Image Source: Unsplash

“12 Qatar Airways passengers injured as Boeing jet hits turbulence en route to Dublin,” reads a May 27 Fox Business headline. It’s yet another negative Boeing (BA) story for the year.

This time, nobody died, as with the recent Singapore Airlines episode – another turbulence incident. And no door panels were ripped off, as happened to the Alaska Airlines flight in January. But it was still an undesirable experience, to say the least.

“Flying is safer than driving,” those who aren’t scared of it frequently tell those who are. And the statistics do seem to prove as much. Even so, the skies don’t seem nearly as friendly as they used to be. Nobody wants to board a plane if it’s going to mean experiencing the “worst 15 seconds of [their] life,” as one passenger described it.

According to Qatar Airways, “a small number of passengers and crew sustained minor injuries in flight.” And while the culprit in this case was probably out of both Boeing and the airline’s control, it’s “now subject to an internal investigation.”

Look, turbulence happens when you’re up that high. Most of the time, nothing comes of it. However, Boeing is now under Congressional investigation for (allegedly) producing defective planes. So, anytime something negative happens to a Boeing vehicle, it’s going to face added scrutiny.

Understandably so. It’s also understandable that Boeing’s stock has gone from a high above $380 in early 2019 to a low of $121 and change in July 2022. It was recently seen trading around the $177 mark – a recovery, yes, but still down by more than half. All because its management (allegedly) valued profits over quality.

Boeing is quickly becoming a case study on what happens to businesses that prioritize financialization and cost-cutting above producing a quality product. And it’s a lesson for all investors holding these stocks.

Shortcuts Only Work So Long

The allegations against Boeing have included more than one whistleblower with damning allegations. The now-deceased Sam Salehpour, for instance, told a Senate subcommittee last month that his former employer is “putting out defective airplanes.” It’s “taking manufacturing shortcuts on the 787 program that could significantly reduce the airplane’s safety and... lifecycle,” he accused.

The reason, he and other witnesses have said, is because Boeing – a company once known for meticulous engineering – now puts profits over everything else.

And according to some at the company, leadership would go out of their way to thwart anybody still interested in producing quality products. A recent writeup in The American Prospect was interesting:

CEO Jim McNerney, who joined Boeing in 2005, had last helmed 3M, where management as he saw it had “overvalued experience and undervalued leadership” before he purged the veterans into early retirement.

“Prince Jim”—as some long-timers used to call him—repeatedly invoked a slur for longtime engineers and skilled machinists in the obligatory vanity “leadership” book he co-wrote. Those who cared too much about the integrity of the planes and not enough about the stock price were “phenomenally talented assholes,” and he encouraged his deputies to ostracize them into leaving the company.

He initially refused to let nearly any of these talented assholes work on the 787 Dreamliner, instead outsourcing the vast majority of the development and engineering design of the brand-new, revolutionary wide-body jet to suppliers, many of which lacked engineering departments.

The article goes on:

[A whistleblower] wrote that 75 out of a package of 300 oxygen masks slated for installation on a plane did not actually pump oxygen. His team compiled a list of 300 defects on a fuselage scheduled for delivery, and he discovered that more than 400 nonconforming aircraft parts had gone missing from the defective parts cage and likely been installed on planes illegally and without documentation, by managers and mechanics desperate to get them out the door.

Somewhere along the line, Boeing lost its way. It lost sight of producing quality products that millions of people depend on every day. The faster and cheaper it could get planes out, the more money it could make.

There’s a big difference between gaining efficiency and sacrificing quality. And based on everything I’ve seen, Boeing appears to have crossed that line a long time ago. It’s an appalling mentality, if true. And not just from an ethical standpoint, though obviously the lives jeopardized are the worst aspect about it. But even from a purely profit-driven perspective, it’s doomed to fail.

When a company devalues quality like this, it devalues its products. When it devalues its products, it devalues its customers. And customers are only willing to take so much before they demand something different.

Sure enough, Cathay Pacific, Turkish Airlines, and Qantas have already chosen Airbus over Boeing in the last six months. Who knows how many more will follow? I know I would at least seriously consider the option if I was an airline executive.

I consider quality as an everyday consumer. I don’t want to expose myself or my family to low-value products that could easily harm us later. If I had to guess, I’d say the same is true of you.

Yet too often, investors lose sight of that. They assume that if the share price is still going up, all is well. They forget to ask if a company is still producing quality products -- or if leadership is just playing games with the stock.

Quality Always Wins

If you take nothing else away, let it be this: In investing, quality always wins. And, yes, I mean always.

A public company may play games with the accounting, it might buy back the stock, it might hitch a ride on the latest trend. And that might “work” for awhile, but in the end, the quality of a business and its products are all that matter. And they are the only businesses deserving of your investment.

That’s why, whenever I or my colleagues “open the hood” to analyze a business, we look for key components, such as:

1. Consistent earnings and dividends
2. Overall strength of its balance sheet
3. Primary competitive advantages
4. Overall strength of its management team.

They’re all indicative of future earnings power. So a truly quality company will boast all four aspects, no matter the economic conditions around it.

Weaker firms, meanwhile, tend to eventually lose market share. They can’t raise their prices to offset costs due to too many competitors that offer exactly what they do – or something better. Or they literally fall apart, as Boeing is learning the hard way.

It’s a sad state of affairs. A once prestigious American firm sacrificed the quality of its products and brought investors down with it. That’s not something we’ll ever let happen in our portfolios. We always insist on quality. And so should you.

More By This Author: