‘Big gap’ between what new Boeing CEO is saying and what’s happened

Simone Del Rosario: Boeing is looking to take flight after moving on from its worst quarter performance since COVID-19 halted travel worldwide. And they’re doing so with a new captain in the cockpit.

Kelly Ortberg: We’re clearly at a crossroads. The trust in our company is eroded. We’re saddled with too much debt. We’ve had serious lapses in our performance across the company, which have disappointed many of our customers. But by the same token, we have great opportunities ahead.

Simone Del Rosario: The challenges facing the company are countless. A Boeing-made satellite that exploded in space this week exemplifies the kind of year Boeing has had.

As it swallows a $6 billion quarterly loss, I want to bring in Richard Aboulafia, a top-flight aviation analyst and managing director at AeroDynamic Advisory.

Richard, for you, what was the most important thing that Kelly Ortberg said today?

Richard Aboulafia: Well, he said what had to be said the importance of changing the culture and getting out there and restoring the links between people at the top and people who are engaged in the company’s core business of designing and building planes. It was very refreshing, frankly, to hear that and good to hear.

Simone Del Rosario: Did you hear a specific plan, or did you hear sentiments?

Richard Aboulafia: Well, here’s the problem. Yeah, there was a big gap between what he said, which was exactly in line with what needs to be said, and what’s been happening so far? You know, it’s still a Baffler why they’ve gone down this path in terms of dealing with the strike. Why hasn’t there been more frequent engagement with the union? Why was the last offer submitted in the way that it was, and also in the middle of it, the announce, the announced plans to, literally, according to the Latin term, decimate the company by getting rid of 17,000 out of 170,000 workers, at a time when you think they would need more resources to build planes rather than fewer. So there seems to be kind of a gap between stated intentions and and reality So far.

Simone Del Rosario: He did make a comment about the culture issue of Boeing that stuck out to me. He essentially said that the culture that needs changing at Boeing came from people who are no longer with the company. Do you think that that is accurate?

Richard Aboulafia: It’s more than accurate, you know, I mean, it doesn’t I mean, my God, you look at the devastation inflicted on this company by, you know, some of the previous CEO, certainly the last CEO, Dave Calhoun, but also, you know, Jim McNerney in the 2010s I mean, they regarded the business of building plans as something that they kind of dragged on the back of their shoe walking out of the executive washroom. It was just not a priority. Money management was effectively the only thing that mattered to them. My real concern, I mean, you had, frankly, a close to worst in class board of all time that put up with a very bad situation for far too long. Some of them need to be swapped out very badly. And similarly, you had people in fairly senior positions at Boeing Commercial and elsewhere who also, frankly, need to be replaced. And one of the big mysteries of of Kelly Ortberg reign so far is that he hasn’t parachuted in the sort of people we expected him to people he knew from Rockwell Collins and elsewhere. It would be really good to see some new blood replacing these folks.

Simone Del Rosario: Did you get the hint in here, in this conversation, from him, that he is looking to do that. He did mention external people and having that outside perspective.

Richard Aboulafia: Yeah, he did. So we’re going to be waiting and watching and hoping, because they really need some new blood. The biggest personnel change he’s made so far is firing Ted COVID from the defense side. And I actually thought Mr. COVID was, was, you know, an improvement. So I, you know, I was kind of baffled by that, whereas, you know, it’s pretty clear they need some replacement people and senior positions elsewhere that haven’t been dealt with.

Simone Del Rosario: Let’s move on to some of the money management. We heard a lot about how Boeing is beholden to certain defense contracts, and Ortberg said they can’t really walk away from those contracts, despite profitability issues. How concerning is that, as they’re trying to turn their financials around?

Richard Aboulafia: You know, pretty concerning, but we kind of all knew that this was the case back in the 2010s under McNerney, they’d had this sort of strategic decision to use ample and endless cash flow from the jetliner business to subsidize money losing defense contracts that were fixed price. The Pentagon, of course, was happy to say, Oh, you want to subsidize our weapons systems, wonderful, and give them those contracts. But now the bills are coming due, and because of inadequate resources, they are having an even harder time executing on those programs. I guess the upshot is that it places an even greater emphasis on, well, restoring their only truly profitable programs, which, of course, are jet miners, led by the 737, Max.

Simone Del Rosario: He talked about, you know, the core mission at Boeing, the commercial and the defense, where should Boeing be trimming the fat? He did say something to the line of, they’re better off doing less and doing it better than doing more and not doing it well. So what needs to go at Boeing?

Richard Aboulafia: I was kind of baffled by that, to be honest. Okay. I mean, they’re doing a very ambitious jetliner production ramp, cutting people from jetliner programs not going to happen. Similarly, defense, you know, it’s those resource constraints that have made bad contracts even worse. So I can’t imagine getting rid of people there. Is there enough overhead to get rid of 17,000 people? This is a company that abolished their strategy department back six months ago. If anything, I would be bringing on more people. Is there some fad to cut? Sure, but I just don’t see where it comes from.

Simone Del Rosario: It sounded like he was talking specifically, if I were to go into like, the corporate world, we would call them middle managers, right from what he’s hearing, the people on the ground are saying, there is too much overhead. They’re not able to get as much done. Is that the interpretation that you were getting from this,

Richard Aboulafia: I guess. But again, I have my doubts, because, you know, resources are necessary. Are some of those middle management managers concerned with, you know, quality oversight and checks on jetliner production and whatever? Some of them are some of them aren’t. This takes work, but again, the idea of getting to 17,000 redundancies given the challenges the company is facing, I just don’t know how that happens.

Simone Del Rosario: Does that plan still stay in effect? If the strike is over, and you know, it’s more, you know, back to business as usual at Boeing, or do they rethink that, because that layoff announcement came in the middle of the strike?

Richard Aboulafia: Yeah, that’s exactly right. Right? And so we’re all asking ourselves, that was it one of those, my God, we’ve got to prepare for a siege and outlast these guys, and therefore, you know, cut lots of jobs or and therefore it goes away when the strike ends, or was it a strategic and rational decision to get rid of all these jobs? I sure hope it’s the first

Simone Del Rosario: As far as what Boeing has taken on. Are there programs that they should drop, but, you know, taking people out of it? Are there just avenues that it’s like, this is not the best use of our time and resources. It’s distracting, and we’re not doing what good job. Well,

Richard Aboulafia: you know the nature of these defense contracts. You can’t just walk away from them, right? You sign them their firm, fixed price. You You know it’s an awful situation, and some of them, but I think the Casey 46 is up to 8 billion in losses or something, but not much you can do space. I’m sure if they could find a buyer, they would sell it. No question, can they find a buyer? Maybe parts of it? Can they walk away from it realistically? I don’t know. The answer, doing it. You know, one thing they did just a couple weeks ago was decide to End production of the KC 46 is analog, the commercial analog, the 767, freighter after 2027 I’m I guess that was done for good reasons, but that was the one obvious one that I would look at. Other than that, I’m not so sure what they could get rid of.

Simone Del Rosario:  Richard Aboulafia, Managing Director of aerodynamic advisory. Thank you so much for your thoughts today.

Richard Aboulafia: My pleasure, thank you.