Nov. 22, 2016, © Leeham Co.: Boeing hopes to triple its global services businesses from $15bn in revenues to nearly $50bn in the next five years. A corresponding increase is targeted in market share from today’s 7% in commercial aviation and 9% in defense.
Two moves in the executive ranks yesterday are clear signals of the increasing importance of services to The Boeing Co.’s business strategy, revenue growth and profits.
Ray Conner, who has worked for Boeing for more than 40 years and worked his way through the ranks to become CEO of Boeing Commercial Aircraft and Vice Chairman of The Boeing Co., announced his retirement yesterday as CEO. He remains vice chairman through December next year, when his current contract expires.
His success is Kevin McAllister, the CEO of GE Aviation Services. He is the first CEO of BCA, which was formed in 1965, who didn’t come from within BCA or the Defense unit.
Boeing Co. CEO Dennis Muilenburg took pains to claim McAllister isn’t the outsider he appears to be, noting that McAllister worked closely with Boeing for many of his 27 years at GE.
Still, McAllister is probably an unknown to the BCA rank-and-file.
McAllister’s experience in customer services at GE Aviation will be important to Muilenburg’s ambitions to grow Boeing’s services business unit.
Stan Deal, a long-time BCA employee and one of those widely believed to be in the running to succeed Conner, was named president and CEO of the new Boeing Global Services (BGS) unit. Deal was previously president of Boeing Commercial Aviation Services (CAS), which services BCA customers.
The new BGS unit will merge CAS with the Boeing Defense services unit to become a 20,000-employee company. Current revenues are about $15bn. CAS has a 7% market share of the commercial aviation service industry. Boeing’s defense unit has a 9% share.
Muilenburg wants to triple these figures in 5-10 years. Boeing sees the service industry growing to $2.5 trillion over the next 10 years.
BGS is targeted for full integration between BCA and Defense in the third quarter next year.
Although Conner stepped down as CEO of BCA, he remains with the company during the next year to assist with the transition to McAllister.
He also remains involved in product development. BCA currently is studying development of a 737-10, a 777-10 and potentially a New Mid-range Aircraft (NMA), more commonly known as the Middle of the Market Aircraft.
Decisions on the 737-10 and 777-10 are thought to be coming as early as year-end, but potentially into next year. A decision on the NMA is thought to be farther away, well into next year at the earliest.
None is a given at this time.
Boeing (BA) today announced several changes in its leadership team. First, as expected, Ray Conner, current BCA head, has announced his plans to retire at the end of 2017. We believe the disagreements between Seattle and Chicago over product strategy had taken a toll on Mr. Conner, and while we expected this announcement in early 2017, we are not surprised by this move. However, in an unusual move for Boeing, it has appointed an outsider to run BCA, Kevin McAllister, former head of GE Aviation Services. We had heard rumors that the next CEO of BCA would come from the finance department or at a minimum from within Boeing, which has typically been the pattern. We believe the appointment of Mr. McAllister is a strong move and will ensure continued customer focus within BCA, something Mr. Conner was known for. We also believe BA will benefit from an external perspective, and Mr. McAllister will bring a unique set of tools and perspective that should be valuable as Boeing looks to execute on its upcoming rate breaks, and drive FCF and margin improvement in the business.
BA also announced that Stan Deal, current head of Commercial Aviation Services (CAS) will assume a new role as head of a combined Boeing Global Services, which will pull together the services business of both the commercial airplane and defense businesses. Note that CAS alone is a ~$8.3B business, and GS&S is a ~$10B business, implying that the new Global Services business will be a ~$15B to $20B business, depending on how it is divided. The business will include at a minimum Aviall and Jeppesen, but parts of the fleet support work will remain with the defense and commercial businesses. We believe the break-out of the services business, expected in Q3/17 for reporting purposes, will help with the focus on the services business, and is a positive step from a financial reporting perspective.
In terms of industry implications, clearly the master contract negotiations with Spirit AeroSystems (SPR) will take on a new twist considering now both Mr. McAllister and Mr. Gentile, current CEO of SPR, are both from GE Aviation. While it is difficult to handicap the outcome here, we view this development as a positive for these negotiations getting wrapped up in timely manner. We also believe considering Mr. McAllister’s knowledge of the services market, and the financial accountability now in this effort, Boeing will continue to focus on the services market, and we would not be surprised to see more significant investments in this market, both organic and potentially inorganic. As we have written, we believe BA’s commercial services effort has been under-delivering in terms of its potential. We view these moves as positive, as they reflect a change of strategy at Boeing, and a willingness to take a risk in areas where it sees opportunity, but we remain cautious on the stock considering additional production downside risk, and the challenges with hitting the margin and FCF long-term targets.