The Boeing Story: A Tale of “Capitalism”

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By: Mark H. Goodrich – Copyright 2016

As with many looks backward, the popular lore about the first 100 years of success at The Boeing Company turns out to be as much legend as fact. The legend is that William Boeing started with little, and forged a manufacturing giant with his ingenuity and strong work ethic, proving that American exceptionalism, pure capitalism, corporate integrity, and high product quality will always prevail over socialism, with its invariable meddling by agencies of government. The facts are considerably more complicated.

William Boeing was the son of a highly successful lumber executive. He grew up in privilege, and enjoyed an easy life that included secondary schooling in Switzerland and college in the Ivy League at the turn of the 20th Century. He dropped out of college in 1903, moved to the Pacific Northwest, and started his own business career using family money and inherited land, substantially copying his father’s business model from Michigan to open a lumber business known as the Greenwood Timber Company. He was diligent in his work, and civic-minded in supporting his new hometown, but also something of a playboy, enjoying a lifestyle that economic independence made easy.

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William Boeing – 1929

Six years after the Wright Brothers initially flew under power, Boeing observed the first airplane flight over Seattle. Intrigued, he traveled to an aviation exposition in Los Angeles, where he tried without success – contrary to the legend that assigns his impetus to start an airplane manufacturing company to this ‘ride that did not happen’ – to garner an airplane ride. But the seeds of fascination with flight had been planted by mere attendance, and Boeing was to subsequently realize his first exposure to flight some five years later when an early “hydroaeroplane” – as airplanes on floats were then described – was brought to Washington State. Boeing acknowledged later that his initial interest in aviation was merely in learning to fly – just another lark for a young bachelor of independent means. Within a year after his first ride, he had learned to fly from Floyd Smith of the Glenn Martin Flying School in Los Angeles, where he also met its chief engineer, Donald Douglas, and its factory manager, Larry Bell. Boeing purchased his first airplane, a Martin Model TA, and was soon accumulating flight time. It was the experience of owning and flying that first airplane, and critically inspecting its construction detail, that led Boeing to conclude that he could produce a better airplane. Further, he saw the potential for an expanding future in aviation, and particularly military aviation. In the fall of 1915, Boeing flew his new airplane over a football game at the University of Washington and dropped cardboard “bombs” upon which were printed: “Protection Through Preparedness. This harmless card in the hands of a hostile foe might have been a bomb dropped upon you. Aeroplanes are your defense”. Within a few months thereafter, he employed a dozen engineers and wood workers, and began work on the first Boeing airplanes – to be known collectively as the B&W Model 1, and individually as “Bluebill” and “Mallard” – at his personal boathouse on Lake Union. Those first two airplanes were sold not to private interests, but to the Government of New Zealand.

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William Boeing in the Cockpit of His Martin TA

His chance exposure to and fascination with the emerging technology was to result in a change of career for William Boeing, and establish him as a visionary in aviation. He foresaw the airplane as a revolutionary product, and was to personally pioneer far more than just product development. It was also with those first airplanes that the divergence between pure capitalism and government funding to ensure corporate success was brought into sharp relief for Boeing. The aviation companies he founded were to rely upon government largess – ranging from contractual income to outright corporate welfare – for the majority of their financial successes over the following century.

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B&W Model 1 – “Bluebill”

In July of 1916, Boeing incorporated the Pacific Aero Products Company. Larger facilities were required for manufacturing activities, and Boeing moved production from his Lake Union Boathouse to the old Heath’s Shipyard on the lower Duwamish River, a facility he purchased several years earlier for the purpose of building a personal yacht. This shipyard facility was to become the “Red Barn” of Boeing Lore, subsequently known as Boeing Plant One, and the sole site of its manufacturing activities for more than a decade thereafter.

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Boeing Plant One – The “Red Barn”

As the work of the fledgling company began to coalesce, Boeing followed the lead of the Wright Brothers in recognizing the need for a scientifically-based approach to the design and construction of airplanes, including specialized structural engineering, materials and aerodynamics. He funded construction of a wind tunnel at the University of Washington, and establishment of a curriculum in aeronautics, initiating a relationship that continues today, most recently in the form of an alliance that evaluated composite materials for use on the Boeing 787 Dreamliner. Boeing’s belief in the necessity of aeronautical science was further reflected by his hiring one of the few aeronautical engineers in the United States – Tsu Wong – in May of 1916. A native of China, Wong studied naval engineering in England, later aeronautical engineering at the Massachusetts Institute of Technology, and learned to fly at Glenn Curtiss’ Flying Boat School in Buffalo, New York. In June of 1917, Boeing hired two recent engineering graduates from the University of Washington, “Claire” Egtvedt and Philip G. Johnson, both of whom would become company presidents.

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Tsu Wong – 1918

In 1917, Boeing changed the name of his firm to Boeing Airplane Company. There were no markets as yet for airplanes, and it was clear that Boeing would have to venture beyond manufacturing and into the operation of airplanes, not just to develop those markets, but also to maintain solvency in the interim. Fortuitously, the likelihood that the United States would be drawn into the European Conflict – later known as World War I – was ever more certain, and Boeing began courting the War Department as a potential customer. He enlisted in the Navy Reserve and lobbied for military work. His efforts quickly bore fruit. He dispatched test pilot Herb Munter with two Model Cs – designed by Tsu Wong – to Pensacola, Florida, for demonstration to the United States Navy, following which he received contracts to build fifty-three seaplane versions as Navy training planes, and two landplane versions for the Army Signal Corps. In addition, Boeing received a contract to train Navy Aviation Cadets, as the Navy did not as yet have any experienced instructors of its own.

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Boeing Model C – US Navy Training Seaplane

In June of 1918, Boeing was given a fifty-airplane order to build Curtiss HS-2L flying patrol boats for the United States Navy. The War Department spread the manufacturing for the Curtiss HS Series aircraft between seven different manufacturers, including: designer Curtiss; Lowe, Willard and Fowler; Standard Aircraft; Gallaudet; Loughead (later to be known as Lockheed); Boeing; and the Naval Aircraft Factory. Spreading manufacture was in part so that airplanes would be produced more quickly, but also to dilute the risk that any one or more might sink into insolvency by essentially creating a system of “corporate welfare” that was thought to further ensure that manufacturers would remain financially viable and able to support future contracts for government production.

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Curtiss HS-2L – Built Under Government Contract by Boeing – 1918

All of that notwithstanding, the end of the world war in November of 1918 brought reality crashing down across the fledgling aircraft industry. The War Department thought that it could keep airplane manufacturers in business even after hostilities ceased, but Congress had other ideas, and the military’s post-war budget was reduced to far less than required to sustain manufacturers at even subsistence levels. For Boeing, an anticipated extension of the Model C contract evaporated, and the last twenty-five Model HS-2L orders were cancelled.

Boeing had increased employment by some 330 workers to fulfill the war-time contracts, and now found himself without the business to meet payroll. He knew the value of skilled workers, and was keen to hold on to a core group of the most skilled in order to ensure that he would be able to continue the business, and once again increase production in response to demand without the need to start entirely from scratch. Boeing therefore decided to reduce the impact of the instant financial crisis by manufacturing other wood products that would allow for use of existing materials, tooling and skills of his workers. The products included furniture, counters for local businesses, and low profile speed boats known as “Sea Sleds”. The boats had been designed under a contract with the Navy, and were capable of outrunning patrol boats used by the Coast Guard. Customers for the boats were “rum runners”, bringing alcohol products from Canada during the “Prohibition Era”, when alcohol had been established by Constitutional Amendment to be an illegal product.

Boeing knew that stemming the flow of corporate blood was only the immediate issue, and diversifying the business into new ventures was the key to long term survival. He had also seen the value of the corporate-governmental relationship, and focused on moving into the emerging air mail business. In March of 1919, Boeing personally flew sixty letters from Vancouver to Seattle using his private Model C (designated the C-700 to avoid questions about whether it had been appropriated from the military contract for Model C production), and stoked media coverage to pique public interest in faster mail service. This laid the foundation for his plan to establish his company as already “in the air mail business”. Many of the other airplane manufacturers went out of business in the post-war recession, but his inherited money and property, as well as income derived from his lumber ventures, allowed Boeing the time and capability to modify the business of the airplane company, and invest sufficiently in the new business plan to ensure its success. What Boeing did not understand were the ins and outs of national politics, and how a web of political alliances and horse-trading was to haunt his expansion and diversification endeavors.

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Eddie Hubbard and William Boeing

First International Air Mail Flight – Vancouver to Seattle – March 1919

In November of 1919, Boeing won a five-year contract with the Army Signal Corps to modify surplus JN-4 “Jenny” trainers into a configuration more suited for use as mail planes. Landing gears were strengthened, some wood structure was replaced with welded steel tubing, fuel tanks were moved to reduce fire risks in survivable crashes, additional fuel capacity was added, pilot seats were relocated and front cockpits converted for the carriage of mail. Ultimately, 298 JN-4s were so modified to what was known as the DH-4M, and the contract provided a steady cash flow through the period, allowing for developmental work on Boeing’s first commercial airplanes, and more projects for the military services.

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DH-4M Modified by Boeing Under Government Contract for Air Mail Service

In 1920 work started under yet another military contract to design a new ground attack airplane with armor plating. Initially known as the Model 10, ten were built for evaluation by the military. The military designation was GA-1, and it was rejected by the Army pilots, including General Billy Mitchell personally. But failure of the Model 10 was a mere bump in road, and did not stem the issuance of new contracts to Boeing for the development and production of other military airplanes. In 1921, he received a lucrative contract to build 200 Thomas Morse MB-3A fighter planes, because its designer company could not match the production quality or assembly line pricing efficiency of Boeing. The following year, a Boeing-built MB-3A won the Pulitzer Trophy Race achieving a speed of 147.8 miles per hour over a 200-mile course. Through the 1920s, over 1,000 military planes were developed and sold to the Army and Navy, including the PW-9, NB-1, FB-5, TB-1, P-12, F4B, and others.

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Boeing GA-1 Armored Attack Bomber – 1920

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Thomas-Morse MB-3A Built Under Military Contract by Boeing – 1921

In this period, non-military business at Boeing was also government-funded, with the air mail business having become a political imperative. From 1918 to 1925, air mail was flown by the Army, mostly in the DH-4M aircraft that had been redesigned and remanufactured by Boeing, but in 1925 the Post Office Department began to contract for mail carriage. Using Model 40s it had developed in 1923 specifically for use as mail planes, and later modified with air-cooled engines, Boeing was prepared to enter the air mail business.

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Boeing Model 40 Mail Plane- Washington Cascade Mountains – 1930

The first civil air regulations were promulgated in 1926, and required certification as an air carrier to operate mail, freight and passenger service. Boeing Air Transport was formed in 1927 and certified, once again relying upon government contracts for profitability. In 1928 Boeing acquired the west coast airline operations of Pacific Air Transport – a pioneer airline started in Oregon by Verne Gorst two years earlier to operate Contract Air Mail Route 8 between Seattle and Los Angeles – and merged it into Boeing Air Transport. In 1929, he further expanded his activities through acquisition of several fledgling aviation companies, and controlled an ever-larger share of the national aviation industry. He also expanded across the 49th Parallel by opening Boeing Aircraft of Canada in Vancouver, where he would manufacture the first flying boat designed by Boeing – the Model 204. The Boeing School of Aeronautics was established in Oakland during this period, training pilots and mechanics. This facility would later become one of the original Civilian Pilot Training schools in World War II under contracts with the Army Air Corps and Navy, and the original United Airlines Training Center. In the early 1930s, National Air Transport and Varney Airlines were brought into the fold, and Boeing began operating the acquired carriers as United Airlines within his United Aircraft and Transportation Company.

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Boeing Aircraft of Canada Model 204 – 1929

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Boeing School of Aeronautics – Oakland, California – 1930

The efforts of Boeing to expand into the most significant aviation conglomerate had been encouraged by the government through 1932, but the Great Depression resulted in political upheaval. Politicians looking for cover sought scapegoats, and William Boeing was quickly brought into the crosshairs. Boeing had always considered himself a gentleman of business who sought to act fairly and legally, and finding himself in the dock of public scorn was an enormous personal shock. He was subjected to hearings before the national legislature, and attacked harshly on the basis of mere allegations, half-truths and misinformation without the opportunity to defend himself or his companies. His aviation empire was singled out under new anti-trust regulations ostensibly intended to prevent another depression. New postal regulations provided that no manufacturer could bid for mail contracts, and those already issued were cancelled. Boeing was ordered to split up his enterprises. United Aircraft and Transportation was dissolved, and its divisions spun off into companies that would represent a broad spectrum of the aviation industry during the 1930s and beyond, including United Technologies, Sikorsky Aircraft, Chance-Vought, Hamilton-Standard, and Pratt & Whitney. United Air Lines was re-incorporated as its own entity, and its Boeing-affiliated President – Phillip Johnson – migrated to Canada, where he was instrumental in setting up Trans-Canada Airlines. The Boeing Airplane Company itself was re-organized, and held onto its manufacturing divisions, including Stearman and Boeing of Canada.

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Original Boeing Company Logo

William Boeing was personally unable to separate the political theater from his ongoing business, even though it continued to hold a substantial book of government contracts to design and build military airplanes. Although generally agreed that his United Aircraft and Transport operated the one airline completely innocent of any possible charge of collusion to overcharge the Post Office Department or unfairly coerce the award of contract air mail routes, Boeing was very publicly black-listed from further work as an air mail carrier. Ironically, the new scheme intended to prevent fraudulently inflated billings instead paid carriers for merely having space to carry mail on a flight, regardless of whether mail was actually carried. Still an independently rich man, Boeing was so offended by the political witch hunt that he resigned as Chairman of the Board on September 18, 1934, sold most of his stock in the company, and retired.

Senior executives who would follow at Boeing took lessons from the Air Mail Scandal. Over the next eight decades, the company would from time to time – and with increasing frequency – find itself subject to claims of anti-trust violations, fraud and price-fixing, but no longer did its executives consider attacks against the company to be personal. The company learned to play the game with politicians. It hired lobbyists and lawyers by the hundreds, and came to see political ups and downs as part and parcel to contracting with the national government.

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Boeing-Stearman Model 75 Trainers – Pensacola 1936

The 1930s were a banner decade for Boeing in the development of military airplanes. Its first monoplanes were developed in 1930, and soon the P-26 pursuit fighter and B-9 bomber were in military service. Its Stearman subsidiary in Wichita began producing the Model 75 Kaydet in 1934, a sturdy design that would become the most prevalent military trainer over the following decade under thirty separate model and sub-model designations. In 1935, its contract with the Army Air Corps to develop a four-engine bomber resulted in the Model 299, later to become known to the world as the B-17 Flying Fortress. Two years earlier, a development contract for a long-range bomber started with the Model 294, became the Model 316 and concluded as the Model 345, known as the B-29 Superfortress.

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Boeing Model 299 – Forerunner of the B-17 Flying Fortress

Work in the commercial sector was proving far less profitable. Airlines were somewhere between financially incapable and intellectually unwilling to fund the development of new airplanes. Design work on the first modern airliner – its Model 247 – started in 1932, and airplanes were entering service with United Air Lines by the fall of 1933. But the vagaries of depending upon commercial products for profitability quickly placed the Model 247 program in jeopardy. Boeing declined to sell Model 247’s to its competitor Transcontinental & Western Air (TWA), leading to the development by Douglas Aircraft of its DC-1, DC-2 and DC-3 Series. Ultimately, only 75 Model 247s were built by Boeing, while over 800 of the Douglas airplanes were sold in just the 1930s. Similarly, its Model 314 flying boat, designed and developed for Pan American Airways in 1936 through 1938, ultimately sold a total of only twelve units, failing to offset its development costs even after using technology that had been developed at government expense on the Model 294. The Model 307 Stratoliner was designed as the first pressurized airliner, but only ten were built, and despite having “borrowed” technology from the military program for the Model 299, money was lost.

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Boeing Model 247 Assembly Line – 1933

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Boeing 307 Stratoliner

Even before World War II, government contracts had always been the source of profitability at Boeing, and like industrial firms generally, the world war was to be a financial boon for Boeing. Production of its B-17 totaled 12,731 units, its B-29 3,970 units, and its Stearman Model 75 10,396 units. In addition, there was a continuing series of military contracts to develop new technologies and other airplane models, along with contract production by Boeing of aircraft designed by other companies, which grew to be a significant portion of its overall business. To meet the demands of wartime production, Boeing built new factory facilities throughout areas surrounding Seattle and Wichita, and established temporary production facilities nationwide with non-aviation companies.

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Boeing B-29 Superfortress

The end of World War II resulted in an economic recession. Boeing laid off over 70,000 workers between August and December of 1945, but garnered military contracts over the following two years to develop the first surface-to-air missile, the first jet-powered strategic bombers, and the first air refueler. In May of 1945, a Boeing employee was invited to be a team member for Operation Paperclip, the Office of Strategic Services program to patriate German engineers, scientists and technicians to the United States. Upon seeing documents concerning swept-wing, jet-engine and high-speed technologies, he immediately advised Boeing management so that it could be among the first to make use of the captured data.

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Boeing Model 377 Stratocruiser

As had been the case before the war, the market for civilian airliners after hostilities was modest. Development and production of the Model 377 Stratorcruiser resulted in the sale of only fifty-five units, whereas military contracts then undertaken were to result in delivery to the military of more than 4,300 aircraft over the following decade. In addition, new missile and airplane programs were added. Between 1952 and 1958, Boeing delivered over 600 surface-to-air missiles to the military, and some 6,500 aircraft.

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Boeing B-47 Stratojet

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Boeing B-52 Stratofortress

But there was also a new wrinkle to Boeing’s business plan for the future. It decided to fund a proof-of-concept development program for swept-wing commercial aircraft, mostly using its own money, although relying significantly upon technical knowledge and experience from the B-47 and B-52 programs. The Model 367-80 Program was initiated in May of 1952, and the single prototype first flew in June of 1954. Known as the “Dash 80”, it was to become the basis for the KC-135 military tanker, and the Model 707 airliner. In less than three years, Boeing was delivering KC-135 Stratotankers under a contract that would result in 803 units across a ten-year production run. In addition, 1,010 units of the Model 707 were delivered to airlines, with another 811 to military services around the world.

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Boeing Model 367-80 (“Dash 80”) – Rollout May 1954

The 1960s saw more civilian airliner development in the form of the Models 727, 737 and 747, but once again, military programs for aircraft, missiles of various configurations from battlefield through intercontinental ballistic, a supersonic transport, and space vehicles including the Lunar Orbiter and Lunar Rover, were by far the bulk of business at Boeing, producing profits that made the civilian development programs possible with a minimum of corporate risk. Indeed, significant parts of the Model 747 used technologies developed under a military development contract for a large strategic transport that would eventually become the Lockheed C-5 Galaxy. Much has been made in Boeing Lore of how development of the Model 747 took it to the edge of bankruptcy, but that was principally related to problems with the engines that relegated two dozen completed airplanes to the factory ramp for months before resolution of fuel-air and stator scheduling issues made it possible to begin deliveries, and an international recession that brought airline orders to a virtual standstill for three years.

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Boeing 747-100 Rollout – 30 September 1968

Beginning in the 1970s, the modern era of military contracting began, characterized by a continuing concentration of military contractors until the several hundred of the 1950s were reduced to fewer than one dozen mega-corporations. Following a path similar to that forged by William Boeing in the 1920s, Boeing expanded its aviation and non-aviation endeavors through acquisition and merger to the point where it became a consortium of its former competitors and vendors. Its corporate-family came to include businesses across a wide spectrum of technologies, making it ever stronger in the area of government and military contracting. No longer just an aviation enterprise, Boeing’s developmental and production contracting expanded into ground, space, and marine vehicles, and other technologies, as well. The area of associated services, such as training, financing and leasing likewise added to the expansion and diversification of Boeing.

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Boeing 767-200 Prototype – 1982

Significantly, Boeing began to develop a “family” of airline aircraft from small to large, including programs that would result in the Models 767, 757 and 777, as well as modernized versions of the Models 737 and 747. But increasing the scope of its commercial products did not mean they would become a larger percentage of the overall business volume. While the commercial business remained cyclical, the military business no longer waxed and waned as a function of budgets or war-time status. Boeing was not moving away from its century-long dependence upon military and other government programs as its principal focus, but rather continuing to depend upon them as a business anchor. Boeing Lore holds that income from its universally successful commercial programs then carried the company’s balance sheet, but the true facts were that commercial programs generally resulted in production runs of fewer units than military programs. While often less visible to the public, military programs were also larger in number. Even though profit from its military programs was stronger than ever, Boeing initiated new strategies to spread the risks of commercial product development, involving commercial customers more in design phases, and spreading manufacturing across a broad worldwide base of vendors, and even competitors. Boeing was becoming a true multi-national enterprise, and increasingly “branding” the design and manufacturing work of its vendor community.

Along the way, Boeing mastered the art of the corporate-government interface. It has made itself “too big to fail”, and employs a staff of lawyers and lobbyists in Washington, DC estimated at well over 1,000 in number. When unable to obtain a result that it wants at agency levels, it elevates to fight on in the Congress, the press, and with advertising to the public. It treats politics as just another layer of negotiation. It acts aggressively and is not reluctant to throw its enormous economic and political weight into the fray. When indicted or challenged for violations of law, it has learned that it may usually settle those claims for a fraction of the profit made through the illegal conduct alleged, and without the need to admit guilt. It knows that the military cannot get along without it, and the Congress sees it as one of a handful of companies that keep the international balance of payments under some semblance of control.

It has learned to play domestic and foreign states against one another by threatening to leave for or build new facilities in more Boeing-friendly locations, and squeezing abatements of taxes and other concessions in what amounts to state subsidization measured in hundreds of millions to billions of dollars. Giving in to Boeing’s demands in 2003, its long-time home of Washington State cut funding for education, employee pay and pensions, and health care programs. The state also agreed to build new seaport facilities that would allow Boeing to more efficiently import outsourced products, and eliminate or modify laws and regulations related to worker’s compensation for job-related injuries of Boeing workers, and to environmental issues for plant operations. The concessions were to obtain an agreement that Boeing would do final assembly of the Model 787 in Seattle, and all of that notwithstanding, significant levels of assembly were subsequently moved to “union free” South Carolina.

Boeing has also learned how to manipulate the press, agencies of government and the Congress itself. In 1994, Boeing paid a fine of $75 Million to settle criminal charges for over-billing the government. In 2003, it was suspended from three defense contracts due to charges of unethical practices, including corporate espionage to steal trade secrets from competitors, ultimately paying $615 Million in 2006 to settle the cases arising from those charges. In 1997, Boeing settled charges of securities-fraud for $92 Million, and in 2014 and 2015, settled fraud charges of over-billing for $32 Million and $18 Million. Meanwhile, its profit and share price soared. Similar allegations have come to represent a regular and ongoing pattern of behavior, but as with other large companies, are now treated by Boeing as just a part of doing business.

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US Department of Justice 2015 Press Release Regarding Boeing Settlement

In the final analysis, the 100-year history at Boeing reflects that its reputation in lore as a paragon of pure capitalism does not square with the facts. While it has built some of the best aircraft in history, its military production has out-stripped the commercial in every era and its dependence upon government contracts has been an economic constant. Even its most successful commercial project – the Boeing 737 Series now in production for half a century – is unlikely to ever match the total numbers produced in any one of several military programs. The success of Boeing may well represent the case that government oversight, legislation and regulations are too vulnerable when matched against the enormous financial and political power of the 21st Century’s “mega-corporations”. And, contrary to the thinking of at least the political right, stronger oversight, anti-trust and regulatory forces may well be necessary to save large corporate enterprises from their own excesses, and from economic events beyond their control, ensuring that the benefits of the corporate existence flow to investors, employees, customers, and society itself.

The emerging issue will be whether the expansion of large corporations such as Boeing through merger and acquisition – reducing their efficiency, creating conflicts to competition and concentrations of political and economic power – should be restrained through anti-trust measures in order to limit potentially catastrophic effects to the economic well-being of an entire industry, or even the nation. For now, large corporations hold sway over national and state governments through an essentially unlimited ability to pour money into the political processes, and thus stymie any effort to hold them accountable under even existing laws and regulations. But, as the history of railroad, mining, and other industries instruct, the concentration of too much power often precipitates ultimate corrective action.

A “master warning light” should be flashing in the carpeted hallway at Boeing Headquarters.

Mark H. Goodrich – Copyright © 2016

“The Boeing Story: A Tale of Capitalism” was first published in the October 2016 Issue (Vol 13 No 3) of Position Report magazine.