Now open to all readers
Jan. 27, 2015: Dennis Muilenburg has been the No. 2 at The Boeing Co. for a little more than a year. He was named vice chairman, president and COO in December 2013.
His boss, Chairman and CEO Jim McNerney, turned 65 last August. Sixty-five is the mandatory retirement age, but this has been waived before and McNerney is widely understood to want to stick around through Boeing’s 100th Anniversary in 2016.
The industry is buzzing with reports that McNerney might move up soon to
non-executive chairman, with Muilenburg assuming the CEO title.
If and when Muilenburg becomes CEO, he faces a laundry list of challenges.
Muilenburg’s entire Boeing career until he was named No. 2 in December 2013 was in Boeing’s defense unit. With no experience in Boeing Commercial Airplanes (BCA), which now accounts for the majority of the revenues and profits because of declining defense budgets, he faces unfamiliar territory despite a mere year as vice chairman, president and chief operating officer of the corporation.
Ray Conner, president and CEO of BCA, was named vice chairman with Muilenburg and no doubt has served as a tutor. But Muilenburg remains removed from the core business by a four hour flight and 1,700 miles is a handicap that will take some time to overcome.
Strong competition from Airbus that is getting stronger
Airbus surpassed Boeing in orders for the last 10 years and, until recently, also delivered more airplanes than Boeing. Now that the Boeing 787 is being produced at 10 airplanes per month, Boeing has regained the title in this arena.
But Airbus has a much larger market share of the bread-and-butter single-aisle market, capturing 57% or better (depending on the year) in orders and retaining about this share in backlog. The development of the A321LR as a replacement for the Boeing 757 neatly boxes in Boeing, which cannot further enhance the 737-9 to match. The A321ceo/neo has outsold the 737-900ER/9 by a ratio of 2.5-3:1 for years, and it’s on the strength of this airplane that Airbus captures the stronger market share in the single-aisle sector.
Boeing plans to ramp up the 737 production rate to 52/mo by 2018 and is
making plans for ~58/mo the following year. Boeing is studying rate 60 thereafter. This is an aggressive schedule and Airbus has its doubts whether Boeing can get there on this timeline.
But Airbus has similarly aggressive plans. It’s announced rate 46 for the A320 by 2016, when the Mobile (AL) plant comes on line. It’s notified the supply chain to plan for rate 54 by 2018. We certain Airbus will play Keep Up with the Jones with Boeing.
Now that that A350 has entered service and will be ramping up its production rate, to an announced 10/mo by 2018 and 13/mo by the end of 2018 in out estimates, Airbus stands to gain production parity with Boeing. The A330ceo will be declining to an estimated rate of 6/mo by 2017, but Airbus believes it will ramp back up to nine or 10/mo by 2019 with the A330neo.
The A380 continues at 2.5/mo.
Boeing has announced a rate reduction on the 747-8 to 16/yr from 18/yr and we think this is only the beginning before the rate comes down to 1/yr and program termination is announced, effective around 2020 if not a little before.
The 777 Classic rate at 8.3/mo depends on obtaining sales of 40-60 a year, depending on conversion of options and LOIs. Boeing is set through 2016 but the backlog drops sharply in 2017, and the new 777X doesn’t enter service until 2020 under current plans. Boeing vows to maintain the Classic rates through introduction of the 777X but we (and most aerospace analysts) believe the rate will have to come down to 5-6/mo in 2017.
The 787 rate will step up to 12/mo in 2016 and 14/mo in 2018.
Thus, if all the prognostications are correct, Airbus will be out-producing Boeing’s widebody rate in 2018 or 2019 and maintain this advantage for a few years.
The challenge for CEO Muilenburg will be when to pull the trigger on a new airplane to truly replace the 757 and also the weak 737-9. There remains a belief that this could happen as early as 2018, with an EIS of 2025, well in advance of McNerney’s 2030 target date. But this is by no means assured.
Continued cost cutting
Muilenburg is described by one aviation consultant as “Dennis the Menace” when it comes to future cost cutting, and Boeing Commercial Airplanes better look out.
It’s true Muilenburg has had to take the kostensenkungs at the defense unit when he was CEO of Boeing Defense as Sequestration and the wind-downs of the Iraq and Afghan wars occurred. And they’ve had to be steep.
Wall Street analysts are all over the map when it comes to predicting Boeing’s free cash flow. McNerney and CFO Greg Smith will offer guidance for 2015 tomorrow on the 2014 earnings call. But during an appearance by Muilenburg as the December Credit Suisse conference, he said it will take “years” to hit cash flow targets many analysts have forecast.
Our information from inside Boeing indicates that cash flow is going to be tight this year and the next couple of years. Additional cost cutting was ordered under what was called the “Chairman’s Challenge” (McNerney), to reduce non-salary and non-airplane expenses by double digits.
We also have indications from Market Intelligence supporting a cash flow squeeze this year. Bernstein Research is looking for $5bn in FCF guidance from Boeing tomorrow. We shall see.
Learning the Commercial Airplanes business
No matter how good a tutor Ray Conner, the CEO of Boeing Commercial Airplanes, might be for Muilenburg and no matter how much Muilenburg picked up in Chicago, one year isn’t a lot of time to learn what he needs to know about the incredibly complex commercial airplanes market. He’ll have his work cut out for him as CEO.
Declining defense business and revenues, putting pressure on profits and cash flow
For those of us who focus on commercial aviation and Boeing’s cash flow, we tend to overlook defense. The declining defense business isn’t just about programs and wars past. It’s about recapitalizing an Armed Forces who equipment is war-weary and depleted. It’s about recapitalizing aging Naval warships and the Air Force’s fighters, bombers and ICBMs. It’s about shifting a glacial defense department and a Congress that favors its favorite programs to the realization that cyber warfare and terrorist fighting doesn’t need some of the age-old programs that Congressmen like to protect.
There are fewer and fewer new defense programs to bid on. There is real concern about diminishing expertise and skill sets to develop new programs. CEO Muilenburg is more in his realm here than with BCA, but his challenges will be immense.
Flight testing and development of the KC-46A
The Air Force now thinks this program will be at least a year late. It’s projected to be $1.5bn over budget for just the first four airplanes Boeing is producing. How soon can CEO Muilenburg stop the bleeding and get the airplanes delivered?
Good luck on this one.
Development of the 737 MAX and 777X and proving that delivering new airplane programs on time and on budget can be achieved again
The 787 and 747-8 programs were production and design debacles. The MAX and 777X are supposed to be safer derivative developments, but as we saw with the derivative 747-8, even these programs can go South in a hurry.
The MAX EIS has already been moved up from October to July 2017. Boeing wants to advance the 777X EIS from mid-2020 by six months. The MAX and the 777X are driven more by new engine development than by the airframe, and the 777X has a new composite wing as well. Can CFM deliver the MAX’s LEAP-1B on time? Can GE meet Boeing’s desired EIS schedule six months sooner for its new GE9X?
As those statements required by the Securities and Exchange Commission say, Past performance isn’t a guarantee of future performance. Let’s hope in this case, this means positive news instead of warning flags.
Selling enough 777 Classics to maintain production rates to the 2020 EIS of the 777X
This will be perhaps the most closely watched event in the next 12 months. Boeing’s free cash flow is dependant upon Defense revenues, the 787 program, advance payments for all orders (heavily weighted toward 737 and 777 these days) and the 777 Classic. Some analysts focus on the 787’s deferred production and orders/deliveries cash flow. Some focus on Defense. And some focus on 777 Classic. If Boeing does have to lower production rates beginning in 2017, FCF will take a major downward spike. Or, if Boeing has to cut the customer pricing even more than the discounts today to maintain production, cash flow takes a hit. Either way, the 777 Classic program production rates will be an important element to cash flow.
As an aside, watch the order flow for the 737. Deposits and progress payments come from the 737, the most prolific program at Boeing. If orders start to fall sharply from recent history, either due to extended backlog or falling fuel prices or both, FCF falls, too.
Dealing with labor unrest with its Seattle area unions and a new attempt to organize the Charleston 787 plant
The International Assn. of Machinists is trying to re-unionize the 787 plant in Charleston and may be close to obtaining enough signatures to call for an election. Boeing hates the idea of any union, but especially at Charleston, where non-union work is used as a cudgel to extract concessions from the IAM 751 in Seattle.
The engineer’s contract comes up for amendment next year. SPEEA is a
weaker union than the IAM and engineering jobs can be outsourced easier than touch-labor jobs, but don’t expect contract negotiations next year to be easy.
Instead of SPEEA vs McNerney, it will probably be SPEEA vs Muilenburg, and Muilenburg remains an enigma to SPEEA.
Deciding whether to take that “moonshot” and launch new airplanes earlier than the 2030 EIS former CEO Jim McNerney set as policy
When McNerney says no “moonshots” for a new airplane and no 737 replacement until 2030, one has to assume Muilenburg shared in these current policy decisions. It could also be that he didn’t and is being a good soldier in supporting them. But his personal views aren’t known outside the executive suite.
Will CEO Muilenburg have a different timeline and philosophy than McNerney? Will McNerney have to finally depart the Board of Directors, presumably in 2016, before Muilenburg can call his own shots? Will the Board of Directors, hand-picked in many ways by McNerney and still dominated by the McDonnells back a new Muilenburg strategy or stick with the low-risk path currently in place?
It’s like the Perils of Pauline.