May 3, 2021, © Leeham News: Cowen Co. called the Boeing 1Q21 financial results “messy” with questions unanswered.
Credit Suisse characterized a “challenging 1Q, though recovery should begin to accelerate.”
My take falls in line with Credit Suisse. It was a challenging first quarter and lots of variables overhang Boeing going forward. But I was struck by the confidence displayed by CEO David Calhoun and CFO Greg Smith going forward. And I’m not one to drink the Kool-Aid by any stretch.
To be sure, many challenges lie ahead for Boeing. Returning the 737 MAX to service has been anything but smooth. New issues popped up that resulted in Boeing (not the regulators) grounding the airplane again. Deliveries were suspended once more.
After 10 years of production, Boeing suspended deliveries of the 787. The KC-46 tanker still isn’t performing as required after nearly two years of delivery delay and limited operations with the US Air Force.
This is not The Boeing Co. of decades past.
Calhoun’s job is hardly finished, which is obviously why he got another five years approved beyond the mandatory retirement age of 65 next year.
Making over Boeing is a daunting task. Calhoun got off to a very rough start in his first 60 days as CEO, beset by foot-in-mouth disease. Is he hitting his stride now?
It might be a little soon to say he is, but Calhoun is certainly making the right noises.
His closing comments on the earnings call outlining the future engineering and production path is the clearest indication yet how Boeing plans future airplane programs. This part has been hinted at for years, dating to the McNerny era. LNA was the first media to understand this direction after a corporate communications professional told me the Middle of the Market airplane (as it was then known) would be as much about production as it would be about the aircraft. LNA dug into this oblique comment to discover what Boeing’s “Black Diamond” approach was all about.
We take a dive into Calhoun’s closing comment in today’s paywall post.
Writing about Boeing during the last 14 years has been painful. Ever since Boeing began to screw up the 787 program—the details emerged in advance of the July 8, 2007, roll out of 787 No. 1—it’s been one bad story after another. Nothing encapsulates this more than one question on the 1Q21 earnings call.
Questions from analysts are generally rather benign. (Once again, Boeing did not allow media questions.) One exception to the benign questions is Ron Epstein of Bank of America. Epstein has been banned from earnings call questions in the past for his pointed probing. In advance of this earnings call, he published a note ripping the governance at the Board level and executive suite.
His question on the 1Q earnings call was just as pointed. It’s reprinted here in its entirety from the earnings call transcript.
“You’ve talked a lot about business transformation. What’s the end state? And ultimately, how does engineering fit into that vision? Because to be fair, the 737 [MAX] had issues, the 787 had issues, the 777X has issues, the 747-8 had issues, the KC-46 has issues, Air Force One now has issues and the Starliner has issues. So, how does business transformation fix that?” Epstein asked.
“Well, I’ll remind everybody that the A380, the A350, the A330, the A3…,” Calhoun began.
“We’re not talking about Airbus. We’re talking about Boeing,” Epstein interrupted.
“But I just want to remind everybody, that they had a little trouble as well. These programs are big and they’re complicated. So, the idea that we fix everything, I’m not sure I can sign up for that. The idea that we’re going to be a whole lot better, I can sign up for it,” Calhoun said. “And the work we’ve done to align our engineering function broadly, everybody inside the company has signed up for that endeavor and feels great about it. The work we’ve done with respect to the safety management system that surrounds that engineering function and which they lead into half of the company. It avails itself to new data to a faster cycle time with respect to how our company processes that data and ultimately make decisions around that data.
“And a reinvestment in the fundamental design practices of the company that will instill disciplines that we just need to get better and better at. Everybody in the company signed up to do this and we’re making real investments in that process. So, I feel very, very, very good about all of that. It does not mean that in a flight test, somewhere along the way, we don’t run into an issue that needs to get resolved. It is the nature of our industry to do big things and do them very well,” Calhoun said.
“I’m confident that these transformation efforts are significant. I’m also confident on this production stability, which goes hand-in-hand with engineering. We’ve taken actions over this — really hard actions over this course of this year to stop things when we see an issue and get them fixed once and for all. The 787 in Q1 was a glaring example of that.
“These fit and finish issues with respect to the joints in our fuselages were just nagging difficult problems. We applied real engineering talent and expertise to that, [with] new process controls and new lines of communication with our supply side so that we’re not surprised by that stuff anymore and we can eliminate rework loops that ultimately travel with the product.”
Would Boeing and the market expect to see the next product development and introduction go smoother? Epstein asked.
“Yes,” Calhoun replied. “Yes, and I expect the next product to get differentiated probably in a significant way on the basis of the way it’s engineered and built and less dependent on the propulsion package that goes with it.”
Calhoun is right, of course, that Airbus had its issues with the A380/350/330/320neo. But none of these airplanes was grounded due to safety concerns. The 787 was grounding for 90 days due to fires. The MAX was grounded by regulators for 20 months and by Boeing over electrical issues.
Problems with the Pratt & Whitney GTF engines and delivery delays from CFM prevented deliveries of the A320neo. Delays from interior suppliers affected the A350 and 787 deliveries at one point.
But apart from Qatar Airways, which is famously persnickety and refused delivery of Airbus and Boeing aircraft at times, no customer declined Airbus deliveries like those on Charleston-built 787s or by the US Air Force and the KC-46 tanker over quality control issues.
So, while Calhoun tried to deflect Epstein’s question, the analyst’s probing was spot on.
There is no question Boeing still has a long recovery ahead. The continuing effects of the COVID-19 pandemic will slow it. Boeing has a huge inventory of undelivered MAXes (400) and 787s (100) to work through. Fixes remain for both airplanes to be implemented. Billions of dollars in debt must be paid down. And a new airplane program must be launched to fix the weakness in the MAX product line.
But I’m confident Boeing will get there, absent any other market disasters beyond its control.