Nov. 14, 2022, © Leeham News: Here are some takeaways from last week’s Boeing Investors Day.
When CEO David Calhoun said there won’t be any new airplane this decade, much of the industry went into shock. Consultant Richard Aboulafia, writing in Forbes, said the decision threatens Boeing’s future in commercial aviation. He’s previously predicted delaying a new airplane program launch will see Boeing descend to about a 30% market share.
Kiran Rao, the former chief product strategist for Airbus and now an advisor to airlines and lessors, told LNA that Boeing is now headed to a market share between 20% and 30%.
In the wake of Calhoun’s announcement, some wondered when Boeing would “launch” a new airplane. Would this be in the last part of this decade, with entry into service in the mid-2030 decade? Or did Calhoun mean a program launch next decade?
A Boeing spokesman provided this transcription to clarify:
“And then there’ll be a moment in time where we’ll pull a rabbit out of the hat and introduce a new airplane sometime in the middle of next decade,” Calhoun said. (Emphasis added.)
A normal program launch-to-EIS is about seven years. One could conclude, then, that the program launch could come around 2027 or 2028 if EIS is 2035. (Boeing wants to shrink the timeline to five years from launch to EIS.) CFM is working on an Open Fan engine design for the single-aisle sector (ie, replacing the 737 MAX and A320neo). The EIS target for the engine is 2035. So, Calhoun’s statement seems to fit with his desire for a step-change engine.
Intriguing, to say the least.
Officials said supply chain issues continue to dog steady production and delivery rates of the 737 MAX. Engine deliveries from CFM remain slow. Bringing the production line back from zero to higher rates remains a challenge.
This is what they say. However, this may not be the whole story.
Speaking afterward with aerospace analysts who were there, and others, they point to other problems.
During the pandemic, Boeing encouraged early retirement and offered buyouts to reduce headcounts across the enterprise. On top of normal attrition and scheduled retirements, thousands left the company. Returning to normalcy—a process still underway—required hiring new employees. These employees have a learning curve, which, LNA is told, slows the production of not only the 737s but also the 767-300ERF. (Customers have complained to LNA about quality control on 767s.)
Stan Deal, the CEO of Boeing Commercial Airplanes, said in his investors presentation that there is “occasional quality escape out of our supply chain which our quality management system catches.” The term “quality escape” was new to us, smacking of government-speak, The similar term “quality escapage” was used by multiple sources in describing production problems on the 737 line. One source with knowledge of the situation said there are occasions where “quality escapage” per airplane is in the low three figures.
Deal also said, “The major limiting factor to rate being through the engine manufacturers.” However, LNA is told that CFM has delivered scores of engines to Boeing that are awaiting installation. Additionally, Boeing had 240 MAXes stored at the end of the third quarter, from which engines may be removed for new production. This includes nearly 140 airplanes destined for China for which there are no delivery dates in sight.
When Dennis Muilenburg was CEO of the enterprise, he set a revenue target of $50bn for Boeing Global Services. It was a target that few outsiders thought remotely possible. Calhoun stuck a fork in that last week.
Calhoun, knowing his investors/analyst audience, spoke the magic words: returning free cash flow to shareholders. He forecast that by 2025-2026, Boeing will have $10bn in free cash flow. He’d like nothing more than to resume paying dividends and stock buybacks then, he said.
Coming on the heels of killing any new airplane program this decade, critics were quick to pounce on Calhoun’s desire. But Wall Street loved it.
Boeing’s stock price closed at $143 per share on Nov. 1, the day before the presentations. The stock closed at $147.41 on Nov. 2, a partial trading day vis-à-vis the presentations. After that, the closing prices were $156.75 on Nov. 3, $160.01 on Friday, Nov. 4, and $169.62 on Tuesday, Nov. 8, a week after the investors day—a gain of 18.3%.
By Boeing’s measure, the investors day was a roaring success.
IAM 751 reaction
The International Association of Machinists and Aerospace union, District 751, is Boeing’s largest union. It assembles the airplanes in Everett and Renton (WA) and has shops elsewhere. Needless to say, the reaction wasn’t favorable.
“It was not great to hear that Boeing is not going to launch new products until the mid-2030s,” said Jon Holden, president of the IAM 751. “I’m not sure the US commercial aerospace industry can remain competitive if that is the case.
“Boeing needs to be pressed on the decisions they make that impact the future of the US commercial aerospace market. The capacity we have in Everett, if underutilized, is something upper management should not get a pass on. Failing to launch their next airplane program, effectively handing over dominant market share in the single-aisle and mid-market aircraft to their main competition, is a situation with dire consequences for the future. If market share tips in favor of Airbus at 60/40 or worse 70/30, it puts pricing pressure on Boeing making it impossible to recover for decades.”