Boeing's Defence Pivot Meets the Execution Problem That Won't Go Away

The 737 MAX crisis in 2018-2019 was supposed to be the inflection point — the moment that forced Boeing to fix its engineering culture, its supply chain, and its quality control processes. Instead, each fix has spawned new problems.

The Alaska Airlines door plug incident in January 2024 revived safety concerns that had barely subsided. Production rate increases on the 737 MAX have been repeatedly delayed. The 787 Dreamliner has faced its own quality issues, with deliveries paused multiple times for inspection failures. And the Starliner programme, meant to showcase Boeing's space capabilities, has been an embarrassment.

The historical parallel is McDonnell Douglas in the 1990s — a company that prioritised financial engineering over product engineering until the culture became unfixable from within. Boeing merged with McDonnell Douglas in 1997 and, ironically, adopted many of the same management practices it was supposed to reform. Three decades later, the chickens have come home.

Boeing's negative operating margin isn't a one-quarter blip. It's the result of fixed-price defence contracts signed during a period of cost inflation, commercial aircraft programmes running at sub-economic production rates, and a supply chain that remains fragile two years after the post-COVID reopening.

The 737 MAX production rate, which Boeing has targeted at 38 per month, has struggled to sustain above 30. Each aircraft that comes off the line below the target rate carries a higher per-unit fixed cost. And the supplier base — Spirit AeroSystems in particular, which Boeing is in the process of reacquiring — has its own quality and capacity issues that Boeing can't fully control.

Look, nobody buys Boeing stock for the current margins. They buy it for the recovery. But recovery requires production rate normalisation, which requires supply chain stability, which requires quality control improvement, which requires cultural change. That's a four-link chain, and each link is uncertain. The probability of all four connecting simultaneously is lower than the 87.8x multiple implies.

The Iran-Hormuz situation is theoretically positive for Boeing's defence division. Increased military readiness means more demand for fighter jets, surveillance aircraft, and munitions. Boeing's defence backlog stands at roughly $60 billion, and rising geopolitical tensions could push that higher.

But defence revenue is recognised slowly — over multi-year contracts with milestone-based payments. A surge in orders today doesn't translate to revenue for 18-36 months. And Boeing's recent track record on defence execution is poor. The KC-46 tanker programme has been plagued by cost overruns. The MQ-25 drone programme is behind schedule. The T-7A trainer has delivery delays.

The defence premium in Boeing's stock price assumes the company can execute on its backlog. The evidence from the past five years suggests execution is precisely what Boeing cannot do — in either commercial or defence.