Odds and Ends: CNBC reporter says Boeing’s McNerney among top 25 CEOs; 757 replacement; BBD earnings; Spirit Air

CNBC and Boeing’s McNerney: CNBC reporter Phil LeBeau, who covers aerospace and automobiles among other topics, thinks Boeing CEO Jim McNerney deserves a place in CNBC’s Top 25 CEO list. Here’s why. Aaron Karp at Air Transport World has his own take on Boeing’s position in the market today.

757 replacement: Airchive has an analysis on the need fora Boeing 757 replacement that is well worth reading. Our analysis was last October. Richard Aboulafia of The Teal Group said last week he also believes a 757 replacement is on its way (with a launch in 2018, as we previously suggested). Bloomberg has this article from the Singapore Air Show on the topic.

Bombardier earnings call: BBD reports its fourth quarter and year-end financial results Thursday. It will be interesting to hear of the impact of the latest CSERiesdelay, of 9-15 months. Here is a report in the Toronto Globe and Mail on what analysts thought in advance of the call.

Spirit Air CEO profile: The Associated Press has an entertaining profile of the CEO of Spirit Airlines, the notoriously unfriendly US airline that rivals Ireland’s Ryanair for fees and an apparent dedication for pissing passengers off.

Odds and Ends: A330neo; The 12th Man; Boeing’s earnings

Clearing the air on the A330neo, again: Bloomberg News has an extensive story on the prospective development of the A330neo. Following a report from Reuters, these two news articles basically confirm everything we reported in December.

The 12th Man: The Seattle Seahawks, which plays in the Super Bowl Sunday against the Denver Broncos, is well known within the National Football League for its “12th Man.” This is the fan base which has set records for being the loudest fans in football, at a record 137db. They’ve also been recorded on the Richter Scale for their stomping at the Seahawks’ Century Link Field (that’s a local phone company, and the name is routinely shortened to “the Clink”).

Boeing is a corp0rate sponsor of the Seahawks and rolled out its 747-8F house test plane in a new Seahawks livery.

Boeing’s earnings: Boeing reported its 2013 earnings and while they were a record profit, the forecast disappointed and the stock took a major hit Wednesday. The Seattle Times has the recap.

Odds and Ends: AirAsiaX orders A333; WA and Airbus; Boeing names COO

AirAsiaX orders A330-300s: As forecast earlier this week, the budget carrier ordered 25 Airbus A330-300s. According to reports, AirAsiaX may not be done. Group CEO Tony Fernandes wants Airbus to develop an A330neo. Stay tuned.

Washington State and Airbus: The Associated Press wrote a story about the courtship of Washington State of Airbus, making a link between the Boeing 777X site selection Schizophrenia and the Airbus effort. Some headline writers made an even more direct cause-and-effect link. This vastly overstates what’s been going on. Gov. Christine Gregoire began reaching out to Airbus in 2010, but the effort was stalled by the then-contentious and bitter competition between Boeing and Airbus over the USAF KC-X tanker competition. Gregoire, who was just named chairman of the advisory committee to the US Export-Import Bank, naturally backed the Boeing bid but was wisely measured in her rhetoric when it came to the EADS KC-330 offering. The Washington Congressional delegation, however, was often vitriolic and as a result, Gregoire’s efforts largely stalled.

Once that competition was over in 2011, Gregoire resumed her efforts in the last year of her governorship, meeting with EADS and Airbus officials at the 2012 Farnborough Air Show. The WA Dept. of Commerce had continued efforts throughout. This past summer, Commerce and the Pacific Northwest Aerospace Alliance hosted an Airbus suppliers meeting in the Seattle area, attended by about 120 suppliers (about 30-40 had been expected).

So while the AP story is factually correct overall, any linkage to 777X and the Airbus courtship is overstated. This has been a long-term effort by Airbus, PNAA and it is a concept we called for in October 2009 in a speech before the Governor’s Aerospace Summit just days before Boeing announced it was locating 787 line 2 in Charleston (SC). The Airbus effort, if anything, has more of a link to that event than to the 777X.

Boeing names Muilenberg COO: Dennis Muilenberg, CEO of Boeing’s defense business, has been named COO of The Boeing Co. He is succeeded by Christopher Chadwick. Ray Conner, CEO of Boeing Commercial Airplanes, was named Vice Chairman of the Board and continues in his current position. The press release is here.

McNerney reaches retirement age next year but given the timing, we think he’ll stick around a bit longer to give Muilenberg more time in the #2 corporate position. Since Muilenberg is younger than Conner, we think Muilenberg is the more likely choice for successor.

Another Day, Another 777X story: The obsession continues. Seattle Times columnist Danny Westneat has this commentary worth reading. The Everett Herald has a good wrap up of where things stand in Washington State right now. The Seattle Times looks at Long Beach (CA) in depth and its potential for the 777X.

IAM, Boeing talks fail; 777X site selection evaluation continues; Update: Members to vote on deal

Update, 11:30pm PST: KIRO TV (CBS Seattle) quotes Boeing spokesman Doug Alder as saying the Boeing offer has not been withdrawn, contradicting the IAM 751′s understanding.

Update, 9:10 PM PST: The Seattle Times reports the IAM 751 membership will get to vote on Boeing’s counter-contract offer after all.

Original Post:

Talks between Boeing and the IAM 751 machinists union failed to reach an agreement when Boeing presented a counter-proposal to the union’s offer that did’t budge on the pension issue, according to The Seattle Times.

KING5 TV (NBC Seattle) has this story.

Boeing’s statement is here.

IAM 751′s statement is below the jump (there isn’t a unique link to it).

The Boeing and IAM 751 statements paint a very different picture of the offers.

Our take:

Although both sides now have said talks have ended, we fully expect political pressure on both sides to resume talks before Boeing makes a final decision on the 777X assembly site.

Boeing said it will make a decision early next year; our sources suggest this timeline is the end of January.

This leave a small window for a third try, but we’re not optimistic.

We believe that barring an agreement, Boeing Chicago will elect to put the 777X assembly site and wing production somewhere other than Washington.

We believe that those within the IAM membership who believe Boeing is bluffing are mistaken. One need look no further than the events leading to putting 787 Line 2 in Charleston. Members believed Boeing was bluffing then, and it wasn’t.

As we have written many times, while Boeing Commercial Airplanes is understood to want to assembly the 777X in Everett, headquarters in Chicago has a very different view–and in the end, it’s only that view that counts.

One item in the Boeing statement stands out like Braille to us as well:

In addition, a separate agreement committing final assembly of the 737 MAX at the Renton, Wash. site would have been extended through 2024.

For those who think it impossible Boeing wouldn’t start another 737 assembly line elsewhere, we understand from two sources close to Boeing that a study is underway about opening a 737 assembly line in Charleston. Some 737 MAX work has already been assigned there, and Boeing continues to buy land there.

We firmly believe that the industrial logic–and all other logic–demands that the 777X (and the 737 MAX) assembly be in Puget Sound. But Boeing CEO Jim McNerney is clearly intent on moving work away from the unions (and from Washington State) absent dramatic changes in contracts and the cost of doing business.

Boeing offered terms and conditions in the IAM contract that were sure to be rejected.

The PR war of who is responsible will continue for some time to come. But just as we firmly believe the 777X should be built in Washington, we also firmly believe it won’t be without some last minute agreement.

Washington politicians need to step up their effort to look Beyond Boeing for the future of the state’s aerospace industry.

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Loyalty is a one-way street at Boeing

Boeing’s move to shop around the 777X assembly site, while telegraphed and certainly expected, is another example of the shifting loyalties at Boeing that have been more than a decade in the making.

Before we start, it must be acknowledged that Boeing is a publicly traded stock company and it has fiduciary duties to make sound financial decisions. That being said, one can debate endlessly whether the decisions executives have made have been financially sound (and there is ample evidence with respect to 787 outsourcing and opening a second line in Charleston that the decisions were not sound). Setting aside this debate, since Boeing moved HQ to Chicago in 2001, loyalty appears a thing of the past.

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Chasing the 777X assembly site

Washington State is ramping up its all-out effort to land the assembly site of the Boeing 777X.

Gov. Jay Inslee appointed a bi-partisan panel from the Legislature to come up with an incentive package to present to Boeing. He’s already proposed extending the Boeing 787 tax incentives adopted in 2003 another 16 years, to 2040, though these incentives were ruled illegal by the World Trade Organization.

Predictably, Airbus pounced on Inslee’s proposal, though mistakenly assuming Boeing asked for the incentives. According to The Everett Herald, the initiative is entirely Inslee’s. Said Airbus:

This is another example of Boeing’s refusal to accept to play by the rules by continuing to solicit and receive subsidies which are especially potent in distorting trade. The 787 tax credits were ruled illegal subsidies by the WTO in the final verdict of March 2012. After breaking the WTO rules on the 787, with a repeat of measures for the 777X Boeing continues to show total disrespect for WTO obligations and the compliance process. 

These are the quotes from the reports on
adverse effects:

-  The WTO Panel found that “the availability of … the B&O tax subsidies, enabled Boeing to lower its prices beyond the level that would otherwise have been economically justifiable” (7.1818) giving Boeing a “pervasive and consistent pricing advantage” (7.1819) that is “felt most acutely in particular sales campaigns of strategic importance” (7.1822) and results in illegal adverse effects to EU LCA interests (7.1823) 

– The WTO Appellate Body generally upheld that finding (para. 1273), emphasizing the importance of the subsidy given the price-sensitive nature of many sales, and Boeing’s market power in a duopoly context (para. 1260)

The analysis of the B&O tax rate reduction “subsidies” do not provide any great quotable statements by the Panel, which isn’t surprising given that the dollar value of those subsidies was quite low during the period of review, when the subsidy programs were just starting to take effect.  The numbers now are much larger!! 

The quote on the subsidy side is in 7.302 of the panel report:
“For the foregoing reasons, the Panel finds that the Washington B&O tax reduction; the B&O tax credits for preproduction development, for computer software and hardware and for property taxes; and the sales and use tax exemption for computer hardware, peripherals and software are specific subsidies to Boeing within the meaning of Articles 1 and 2 of the SCM Agreement. The Panel estimates that the amounts of the subsidies to Boeing’s LCA division are $13.8 million; $21.3 million; $20 million; $1.1 million; and $8.3 million respectively”

Inslee’s office said that the WTO ruling is under appeal and until that’s settled, the tax breaks are legal.

Washington has been often criticized, including by its own politicians, as having a worse tax structure than competing states. But Washington has the sixth best tax climate in the country, according to the Tax Foundation. A low number on the map is good.

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Boeing 2Q earnings call recap

Here are highlights from today’s Boeing’s second quarter earnings call.

Jim McNerney (JM), CEO

Greg Smith (GS), CFO

JM:

  • We are working closely with UK investigators on Ethiopian Airlines 787 ELT fire. In anticipation of planned action by regulatory authorities, we have provided guidance to airlines to inspect, fix or remove the ELTs. We remain highly confident in the future of the 787 and integrity of the airplane.
  • Traffic trends improving. We see continued pressure in cargo market but pleased with recent 747-8F activity.
  • Launch of 787-10 is great move, with five key customers. Launch of 777X coming soon, with EIS around the end of the decade. 737 MAX performance exceeds competition. We are positioned to match production with additional demand. (Translation: MAX this is a McNerney hint that 737 production rate increases are coming.)
  • Began assembly on first KC-46 tanker.

GS:

  • Launch of 787-10 did not change accounting block in the second quarter but it will later in the year when orders firmed up. (Editor’s Note: Accounting block is 1,100, Readers may recall.)

JM:

  • Priorities going forward remain clear: Profitable ramp up of production programs, strengthening and repositioning defense business, providing increasing value to customers and shareholders.

Q&A

  • JM: There is pressure to for more 787-9s and -10s. We’ll make the call of going beyond 10 once we’ve settled in on 10. If I were a betting man, I would bet market pressure will go beyond 10.

Note: In June we had a graphic about production rate increases for the 737 and 787 (and the 767). See it here.

  • JM: Achieving 50% market share for 737 MAX–the answer is pretty straight-forward. Airbus introduced NEO about 1.5 years before we did. We at about same pace for customer penetration. They are producing at same rate and we’re ready to go forward with higher rate, moving deliveries to the left. I’d be very surprised if we’d be much off 50-50. We will have higher market share in wide bodies, where we’ve got five relatively new offerings to their three when they get A350 variants introduced. I feel very bullish on widebodies. I don’t want to give a market share prediction. (But will be higher than 50-50.)
  • JM to suppliers: We are determined and committed to reduce costs. We face sequestration. There are aggressive competitors. We need to be out front of these trends and for our suppliers who work with us aggressively, their business can grow disproportionately. We are in only the second inning.
  • JM: Rate 10 on 787–end of the year.
  • JM: Is 747 program sustainable? We do see it as a viable program. As cargo market normalizes over next year or two we should see more orders. The point is how well we are doing in the cargo downturn.
  • JM: It’s too early to say where the 777X wing will be built. Will decide 2-6 months after program launch.
  • GS: Employment count in Seattle declined as 787 issues cleaned up and productivity improves.
  • JM: Re: 787 LHR fire. We’re in discussions with Ethiopian how to fix the 787 (ie, who pays). We obviously will honor warranties and each of us has insurance. Typically we do repairs for new airplanes but over time others will. In this case Ethiopian will rely on us on how to handle repair.
  • JM: in response to John Leahy saying 787 is unreliable and rushed to market: I think even John felt that he got carried away with himself, which can happen, but you’d have to ask him. Reliability is about the same as new models.
  • JM: On whether 737 can achieve 50-50 without a price war: We’re getting reasonable pricing. I don’t see pricing that destroys or significantly impairs our economics.
  • GS: 787 program is profitable today. (Editor’s Note: This is based on program accounting methods.)

Paris Air Show, Day 2

To us the biggest news coming out of Day 2 was not the launch of the Boeing 787-10–this was widely expected–but the suggestion by Boeing CEO Jim McNerney that he might seek a waiver to the mandatory age 65 retirement to hang around a bit more.

We comment on this in another post.

Otherwise, today was pretty anti-climactic: Airbus won easyJet–this had been reported as likely. Boeing launched the 787-10 with the expected launch customers. Boeing added five sales to the largely dormant 747-8I program. The Wall Street Journal has a somewhat cheeky view of Airbus’ sales targets, with Boeing’s Randy Tinseth predictably churlish.

And it rained and rained and rained. We’re glad we’re in Seattle.

McNerney may seek retirement waiver: our view

Boeing’s Jim McNerney may seek a waiver to the mandatory retirement age of 65–he’s 64 this year–to continue as chairman and CEO.

As soon as the news was out, we got a call from one Wall Street analyst who opened the call by saying, “Short the stock.” We initially thought this was some solicitation call.

We’re not that pessimistic but we do have these observations:

  1. McNerney staying beyond 65 is good news for Charleston, where Boeing is increasing its presence at a rapid rate. McNerney has a clear affinity for South Carolina: its local, county and state governments seem to have an open check book for Boeing. And it’s non-union and has lower wages. As long as McNerney is CEO, Charleston will continue to grow rapidly.
  2. It’s bad news for the unions. He just doesn’t like them. We don’t really need to pontificate on this point. Boeing is cutting back on union jobs here and transferring the work to non-union locations.
  3. It’s generally bad news for Washington State. It’s pretty clear that McNerney isn’t a fan of this state, given it’s costly to do business here, wages are higher, environmental rules are stricter and the State hasn’t exactly been innovative when it comes to thinking up stuff with which to incentivize Boeing. Gov. Christine Gregoire, like Gary Locke before her, pretty much took Boeing for granted until the company used the proverbial 2×4 upside the head to get their attention. Gov. Jay Inslee, Gregoire’s successor, so far has offered up more of the same to “win” the 777X assembly: more workforce training, better infrastructure and faster permitting–all-in-all, not at all innovative or outside-the-box thinking.
  4. More blackmail for Washington: Boeing has always been good at prying concessions out of states and local jurisdictions. McNerney has elevated this to an art. Assemble the 737 MAX derivative in Renton? Of course, said Jim Albaugh, CEO of Boeing Commercial Airplanes. Not so fast, said McNerney, in a highly public and humiliating rebuke to Albaugh (who was gone within the year after this faux pas). Assemble the 777X derivative here? Don’t count on it, says McNerney. Assemble the 787-10 derivative here? Don’t bet on this, either. In the end, the MAX was located here, but we think that was payoff to labor (which also gave in return) in exchange for dropping the NLRB 787 lawsuit. Without this card, it’s up to the State to be blackmailed for more incentives (we really don’t think Inslee’s package is worth much on 777X).

We were pretty happy with McNerney’s ascension to chairman and CEO after the disastrous rule of Phil Condit and Harry Stonecipher. But McNerney’s performance throughout the 787 and 747-8 debacles was wanting, we (and many others) concluded. We think McNerney was slow to make changes in these programs, and he was on the Board of Directors who signed off on the McDonnell-Stonecipher-driven outsourcing approach on 787 that proved so disastrous. McNerney has been at war with the unions, who saved Boeing’s bacon during these programs. We certainly understand the need to control costs and we opined a lot on the medical and pension cost issues, generally coming down on the side of the company. But we can’t help but sense ingratitude from Chicago for all the hard and dedicated work performed here in Puget Sound.

Most significant, perhaps, is the thin bench there is to succeed McNerney. Shortly after he became CEO, McNerney said one thing that was his priority personally and professionally was to create a good succession plan. Who is there from within to possibly succeed McNerney in a year or 18 months? The answer is, at this point, nobody.

Ray Conner is well regarded, but he probably needs a couple of more years than a McNerney retirement timeline suggests. Pat Shanahan hasn’t any commercial sales experience. Dennis Muilenburg has no BCA experience.

McNerney may well have to get a waiver because so far he has utterly failed to have a succession path.

“We’ll be in a constant state of development for the next 10 years:” Boeing’s Fancher

Boeing may not be designing new airplanes to replace the 737 NG or the 777 family, but the head of Airplane Development says Boeing employees will be busy just the same.

“We’re going to be in a constant state of development for the next 10 years,” says Scott Fancher, VP and GM. “We can very seamlessly move talent, move experience, move lessons learned from one development from one project to the next to maximize talent.”

The 787-9 entered assembly at the giant Everett plant last month. The 787-10 has been in design for the past several years; launch is expected Tuesday at the Paris Air Show.

787-9 tail

Photo by Scott Hamilton

The 777X, in two models, is expected to be launched at the Dubai Air Show with a massive order from Emirates Airlines. The 737 MAX is moving forward, with assembly of the test airplanes to begin in 2015.

“The EIS for those airplanes extends early into the next decade,” Fancher said of the 777X.

The KC-46A, based on the 767 platform, is in pre-production design. The 737 NG, 747-8 and 777 continue to get Performance Improvement Packages (PIPs).

Airplane Development, a new department within Boeing Commercial Airplanes under Fancher, was created to put key talent under one roof, so-to-speak, as one way to avoid the problems of past programs.

“This becomes a one-stop shop,” Fancher told an international assembly of media during the briefings in advance of the Paris Air Show.

Part of this was detailed in our post about the 777X’s retention of an aluminum fuselage.

Fancher also said new airplane development needs to work with suppliers in a closely coordinated manner that provides for profitability for both. This seemed to fly in the face of recent statements by Boeing CEO Jim McNerney, who said suppliers need to cut costs.

We subsequently asked Fancher about the apparent inconsistency.

“Profitability and competitive pricing are not mutually exclusive,” Fancher said. “We want our suppliers to be healthy and profitable, which they can be while also cutting their costs to be more competitive.”

Fancher said that as a result of lessons learned from the 787 program, Boeing has and will bring more design work back in-house, but suppliers may build to the Boeing design. The 787 handed a great deal of design-and-build work to suppliers, which caused problems, delays and cost overruns.