Boeing merged with rival US planemaker McDonnell Douglas almost three decades ago in a massive $13 billion deal, combining the capabilities of both companies into a single entity. With revenues exceeding $66 billion in 2024, Boeing is now the world’s second-largest aircraft manufacturer behind European firm Airbus, which recently leapfrogged Boeing into the number one spot.
The company’s merger with McDonnell Douglas was a pivotal point in its history. Some believe the deal ultimately had a negative impact on Boeing and its business, while others celebrate the merger for consolidating Boeing’s position on the global stage. Here is the full story on why Boeing pursued its merger with McDonnell Douglas.
Backstory To The Boeing-McDonnell Douglas Merger
In the 1990s, Boeing ruled as the world’s largest planemaker and was enjoying great commercial success with its in-production Boeing 737, 747, 757 and 767 family of aircraft. European rival Airbus was making significant progress with its Airbus A300, A320, A330, A340 families, but it was still a long way from toppling Boeing’s market dominance.
On the contrary, US manufacturer McDonnell Douglas was struggling to keep up in the commercial market and increasingly relied on defense and space contracts for its survival. Its commercial aircraft portfolio was showing its age, and efforts to modernize its product line did not prove successful. Its MD-90 was introduced in the mid-1990s as an updated version of the MD-80, but secured fewer than 120 orders. On the widebody front, it had also failed to pull out a winner with its flagship MD-11, which didn’t attract much interest as a passenger jet.
As a result, McDonnell Douglas slipped into third place behind Airbus and Boeing. The company had also developed an unenviable reputation for prioritizing cost-cutting over quality and innovation, an approach that was all too evident when looking at its new commercial aircraft designs. Although it had a strong position in the defense market, the end of the Cold War saw significant US military budget cuts, which meant less business for its military aircraft. So why did Boeing pursue a merger with a company that was clearly heading downhill?
Boeing Wanted Growth In Defense Market
While Boeing had always had a strong footing in the defense market dating back to World War I, McDonnell Douglas had been outperforming it in that sector with notable contracts like the F-15 Eagle, F/A-18 Hornet and C-17 Globemaster III, along with major NASA contracts in the space sector. Boeing was heavily dependent on its commercial business, which itself was vulnerable to market fluctuations.
However, defense contracts were a much more stable source of income, offering fixed and long-term revenue that was less vulnerable to the whims of the market. This became particularly important for Boeing following the early 1990s recession, which had forced the company to layoff tens of thousands of workers and sell hundreds of its aircraft at cheaper prices just to attract customers. By 1997, Boeing had posted its first annual loss in decades, and its merger with McDonnell Douglas was finalized in the same year.
|
Product |
Category |
Role |
|---|---|---|
|
F-15 Eagle |
Fighter Aircraft |
Air superiority fighter |
|
F/A-18 Hornet |
Fighter Aircraft |
Multirole fighter |
|
AV-8B Harrier II |
Tactical Aircraft |
VSTOL attack aircraft |
|
C-17 Globemaster III |
Transport / Cargo |
Strategic airlifter |
|
T-45 Goshawk |
Trainer Aircraft |
Pilot trainer |
|
AH-64 Apache |
Helicopter |
Attack helicopter |
|
AGM-84 Harpoon |
Missile |
Tactical anti-ship missile |
|
Delta II / Delta III |
Space |
Rockets for satellites & military payloads |
This gave the planemaker access to some of the most lucrative defense contracts in the US at that time, including the aforementioned F-15 Eagle and F/A-18 Hornet programs. These contracts offered long-term revenues that would persist over decades, something its commercial portfolio could not. It also gave Boeing a huge boost in the space and missiles sectors, putting it at the forefront of future space contracts to contest its rival, Lockheed Martin.
Competing With Lockheed Martin
Lockheed had itself merged with Martin Marietta in 1995 in a deal worth over $10 billion, combining what were then the second and third-largest defense companies in the US. This created a new powerhouse in the defense and space sector, and Boeing knew it had to make major moves to keep up.
In July 1993, US Secretary of Defense Les Aspin and Deputy Secretary of Defense William Perry invited the chiefs of every major defense firm to dinner in Washington, an event that was dubbed “The Last Supper.” In this meeting, which came just a few years after the formal end of the Cold War, it was made clear to each company that defense contracts were about to decline rapidly, as there was no longer such a pressing need for defense spending. They were essentially told to consolidate if they wanted to survive, and a series of major mergers soon took place.
By the mid-1990s, Boeing’s biggest defense competitor was the newly formed Lockheed Martin, while Northrop had also consolidated with Grumman to form Northrop Grumman. Lockheed Martin had multiple marquee contracts under its belt, including the F-16 Fighting Falcon, while Boeing was more of a support aircraft manufacturer by this point. While it was still relied on by the Pentagon, Boeing was often overlooked on the more lucrative, cutting-edge contracts which ended up going to its rivals.
A Clash Of Cultures
Boeing and McDonnell Douglas ran their respective businesses on very different philosophies. While Boeing had long maintained an engineering-driven approach that prioritized a high-quality product over anything else, McDonnell Douglas’ leadership was dominated by business prudence following years of shrinking market share and cost pressures.
Despite Boeing being the nominal acquirer in the merger deal, the post-merger leadership structure was dominated by McDonnell Douglas executives, including Harry Stonecipher, the former McDonnell Douglas CEO who became Boeing’s president, and later its CEO. Stonecipher famously remarked that he wanted Boeing to be “run like a business rather than a great engineering firm,” and the merger led to this fundamental shift in priorities.
Prior to the merger, decisions at Boeing were heavily informed by its engineering teams, who were empowered to halt production or request wholesale changes if things weren’t up to scratch. But this mentality changed after the merger, with financial targets and production schedules now prioritized over quality control. This led to a deep rift within the company, and many of its most senior engineers were soon leaving. Boeing’s decision to move its headquarters from Seattle to Chicago at the turn of the millennium only compounded this.
Legacy Of The Merger
Let’s start with the positives, as the merger wasn’t all bad. Boeing did manage to get its hands on McDonnell Douglas’ powerful defense portfolio, a move that has kept Boeing as one of the world’s top defense companies. As per Defense News, Boeing Defense, Space & Security ranks as the 7th-largest defense company in the world and 5th in the US as measured by revenue, raking in over $31 billion in 2024. This diversification of revenue was key for Boeing in the decades that followed, particularly after 9/11 and the 2008 financial crisis.
But the merger’s impact on Boeing’s commercial operations is where most of the criticism lies. Rather than its trademark innovative approach, the company focused on more cost-efficient solutions, rebuilding older platforms instead of investing in new designs from scratch. It also increasingly outsourced in an attempt to drive down costs, which led to major quality control issues across its programs, most notably the 787 Dreamliner. Its reputation hit rock bottom following the two tragic 737 MAX crashes in 2018 and 2019, which were later found to be the result of a software system (MCAS) that Boeing had not divulged to operators.
Boeing’s troubles did not end with the 737 MAX debacle. It had one of its worst years ever in 2024, starting with the Alaska Airlines Flight 1282 incident in January, when a door plug violently detached from a 737 MAX 9 aircraft mid-flight. This led to enhanced oversight by the FAA, which imposed production caps until the manufacturer sorted out its many problems. It then faced various hearings before Congress amid whistleblower reports of production shortcuts and safety lapses, compounded by a major machinists’ strike that ground production to a halt.
While there’s no doubt the merger was an integral moment in Boeing’s history and has helped the company diversify its revenue stream, many believe the overall impact was a net negative on Boeing and its primary vocation, which is building commercial aircraft. The cultural takeover by McDonnell Douglas executives moved the company away from its pioneering, engineer-driven philosophy to one that favored financial management and cost-efficiency. With Airbus overtaking Boeing as the world’s largest commercial planemaker in 2023, the consequences of that culture shift are laid bare.
