Pontifications: Steady as she goes at Boeing–for now

By Scott Hamiltn

By Scott Hamilton

July 27, 2015, © Leeham Co. Dennis Muilenburg, who became the chief executive officer at The Boeing Co. the Tuesday after the Paris Air Show ended (and at which Jim McNerney was front-and-center in his role as CEO), was on the company earnings call for the first time in this role last Wednesday.

If anyone was expecting, or hoping for, dramatic announcements or policy changes, they were disappointed.

With this Muilenburg’s first earning call, it was McNerney’s last. Predictably, it was a love fest between the out-going and the incoming. Muilenburg and McNerney swooned over how well they worked together and praised each other’s work, accomplishments and vision. The discussion wouldn’t be any other way, absent a scandal of some kind (remember Phil Condit resigning over the air force tanker lease deal, Harry Stonecipher over zippergate). Despite the buzz on Wall Street and elsewhere of the relationship strains between the two men, those days really don’t matter now. What does matter is what comes next under Muilenburg.

For now, it’s publicly steady as she goes. Profits are up. Free Cash Flow is up. The learning curve on the 787 is coming down. The rate of growth of the deferred production costs should slow in the fourth quarter.

Yes, there are a few risks and uncertainties–these can’t be helped in a $100bn business that by its very nature flies in turbulent skies. But, according to the earnings call, everything overall is just peachy.

The typically softball questions from the Wall Street analysts didn’t illicit much in the way of news. The new media questions permitted were much more probing. Jon Ostrower of The Wall Street Journal attempted to pin McNerney down on the $835m pre-tax charge announced two days before the earnings call against the KC-46A tanker program. In an interview earlier with Aviation Week, Ostrower asked, didn’t McNerney say the previous tanker charge would be the only one? McNerney pivoted and slid safely home, saying further assessments in future quarters subsequent to that interview proved another charge was needed.

Steve Wilhelm of The Puget Sound Business Journal (Seattle) noted that hard feelings still exist with IAM 751, Boeing’s touch labor union, over the January 2014 vote in Washington State to give contract concessions in exchange for the 777X assembly site in Everett. What was Muilenburg’s view toward the unions and of the prospect of the IAM trying to organize the non-union 787 plant in Charleston?

Cartoon from IAM 751. No more “cowering” under CEO Dennis Muilenburg? Click on image to enlarge.

Muilenburg proved equally adept as McNerney. He values employees, union and non-union alike, Muilenburg said. What else could he say, really? That he was going to try to make them “cower” more than McNerney? (Recall that McNerney only last January said he would be around for some time to come and employees would still be “cowering,” a remark he subsequently dismissed as a poor joke.)

If he does value the employees in Puget Sound, as of two weeks ago when I last checked, he still hadn’t talked with union leadership at SPEEA, the engineers union. They have no clue what to expect of Muilenburg, SPEEA told me. As for IAM 751, its spokesman told me Friday, “We’d welcome a dialogue. We think it would be good for our membership. But at this point, we’re not aware of Mr. Muilenburg holding any shop-floor meetings with our members here in Puget Sound, and to date he has not reached out to anyone in District 751 leadership.”

Wall Street analysts didn’t expect any dramatic announcements on the earnings call today, nor any immediate departure from established policies. But the same analysts believe that Muilenburg has about two fiscal quarters to clear the decks from the McNerney era before beginning to put his, Muilenburg’s, stamp on The Boeing Co. The earnings call included the first definitive statement that the 777 Classic production rate will be reviewed (next year)–until now McNerney and Greg Smith, the CFO of The Boeing Co., danced around the prospect of rate cuts and saying one 777X equals two or three 777 Classics. Finally it looks like Boeing is going to own up that production rates of the Classic will have to come down.

Left unsaid is what happens with the 747-8 program. There are still production gaps, even at rate 1/mo from next March, and the Volga-Dnepr MOU for 20 747-8Fs announced at the Air Show has much less to it than meets the eye–a few firm orders and the rest options, over a seven year period–or three per year if spread out evenly and all options were exercised.

Last week I had two conversations that turned up virtually identical forecasts. One was with a Boeing customer, the other with someone who has close ties within Boeing Commercial Airplanes. Neither knows the other.

Each outlined this scenario:

  • Muilenburg will quickly install people he trusts, from Boeing Defense, where he was CEO before becoming president and COO of The Boeing Co., into Boeing Commercial Airplanes. Muilenburg doesn’t really know the BCA side of the business and wasn’t TBC’s COO long enough to learn on his own. So he needs some of “his” people inside BCA whom he can rely on to give him unvarnished reports about what’s going on, what’s right, what’s wrong and what needs to be changed.
  • A reorganization of BCA internal procedures is inevitable. So is further cost cutting.
  • Although SPEEA, the engineers union, is going to be an obvious target for cost cutting (it’s contract is amendable in September 2016), BCA is still viewed as bloated when it comes to costs.

Boeing’s negotiations with SPEEA are going to be tricky for Muilenburg. Does he become a kinder, gentler CEO than McNerney? Or does he have to take a hard line to prove his chops with the Board of Directors?

How will Boeing handle union grievances from now on? If you listen to the unions (which are hardly disinterested), Boeing over-reacts and takes a hard line on every union complaint.

If Muilenburg has a two-quarter Honeymoon with analysts, here are some things to watch for:

  • Could there be yet another charge for the tanker? Richard Aboulafia of The Teal Group and even Loren Thompson of the Lexington Institute think there could be, according to news reports.
  • Although on the earnings call the prospect of a production rate cut for the 777 Classic was put off until a decision next year, might this be accelerated?
  • Could the future of the 747-8 program be decided this year?
  • Might Boeing take a forward loss on the 747-8 and 787 programs, as warned in the 2014 10K?
  • Meetings with IAM 751 and SPEEA leadership, and the rank and file, might be eagerly anticipated.

 

10 Comments on “Pontifications: Steady as she goes at Boeing–for now

  1. So we see Muilenburg pussyfoot a round McNerny for a quarter and come the following earnings chat lo and behold the write downs and programme changes to 747/777 classic happen.

    The aim of these chats is to have no surprises to spook the markets, all that is happening here is that the non news of this quarter is being telegraphed as a fait accompli into the next quarter/ half year. As suggested the analysts are broadly compliant with this approach unless it is too blatant.

    Muilenburg will get his feet under the table proper and then all the core announcements will happen in short order. McNerny has had his last face saving day in the sun.

    Interesting to note the ‘bloated cost base’ message. It appears after years of excitement both A and B are looking at paring costs as the key target going forward. Forget the emphasis on new products let’s focus on the bottom line. It had to happen sooner or later and chimes nicely with the major new projects being at their current stages of ramp

  2. A great and insightful read as always, Scott. I’m looking forward to something similar on Airbus/ Airbus Group! The issues around the futures of the VLA from both manufacturers are fascinating to watch. What do you believe is the tipping point at which they have to make a decision on the continuation of these programmes – i.e. how small can the remaining orders be before they HAVE to pull the plug?

  3. Boeing: “One 777X equals two or three 777 Classics.”

    I am not sure exactly what they mean by that. The only thing I can see is that for what they can get when they sell a 777X they now have to sell two or three Classics to get the same amount of money. If the 777 programme is indeed Boeing’s cash cow I suppose we could say that the 777X will be able to generate “whole milk” type of revenue while the Classic has now shifted into the “skimmed milk” category.

    • @normand: what McNerney meant when he said one 777X equals 2 or 3 Classics is that the slow rate of production on the X when it initially goes into production will equal 2-3 Classics, so the production rate will be equivalent of the current 8.3/mo. It’s a ridiculous suggestion.

    • They don’t mean that the revenue generated by the 777X will be 2-3 times more than for a 777 Classic – although they will get a higher price.

      What this means is that they are well down the learning curve of the 777 Classic but it will take 2 or 3 times as much time and labour to produce those early 777X’s, so you need to leave more room for them on the production line.

  4. The cost of manufacturing for the Classic is indeed at its lowest after all those years. And because of that, until recently Boeing was able to make a substantial profit on each unit sold. But this is no longer the case because the Classic is now sold with slim margins. On the other hand the 777X selling price is much more interesting for Boeing. Unfortunately the manufacturing cost will also be much higher, and perhaps for a prolong period of time. I say this because the 777X is something like 80% new, including the largest composite wing ever made. And the risk is all on Boeing since the wing will be built in-house. Now, to get back to my analogy it is like if Boeing’s cash cow will fall ill for a certain period of time. And this could’t happen at a worst possible time. Around 2020, when Boeing is likely to EIS the 777X, they will no longer make money on the Classic and will actually loose money on the 777X for the first few years. At that time the 787 will be cash-flow positive but not as much as will be needed to compensate. And to make matters worst the 737 will have likely entered a marked decline in five years from now when the book-to-bill ratio will have started to show a negative value and Boeing will be forced to give them away just to keep production going. Last, but not least, is the possibility that military spending will be at its lowest in decades. But very few people are seeing this because they are not looking beyond the next quater: the stock is high and the backlog is enormous; so there is nothing to worry about, right?

    • Cashflow, over the last Quater, that’s all that really matters we were told last year. And the VeroVenia’s of this world are repeating the party line, as if they just discovered themselves 😀

      Normand I share your concerns and I hope / believe behind the curtains influential Boeing staff sees reality too.

      Hopefully Muilenberg can introduce some of the straight forward, accepting responsibility, blunt honest and long term vision of his German collegue in Chicago. W’ll soon know.

  5. I think that the 747-8 has some limited life left as a freighter. The fate of the a380 is looking slim. I dont know where airbus will find orders even for the re engine version
    The 777 will have another PIP in the class of three percent in order to find more customers or another rate cut

  6. It seems meeting with union is a bit pre-mature.

    He has to make the meet and greet thing, hob nob for a bit.

    Give him some time to settle in and see who he puts where and what he sets up.

    I would hope much better as he seems to have people skills that Mcnneary lacked

Leave a Reply

Your email address will not be published.