Pontifications: Boeing’s sense of invincibility

By Scott Hamilton

Sept. 11, 2017, © Leeham Co.: I can’t help but get the feeling that Boeing feels it’s invincible these days.

And why not?

Boeing racked up some impressive victories and took some hardline positions in recent months that move it forward for its corporate goals.

A huge win at WTO

Last week, Boeing (or more accurately, the US Trade Representative) won an appeal before the World Trade Organization that $8.7bn in tax breaks given by Washington State to entice Boeing to produce 777X wings and assemble the airplane at its Everett plant were not “prohibited” subsidies.

Airbus tried to make a silk purse out of a sow’s ear (a US colloquialism) by pointing out a parallel case (also under appeal by the US) hasn’t yet decided on whether the same subsidies are “illegal” under WTO rules.

“Prohibited” and “illegal” aren’t the same thing, in the arcane world of the WTO. Prohibited means the subsidies can’t be provided, period. Illegal means they can, provided the structure conforms to WTO rules—and they are “illegal” if they don’t. Remedies may be applied and if so, the subsidies are then legal (ie, not “prohibited”).

Washington tax breaks, but no jobs

In a matter related to the same $8.7bn in tax breaks, Boeing earlier fended off yet another attempt by labor unions and Democrats in the Washington Legislature to adopt a “claw back” of the tax breaks, reducing them because Boeing has moved jobs out of state and shed jobs in cost-cutting measures.

When the tax breaks were granted in 2013, Boeing refused to provide job guarantees. The reason quickly became clear. Boeing planned to cut jobs in Washington. The unions warned the legislators this would happen, but no nexus was adopted.

It also became clear that the 777X assembly line was going to be more automated than the 777 Classic line, requiring fewer jobs. No wonder Boeing didn’t want to provide guarantees.

The trouble with the Democrats and the unions wanting a nexus between the tax breaks and the total Boeing employment in Washington when they were given is that the nexus was demanded to the entire Boeing enterprise—not just the 777X jobs for which the program tax breaks were granted.

To be sure, it seems that every other state demands, and gets, a nexus. The Washington politicians seem to get flimflammed every time.

In principal, I agree with the Ds and the unions. Boeing shouldn’t get a free ride. But the jobs guarantee should only have been to the 777X program, not the Enterprise.

Boeing must have the ability to shed jobs to cut costs. LNC has written several times that the head count comparison between Boeing Commercial Airplanes and Airbus’s commercial unit give Airbus a significant advantage.

Growing automation is also a fact of life and jobs. It’s simply unrealistic of the Ds and the unions to not recognize automation means fewer jobs. Boeing must be able to cut jobs.

End of story.

Bombardier and Canada

In what is perhaps the crowning chutzpah last week, Boeing told the Canadian government, in effect, to go perform an anatomically impossible task on itself—Boeing will not drop the complaint filed with the US government over allegations Bombardier “dumped” the CS100 order with Delta Air Lines at illegally low prices.

The Canadian government threatened to not buy a batch of F-18 fighters from Boeing and perhaps take other actions in retaliation for Boeing’s complaint.

Boeing officials countered that Boeing has brick-and-mortar facilities in Canada, employs thousands and spends billions of dollars in Canada. The threat of its own retaliation wasn’t too hard to discern.

A preliminary decision by the US Department of Commerce is due Sept. 25. A decision in Boeing’s favor is likely.

The amount of penalties could be huge, tens of millions of dollars per airplane. The importer of record (either Delta or a Bombardier US subsidiary) would have to escrow the penalties while the certain appeal is pending.

An appeal can be filed with either a US federal court or with a NAFTA board. Of course, President Trump threatens to pull out of NAFTA.

This complaint isn’t going to go away quickly or quietly.

UTC and Rockwell Collins

And then there is the merger announced last Monday between United Technologies and Rockwell Collins. The next day, Boeing said it doesn’t like what it sees so far.

Officials question whether the merger is good for customer (of which Boeing is one, from both companies) and in another not-so-veiled threat suggested it might cancel contracts with the companies if it truly doesn’t like what it sees after a deep-dive.

Why would Boeing care?

There’s consolidation of suppliers, of course. But in this case, it gives UTC and Collins greater heft to resist future endeavors of Partnering for Success cost cutting.

More to the point, it threatens Boeing’s Global Services business plan, which relies on Boeing increasing its share of after-market services. Producing airplanes is an increasingly challenged profit-and-loss effort. CEO Dennis Muilenburg is pretty clear he sees margins coming from services decades in the future.

It’s one thing to divide-and-conquer Rockwell Collins’ service and parts. Or to punish UTC, as it did over 777 landing gear. It’s another to take on both as a single company.

But it looks like Boeing is ready to take on the task.

Feeling good

Muilenburg has good reason to be feeling good these days. He took over a mess from the disappointing reign of Jim McNerney, whose chief accomplishment was a war with the unions. Muilenburg achieved labor peace, of sorts, cut costs, improved margins and sent Boeing stock far higher than McNerney ever dreamed.

Muilenburg even tamed Donald Trump’s hostility toward Boeing, no small feat for the infamously vindictive personality.

Small wonder Boeing is seemingly invincible these days.

31 Comments on “Pontifications: Boeing’s sense of invincibility

  1. The CEO seems to be navigating the knife edge of satisfying all varied stakeholders pretty well. He seems to be playing ‘a straight bat’ without being antagonistic to employees and local govt. I get the feeling that the current climate suits Boeing quite well. A downturn in orders is not affecting FCF and the MAX and 787 are getting well. The only big cash drain is the 77X and at least the 77W gap has almost been filled. The lack of orders must be a much greater concern for BBD and the ongoing shenanigans can only cast more doubt on that programme.

    So the ship has been steadied but the destination is still a bit unclear. If I were the CEO I would use this hiatus in orders to bin the NMA as too marginal a return for too much risk and look again at a large NSA to cover the perceived weakness in its line up. An A322 competitor launching in 2025 could form the basis of a family of aircraft to finally bring the Boeing single aisle product out of the 60s.

  2. All of Boeing is under far better CEO now than it was under Mcsomething…

  3. As Boeing is getting back into the electronic business, why don’t they bid on RC?

    Put their money where their mouth is.

    That’s the real reason for the annoyance, it creates a harder to compete with entity in that business that Boeing is foolish to jump into anyway,.

    At least if they bought out RC they would have a real viable business.

    an anyone see Boeing created a competitor from scratch?

  4. I think the author is entirely wrong.

    Boeing’s margins are being squeezed, badly. The Chinese/Brazilians/Canadians/Russians may not sell airplanes, but they are pushing down prices, and thus margins. So the comfortable duopoly is now in a similar capacity-driven business as the airlines. And airlines do not, historically, enjoy high margins. Boeing is about to lose theirs.

    By competing with their own suppliers, Boeing is inviting suppliers to start to play hardball. And they will. So the squeeze will start from the bottom-end as well. Boeing makes very little of the airplane – they NEED suppliers to not get too mad.

    As for the MRO business: no airline thinks Boeing is good at MRO. Boeing Commercial are too arrogant to provide proper service. This is why the MRO business is driven by little guys, who understand what AOG means, and how to go the extra mile.

    • Boeing will tie up a lot of the IP for its planes so the MRO need them to even touch parts. Thats whats happening with the military where much more money is made during the life of the item than the contract price.

    • The large Tier 1 suppliers are rapidly approaching the point where they are likely to be in a better position to produce an aircraft than the traditional OEMs.

      If UTC partnered with GKN, I don’t know if there is a part of the aircraft they couldn’t do.

      • Yes I can remember others thinking the same. Instead the missing airframe partner is Spirit not GKN. Combine all those and you have a builder of complete passenger aircraft- but not designer of course.

        • Lets ad in Rockwell Collins and UTC and maybe you can and do have a new aircraft builder!

  5. Add to this the 787, and $27 billion in the hole that will never be repaid (since Boeing cannot charge $30 million more for a 787 than Airbus gets for an A330). Boeing is playing accounting games, but eventually that little birdie will come home to roost.

        • It’s been said many times before: The A330 (the plane the 787 was supposed to kill) has sold more copies since the 787’s launch than before.

          Even on an annual basis, the 787 only outsold the A330 twice since 2007, namely in 2007 and 2013. In fairness, 2017 is currently shaping up to join that list.

          • I suspect Airbus aren´t in a hurry to sell A330s, I think their widebody staff are all busy keeping the A350 on track.

  6. Yes, yes, indeed, a lot of leadership in these demonstrations of strength, a lot of feeling expression of power. All this is easier said than done in a situation of duopoly. What if all the airlines, suppliers, governments, and Bombardier were suing Boeing for all the extra costs paid to turn the shareholders and executives of the Chicago builder into small arrogants, rather harmful to society in general?

  7. They’re feeling invincible, Scott? I think not. Granted the stock run up since the beginning of the year is impressive. (Like the crowds at the Coliseum in Ancient Rome, the market gives a “thumbs up”!) However, there’s at least a $5 to $10 billion–that’s BILLION, with a “b” 787 writedown to come on Muilenberg’s watch. (Thanks, McNerney, you’re “the gift that keeps on giving!”) That 747-8 line’s got to be costing some cash. Is it really worth keeping it open till 2020–in hopes of big freighter renewal orders, when they could be selling 777s? Think opportunity cost! (Possible space for 797 assembly?) And what’s going on with KC46 management? A probable, current $2.5 billion in cost overruns, with $2 billion pretax “on Boeing”? And not one peep from the USAF or financial analysts on this financial fiasco! Wasn’t this Muilenberg’s “space”, and why hasn’t someone in executive management been held to account? That increased UA order for 10 more A350-900s gotta hurt also. There’s really a market rut on these widebody orders. Prima facie, the Emirates cancelled widebodies order. So, every lost orders got to hurt. Lastly, for now, there’s a battle royale coming over 15% margins between Boeing and its suppliers. Boeing, of course, wants them, and most of its suppliers doesn’t to cede them!

    • Its been said here many times ‘writedowns’ on expenditure thats been spent long ago doesnt meany anything to the sophisticated investors. They are looking at free cash which can go on share buybacks.
      The past is fixed, it cant change, its what might happen in the future which can be.

      • Let’s just see what Mr. Market says after Boeing “fesses up”. And the KC46 mess and lack of apparent BA executive management concern about same doesn’t engender much confidence in either BA program or executive management!

  8. The article is an interesting take on reality for a company that is losing market share.

      • Only because Airbus have run out of delivery slots.

        The new agreement with United means that some early delivery slots are now available for the A350. Not many. We will see how quickly they go remembering that Vietnam wants 10 and China wants 40.

  9. Help me out, Boeing offer United 737-700 “for free” to prevent Bombardier getting a foodhold.


    Now United has cancelled these 737 & Boeing is sueing BBD because they might kill Boeing by discounting CSeries for Delta and this is all unfair.


    “We act with integrity, consistency and honesty in all that we do. We value a culture of openness and inclusion in which
    everyone is treated fairly and where everyone has an opportunity to contribute.”

    • Well we call that speaking with a forked tongue.

      Its gotten to be an art form over here.

  10. It tends to be the case that once an entity (superhero, corporation, rabbit or normal person) feels invincible… it sets them up for their downfall.
    Quite a few of their current victories may end up being pyrrhic in nature after all.
    Their case against Bombardier is a prime example. I still firmly believe that the whole case is absolutely ludicrous to begin with and a case of the big guy using all its might to fend of the small guy who’s offering, quite simply, a better product. If you can’t actually compete – sue them. So just on principle, this really riles me up. But even leaving that aside – BBD is small fries. There’s much more reason to be worried about China, who are planning to go after market segments that Boeing is actually competitive in – and who control quite a few massive orders that would be at risk if Boeing was to launch a similar complaint against China as they did against BBD.
    Sure, the BBD case plays to Boeing’s home crowd – but the US isn’t Boeing’s only market, and playing to the home crowd exclusively has its risks when you’re in a global business.
    The same applies for the WTO rulings.
    Then, there’s the whole jobs-for-tax-breaks debate – yup, Boeing have got that money in the bank, but also demonstrated what vigilance is needed when dealing with Boeing. Which could come back to haunt them.

    Lastly, we haven’t even talked about ExIm…
    There have been a few u-turns from Trump on the matter, which are of course subject to yet more u-turns (I’d expect DJT to get along famously with Akbar Al-Baker), as well as approval in Congress.

    Then, there’s the neverending MOM/NMA debate, which isn’t exactly a sign of strength, plus the 777X hinging very heavily on the ME3, which are coming under increased pressure.

  11. The A350 deal at United is a huge win for Airbus. Yes, United switched to the -900 but Airbus picked up ten additional orders. Muilenburg has egg on his face in his hometown. Must be difficult after all of his boasting last year about how aggressive his new sales team is. Leahy ate Boeing’s lunch like usual.

  12. Trends in the market indicate airlines looking at “smaller” twin aisles, A359 vs A350-1000, the 787-9 is selling well whatever the analysis on project capital payback (that’s sunk money – past tense).

    Could the 777-9 proof to be to big, shouldn’t they have started with the 777-8? (Maybe the 778 should have been called 779 and the 779 the 777-10?).

    And then the MoM, are Boeing losing momentum here. Are realities catching up that it will hurt the 787. A “clean sheet” 787-8 NEW could be cheaper to develop as an all new MoM?

    An NSA with the MC21 fuselage diameter, starting with a variant with 20-30 seats more than the MAX10 and 4500 Nm range could be a better long term investment?

    • Could we see Air Canada dropping its options for 18 B737MAX aircraft for example?

      I am not sure how binding is “option rights”?

  13. Could we see airlines going 350-1000 instead of 777-9 with theoretical slots opening?

  14. AA could “surprize” by going 789 to replace 330’s and 767’s and 350-1000 replacing 777-200/300’s when due?

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