previous models of the 737 had three-digit designators (737700,737800,737900, etc.), whereas the MAX had only one-digit designator beside the plane type (for example, 737 MAX 8). 66 However, Muilenburg had no intention of rebranding the aircraft, about which he stated, "I don't see a need to change the name of the airplane." He also said, "We're not focused on branding and marketing. We're focused on safety. 167 However, branding and marketing experts commented that Boeing would be required to engage in a full-scale rebranding effort to make travelers comfortable enough to board a MAX plane. 68 RESPONSE TO THE CRISIS: AIRBUS According to analysts, the commercial aviation industry was a zero-sum industry-that is, the gain (or loss) of one firm is exactly balanced by the loss (or gain) of another firm-with only two dominant global players, Airbus and Boeing. 69 These competitors had had an intense rivalry for decades, and victories were celebrated and savoured. Nevertheless, the management of Airbus instructed its sales staff not to mention the fatal crashes of the 737MAX in their sales pitches to customers. 70 In March 2019 , when Airbus received its largest order of $35 billion from the Chinese market, Guillaume Faury, the CEO of Airbus, called the massive order "... a sign of confidence between us and our Chinese partners."71 Faury never mentioned the crashes of the 737MAX planes or commented on the implications for Airbus of grounding the Boeing 737 MAX series. Tom Enders, ex-CEO of Airbus, stressed that it was not the time to go after the wounded rival's business. He stated, "When something like that happens, we're all one big family. Safety is not a competition item."72 Michael Hewson, an analyst at CMC Markets, said, "It's a bad look if you try to capitalize on anything like that. It'll come back and bite you." T/3 According to Nick Cunningham, an analyst at London-based equity research firm Agency Partners, the $35 billion order Airbus received would compel Boeing to "... accelerate the introduction of a new model that's not tarnished by the two tragedies. And that, in turn, will spur Airbus to build a new plane to compete with it." Cunningham further stated, "The impact will be on product strategy."74 However, after the Ethiopian Airline crash in March 2019, share prices of Boeing declined against the gains of Airbus (see Exhibit 4). According to Robert Stallard from Vertical Partners Research, customers of Boeing had the option of switching orders to Airbus, but doing so would involve waiting in a queue for approximately three years for the new A320neo planes. 75 From early 2019 , Airbus worked very hard to produce fuel-efficient jets to complete its orders of 5,962 planes; of these, 5,814 were for the A320neo aircraft, and 148 were for earlier variants of the A320neo. 76 In March 2019, Airbus announced its intention to increase production of the A320neo to 60 per month from the middle of 2019 , and to 63 per month in 2021 . However, given the strains in the supply chain, no further expansion was possible. 77 The 737MAX planes received parts and equipment from a large number of European suppliers, with 30 from France alone. 78 It was predicted that the Boeing crisis was likely to impact equipment manufacturers like Safran Group, which provided electrical wiring solutions to both Boeing and Airbus. 79 Because of the Boeing crisis, Safran was expecting to lose $225 million for the second quarter of 2019.80 According to aviation experts, the grounding of more than 300 aircraft globally was a crisis for Boeing. The company's future depended on the duration of the flight ban as well as on the results of the FAAinitiated investigation. 81 In June 2019, Boeing reported its largest second quarter loss ever, of $2.94 billion (see Exhibit 2). Boeing continued to manufacture 737 MAX planes, although at a slower pace, 82 thereby increasing production costs by approximately $1.7 billion. 83 Boeing engineers worked on fixing the software problem that was responsible for both crashes. They expected to submit the fix to the FAA in September 2019.8 The company hoped for approval from the FAA and for the removal of the sanction on the 737 MAX by October 2019. Muilenburg claimed that further delays could jeopardize its production. 85 Traditionally, airlines had remained loyal to their aircraft manufacturer and rarely switched to another maker, as this implied additional training and productivity costs for the airlines 86 However, airlines like Flyadeal switched to Airbus after the two fatal crashes involving the 737MAX series. Several other airlines from Asia also planned to switch to the Airbus A320neo 87 Boeing was also expected to face another challenge: Aviation experts were of the view that if the FAA lifted its ban on the 737 MAX series, then aviation authorities from Europe (the European Union Aviation Safety Agency) and Canada (Transport Canada Civil Aviation) would be expected to follow the decision. However, the same may not be true for China, a major market for commercial jet aircraft manufacturers, because of its trade rifts with the US 88 How should Muilenburg deal with such competitive and regulatory challenges? What should he do to retain the trust of stakeholders? Page 7 9B20M035 EXHIBIT 1: BOEING-TIMELINE OF KEY EVENTS (OCTOBER 2018 TO JULY 2019) Source: Yen N. Lee, "One Day Before Last Year's Fatal Crash, Lion Air's Boeing 737 Max 8 Was Reportedly Saved by an Off-Duty Pilot," CNBC, March 19, 2019, accessed September 16, 2019, www.cnbc.com/2019/03/20/lion-air-boeing-737-saved-by-off-duty-pilota-day-before-crash-report.html; Kate Lamb and Naaman Zhou, "Indonesia Plane Crash: Flight JT610 Plunges into Waters Off Jakarta," The Guardian, October 29, 2018, accessed September 16, 2019, www.theguardian.com/world/2018/oct/29/lion-air-planelost-contact-indonesia-flight-jt610-Jakarta; "Timeline: Boeing 737 Max Jetliner Crashes and Aftermath," Chicago Tribune, August 7, 2019. accessed September 16, 2019, www.chicagotribune.com/business/ct-biz-viz-boeing-737-max-crash-timeline-04022019story.html; Robyn Kriel and Tara John, "No Survivors in Ethiopian Airlines Boeing 737 Crash Near Addis Ababa," CNN, March 11. 2019, accessed September 16. 2019, https://edition.cnn.com/2019/03/10/africa/ethiopia-airline-crash-nairobi-intl/index.html: Tripti Lahirl, "China is the First Country to Ground the Boeing 737 Max After Its Two Crashes," Quartz, March 11, 2019, accessed September 16, 2019, https://qz.com/1569865/china-grounds-737-max-8-after-ethiopian-airlines-et-302-crash/; Natasha Frost, "A Complete List of All the Countries That Have Grounded the Boeing 737 Max," Quartz, March 13, 2019, accessed August 29, 2019, https://qz.com/1572319/which-countries-have-banned-the-boeing-737-MAXJ; Phil McCausland, "Ethiopian Airlines Crash: FAA Is Resisting Calls by Aviation Advocates to Ground Boeing Jets," NBC News, March 12, 2019, accessed September 16, 2019, www.nbenews.comews/us-news/ethlopian-airline-crash-aviation-advocates-call-faa-ground-boeing-jets-n982316; Jack Nicas, David Gelles, and James Glanz, "Changes to Flight Software on 737 Max Escaped F.A.A. Scrutiny," The New York Times, April 11. 2019, accessed September 16, 2019, www.nytimes.com/2019/04/11/business/boeing-faa-mcas.html; Natalie Kitroeff, David Gelles, and Jack Nicas, "The Roots of Boeing's 737 Max Crisis: A Regulator Relaxes Its Oversight." The New York Times. July 27, 2019. accessed September 26, 2019, uww.nytimes.com/2019/07/27/business/boeing-737-max-faa.html; Sinad Baker, "FAA Boss Says It Let Boeing Partly Self-Regulate the Software Thought to Be Behind Both Fatal 737 Max Crashes," Business Insider, March 28, 2019, accessed September 16, 2019, www.businessinsider.com/faa-let-boeing-self-regulate-software-belleved-737-max-crashes-20193?r=US&IR=T. EXHIBIT 2: FINANCIAL PERFORMANCE AND OTHER INDICATORS OF BOEING 2015-2019 (US\$) Source: "Boeing Financial Reports-The Boeing Company 2018 Annual Report," Investors.boeing.com, accessed September 6, 2019, https://s2.q4cdn.com/661678649/files/doc_financials/annual/2019/Boeing-2018AR-Final.pdf; "Boeing Financial Reports-The Boeing Company 2017 Annual Report," Investors.boeing.com, accessed September 6, 2019 , https://s2.q4cdn.com/661678649/files/doc_financials/annual/2017/2017-Annual-Report.pdf; "Boeing Financial Reports-The Boeing Company 2016 Annual Report," Investors.boeing.com, accessed September 6, 2019, https://s2.q4cdn.com/661678649/files/doc_financials/annual/2016/2016-Annual-Report.pdf, "Boeing Financial ReportsQuarterly Reports: Earnings Release Q2," Investors.boeing.com, accessed September 6, 2019, https://s2.q4cdn.com/661678649/files/doc_news/2019/2Q19-Earnings-Release.pdf. EXHIBIT 3: BOEING 737 MAX-FLEET SIZE, ORDERS, AND BACKLOG Note: UAE = United Arab Emirates Source: Tom Boon, Which Airlines Have the Biggest Boeing 737 MAX Orders?," Simpleflying.com, August 29, 2019, accessed September 12, 2019, https://simpleflying.com/biggest-boeing-737-max-orders/; Max Kingsley-Jones, "Analysis: China and AsiaPacific Lead 737 Max Fleet Distribution," Flightglobal.com, March 11, 2019, accessed September 15, 2019, www.flightglobal.comews/articles/analysis-china-and-asla-paciflc-lead-737-max-fleet-456519/. EXHIBIT 4: BOEING AND AIRBUS CLOSING SHARE PRICES (US\$) AND GROWTH (\%) (OCTOBER, 2018 - AUGUST, 2019) Source: "The Boeing Company (BA)," Yahoo Finance, accessed September 15, 2019, https://finance.yahoo.com/quote/BA/; "Airbus SE (AIR.DE)," Yahoo Finance, accessed September 15, 2019, https://finance.yahoo.com/quote/AIR.DE?p=AIR.DE\&.tsrc=fin-srch