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By Scott Hamilton

David Calhoun

Sept. 4, 2023, © Leeham News: As people try to figure out when Boeing is going to launch a new airplane, confusion continues over semantics and doubts continue over willingness.

The semantics revolves around the words “launch” and “introduce.”

Brian West, the CFO of The Boeing Co., appears at an investors conference Sept. 7 hosted by Jefferies, an investment bank. The event will be webcast; a link is available on the Boeing website. Perhaps West can clarify the timeline, but here is what’s happened recently.

David Calhoun, the CEO of The Boeing Co., said during Boeing’s investors’ day event on Nov. 2 last year that Boeing will “introduce” a new airplane by the middle of the next decade. LNA at that time asked corporate communications if by “introduce” Calhoun meant entry-into-service or a program launch. Corp Com replied that Calhoun meant EIS.

Last month, at another investors conference, a lower level Boeing official said Boeing would “launch” its next airplane by the middle of the next decade. If this is what the official meant, “launching” the next airplane by mid-next decade would represent a major shift. LNA figured the official was mixing words and asked Corp Com for clarity. A spokesman replied, go with Calhoun’s November statement. So, for the moment, let’s take this at face value.

Then there are the skeptics.

Skepticism abounds

There’s good reason to be skeptical, dating all the way back to 1997 when The Boeing Co. effectively became The McBoeing Co., through the merger with McDonnell Douglas Corp. (MDC). MDC failed for decades to invest in new airplane programs (as opposed to a constant stream of derivatives). John McDonnell, one of the founding family members of the McDonnell Corp., went on Boeing’s Board of Directors after the merger. So did Harry Stonecipher, MDC’s CEO. These two became the largest individual shareholders in the merged “McBoeing.” Accordingly, they carried great weight with Boeing’s Board.

Stonecipher became the president and COO to Phil Condit, a Boeing lifer, who stepped upstairs to chairman and CEO. Condit pursued strategy and Stonecipher ran day-to-day operations. It wasn’t long before Stonecipher began changing the culture at Boeing from an engineering focus to a Wall Street focus. “Shareholder Value” became the No. 1 priority of McBoeing. Shareholder value was something Stonecipher absorbed during his long career at GE Corp. under CEO Jack Welch. Welch pursued shareholder value above all else at GE.

Boeing had launched the 777 program under Condit, pre-merger. The 777 program was headed by Condit and was key to his being named CEO later. Also under Condit, Boeing added the 757-300 and 767-400 to the portfolios. Neither was a successful derivative program. Each was the classic case of “A Bridge Too Far,” a reference to a failed World War II campaign conceived by British Field Marshall Bernard Montgomery.

Combined with Stonecipher’s MDC CEO days in which he squashed new airplane development, observers seriously were concerned that Boeing was headed down the same path. Condit was pursuing a new, highly efficient airplane concept called the 7E7. But when he resigned over a corporate scandal and Stonecipher became CEO, skepticism abounded.

Stonecipher surprises

Thus, it was a big surprise when, within weeks of succeeding Condit, Stonecipher announced the program launch of the 7E7, later branded as the 787.

Within two years, Stonecipher was gone, fired for his own personal scandal. Board Member James McNerney was named CEO. Another GE/Welch alumni, “shareholder value” remained a top priority. But first, McNerney had to clean up the design, industrial and production messes of the new 787 and the derivative 747-8. Both were billions of dollars over budget. The 787 would be more than three years late to EIS. The 747-8 would become about 18 months late.

McNerney also oversaw the bidding for the U. S. Air Force’s new aerial refueling tanker. It was the scandal of the first procurement effort that nailed Condit and forced his resignation. The contract was canceled. The scandal didn’t implicate Condit directly, but as CEO the buck stopped with him. Boeing lost Round Two to Northrop Grumman, which teamed with Airbus. This award was overturned due to USAF irregularities in the contracting process. Boeing won the third competition with a bid 10% below Airbus, which pursued the award alone this time. The contract proved costly. So far, Boeing has written off more than $6bn on the tanker program.

McNerney also quickly launched the 737 MAX program in 2011, when he learned Airbus was about to ink a contract with American Airlines for some 400 airplanes. American up to then was exclusively buying its airplanes from Boeing.

Faced with the 787 and 747-8 debacles, McNerney famously declared Boeing would not be doing any more “moonshots” for new airplanes.

Muilenburg takes over

McNerney retired in 2015, succeeded by Dennis Muilenburg, a lifer at Boeing and an engineer. Muilenburg followed the shareholder value priority. He noted that shareholders had taken hits during the 787/747-8 development, and it was time they benefitted from dividends and stock buybacks.

Boeing’s Product Development department had been working on a Middle of the Market airplane design (later renamed as the New Midmarket Aircraft, or NMA) since 2012. The project stalled as Boeing lost billions of dollars on the 787 and 747-8, dealt with delays and authorized development of the tanker and the 737 MAX.

By mid-2015, the 787 was cash positive and had been in service for four years. The 747-8 was also in service. But Muilenburg, and presumably the Board, weren’t ready to proceed with the NMA. The business case remained questionable. But by 2019, Muilenburg was ready to go forward, and it seemed the Board was ready to agree. Then the MAX was grounded in March. Boeing, and Muilenburg, were absorbed with this crisis. Muilenburg was fired in December and David Calhoun was named to succeed him.

Calhoun was lead director and was known to be skeptical of the NMA. He was quoted as seeing the NMA as the wrong plane at the wrong time. Upon taking office in January, Calhoun “paused” development of the NMA (he would later kill it outright).

Calhoun’s rebuilding tasks

Calhoun not only had the MAX crisis to manage, in March 2020, the COVID pandemic hit. Commercial airplane deliveries of the 777 and 787 all but halted (the MAX was still grounded). By October 2020, a production flaw in the 787 was discovered and deliveries, few though there were, were halted entirely. The MAX remained grounded for 21 months and 787 deliveries were suspended for 20 months. No more 777-300ERs were being produced. Production of the 777-200LRF ticked along at two per month. Certification of the -300ER’s successor, the 777-9, stalled, caught up in the MAX grounding fallout.

Calhoun put a stop to almost all commercial Product Development work. Absent cash flow and market demand, it was a logical decision. But once the MAX recertification and resumption of 787 deliveries were in sight, R&D money was restored to the Commercial Airplanes unit.

Still, Calhoun remained skeptical of an NMA-sized airplane (similar to a 767). By the Nov. 2 investors’ day, he officially killed any NMA-level R&D. Boeing announced that day guidance that by 2025-2026, Boeing expected Free Cash Flow to hit about $10bn. Restoration of dividends or stock buybacks were the proverbial visions of sugar plums dancing in the heads of Wall Street. Most aerospace analysts loved the news and the stock shot up 18% in the next week. Except for some blips, it’s continued to climb since then.

Calhoun is another GE/Welch alumni and, as a member of Boeing’s Board since 2009, favored the shareholder value policies introduced by Stonecipher and John McDonnell. This heritage and the history of Boeing’s new airplane development since then leads to continued skepticism.

The Next Boeing Airplane (NBA)

Some very well-known names in the consultancy industry are among the biggest skeptics. But they are not alone.

LNA, however, is not among the skeptics.

Calhoun has refused to directly declare his “vision” of the future. But it has become clear that developing a “green” airplane and making Boeing the green airplane manufacturer is his vision. There are practical constraints, however. Step-change engines, dramatically reducing fuel consumption, is the leading constraint. Calhoun, Airbus, Embraer, and the engine makers agree that the next engines must reduce fuel consumption by at least 20%. Combined with the airframe and wings, the total benefit must be between 25% and 30%. This is the best way to lessen commercial aviation’s impact on the environment.

Step-change engines won’t be ready until—not coincidentally, in Boeing’s rhetoric—the middle of the next decade. A step change design in the airframe and wings may be ready by the turn of the decade. Boeing is developing a transonic truss braced wing design. NASA is a funding partner with a Boeing contract to convert a Boeing MD-90 into a proof-of-concept aircraft. This should be flying in 2028, if all goes well. Given the recent history of new airplane programs, people may be justifiably skeptical of this date.

Assume, however, that all goes well. Boeing may well know as early as 2026 or 2027 if the concept is feasible. Calhoun turned 65 last year, the mandatory age for retirement. The Board gave him another five years, to age 70, should both sides wish to extend his employment till then.

Program launch

It so happens that Calhoun turns 70 in 2027. While Boeing wants to reduce program launch-to-EIS to five years, LNA believes that seven will remain more likely, based on today’s circumstances. Combining the truss design with GE’s Open Fan engine—which targets 2035 for EIS—gets to the 25%-plus benefit Calhoun touts.

LNA believes that Calhoun will announce the Next Boeing Airplane no later than 2027. We also believe it’s possible that the initial NBA might be designed with conventional, evolutionary engines based on today’s designs with the Open Fan becoming a later option. A truss-based, evolutionary engine design could get the NBA to 25% reduced fuel consumption vs today’s airplanes, Boeing and GE officials confirmed to LNA.

If this path is followed, LNA believes it is possible Calhoun could launch a new airplane based on the truss design by 2026 or—admittedly very aggressively, 2025—which is when Free Cash Flow is projected to hit $10bn. All 737 MAXes and 787s in inventory are supposed to be delivered by the end of 2024, boosting cash flow. Debt remains high, but repayment should be well underway.

A 2025 or 2026 program launch with evolutionary engines might be ready for EIS by 2030 or 2031. The MD-90-based proof of concept airplane seats 130 to 210 passengers, making the NBA a straight-up 737 replacement. (Calhoun also said the truss design doesn’t “lend” itself to a large airplane.)

The NBA is what Boeing needs to regain parity, or perhaps leadership, over Airbus for the single-aisle segment. Neither will happen in the 737-A320 contest. Airbus is waiting to see what Boeing does before it makes a move for its next new airplane.

Cautious optimism

So, while critics and skeptics remain pessimistic about Boeing’s future, LNA takes the longer view with practical considerations.

• A step change engine won’t be ready until 2035.
• A step change airframe/wing design might be ready for EIS as early as 2030.
• Evolutionary engines based on today’s design combined with the truss design won’t get 30% better economics but could reach 25%.
• Boeing should be back to production “normalcy” by 2025, absent events largely out of its control.
• Boeing’s debt level won’t be back to pre-crisis levels but should be manageable by 2025-2026.
• Calhoun will be 70 by 2027, the end of his current extension. LNA bets he’ll want his legacy to be two-fold: saving Boeing and setting the path for the future with a new, green airplane.
• Airlines and lessors want a healthy Boeing and healthy competition with Airbus. LNA believes they will flock to the NBA as described above.

LNA remains cautious in its optimism. Institutional knowledge for product development and production has been decimated by the MAX grounding and the pandemic. Neither can be restored easily nor necessarily timely. Calhoun also wants to completely remake the design, development, and production for the next airplane. But this was also the plan for the 787 and we all saw how well that worked out.

McNerney may not have wanted to do another moonshot. But Calhoun’s moonshot is already underway.