May 2, 2022, © Leeham News: Boeing’s first quarter report was just awful. There’s just no getting around this, although a few Wall Street analysts bent over backward trying to make a silk purse out of a sow’s ear (an American colloquialism). One analyst called the quarter “dreadful.” The stock tanked $20 on the day the earnings were reported. As of Friday, it gained $4 from Wednesday’s close.
The one overt bright spot is that Boeing now appears on a definitive path to gain FAA approval to resume deliveries of the 787 in the third or maybe the fourth quarter. A few Wall Street aerospace analysts rightly pointed to this as good news. Some aerospace analysts also said suspending production of the 777X and upping it for the 777LRF is good news, for the 777LRF is high-profit margins. Some also took the position that all the write-offs are “clearing the decks.” This appears to be reaching for the moon.
Boeing’s additional charges on Air Force One and the T-7 prompted Boeing CEO David Calhoun to appear to throw his predecessor, Dennis Muilenburg, under the bus—again. However, this is not entirely clear he did so.
Calhoun said on the earnings call the AF One deal was “a very unique moment, a very unique negotiation, a very unique set of risks that Boeing probably shouldn’t have taken. But we are where we are, and we’re going to deliver great airplanes. And we’re going to recognize the costs associated with it.” Muilenburg negotiated the price with President Donald Trump, who as president-elect criticized the $4bn+ price tag as too high. Some took Calhoun’s remarks as a shot at Muilenburg. (It wouldn’t have been the first time.) But LNA is told that the Boeing Board was briefed in detail, including risks, and had to approve this deal. Calhoun was chairman of the company at that time.
Muilenburg’s kissing up to Trump was important, given his personality and Boeing’s position as a defense contractor. Even after Trump was eviscerated for his remarks about a violent rally in Charlottesville (WV) that had racist overtones and in which one person died, Muilenburg remained on an advisory council after other defense contractors’ CEOs stepped off.
But did Calhoun throw Muilenburg under the bus? Remarks about fixed-price contracts immediately before turning to Air Force One suggest maybe not.
“I will have a very different philosophy with respect to fixed-price development. I hope never to contribute to that issue. But we are where we are. And let me also say, because I was on the Board at the time the T-7 and MQ-25 programs were taken, and yes, they were written off the day we took them knowing that we would be investing a fair amount of our own money in the future of those aircraft.”
The fixed-price contracts above were preceded by the one for the KC-X tanker. Awarded in February 2011, Boeing won the contract for 179 US Air Force refueling tankers based on the 767-200ER. The competition was run under what’s called Lowest Price, Technically Acceptable parameters, or LPTA. EADS, then the name of Airbus’ parent, offered the Airbus A330-200 Multi-Role Tanker Transport (MRTT). Boeing’s bid was not just aggressive—it was super-aggressive. Boeing came in a whopping 10% below the price offered by EADS. Boeing now has written off more than $5bn in cost overruns in the initial tranche of airplanes for which the contract was awarded.
The write-offs for the tanker, T-7, MQ-25, and Air Force One suggest a bottomless pit. But in each case, executives claimed that long run, with service contracts and presumed foreign sales, the programs will be profitable.
Boeing competitors remain baffled, however. Airbus (EADS) execs couldn’t understand why Boeing would trim its bid so aggressively. Neither can Lockheed Martin, according to aerospace analysts who spoke with the company. LM competed against Boeing for the T-7. Under LPTA, in theory you only must beat the next bid by $1. Why leave a billion dollars or more on the table, LM asked rhetorically.
A few analysts thought Boeing was clearing the decks and had bottomed out. But this isn’t the first time a few thought so. This time may not be the last.
Certification of the 737-7 and 737-10 remains a question. Certification of the 777X already has a long overhang. Resuming deliveries of the 787, for which things finally look encouraging, isn’t a lock. Defense programs have continuing challenges. The space programs aren’t going smoothly. China’s still not taking its MAXes that have been stored since March 2019. These account for about one-third of the ~350 MAXes in inventory.
We’ll look at some of these issues in the coming weeks.