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Nov. 21, 2022, © Leeham News: When Boeing CEO David Calhoun told his audience at the Nov. 2 investors day (and all those watching on the web) that there will be no new airplane introduced until the middle of the next decade, it was a shocker to some.
Wall Street analysts and investors loved the news. There would be no spike in research and development spending. Free Cash Flow—which is seemingly all that matters to analysts—was forecast to be $10bn by 2025-2026. Returning money to shareholders seemed to be restored as Boeing’s No. 1 priority. The stock price went up 18% in the week after the news.
Calhoun said there would not be a new engine before the middle of the next decade that would support the development of a new airplane. Calhoun ignored advances in airplane/wing design as a contributor to reducing fuel burn, however.
But, as the late radio commentator Paul Harvey used to say, “now, for the rest of the story.”
Since the Nov. 2 investors day, the first since 2018, LNA quickly learned that there was more than expressed at the investors day event.
In the meantime, Calhoun purchased 25,000 shares of stock on Nov. 8 for approximately $3.87m. Insider purchases like this typically send a message to Wall Street and stockholders that the CEO (or whomever) has confidence in the company’s future.
Nov. 7, 2022, © Leeham News: With the firm declaration that Boeing won’t launch a new airplane program until the next decade, CEO David Calhoun is signaling he’s content to see the company shrivel into a distant number two position after Airbus.
Amazingly, one Boeing executive told one of the attendees of the investors day event that he (the executive) was okay with that for now.
It’s a recipe for Boeing to follow the path of McDonnell Douglas Corp. (MDC) in its long decline into commercial oblivion. MDC merged into Boeing in 1997. Boeing hasn’t been the same since. Its legacy as an engineering company shifted into one focused on shareholder value. McDonnell Douglas had become a company where Derivatives-R-Us prevailed. Boeing long ago shifted to this mode as well.
Calhoun is a creature of Jack Welch’s GE mantra. Cut costs. Emphasize profits and shareholder value. And while Welch’s philosophy that GE should always be No. 1 or No. 2 in any industrial sector it played in, Welch’s vision of No. 2 was a close No. 2. Boeing’s decline into a distant No. 2, with only a 40% market share against Airbus (and less when looking only at the total single-aisle sector) began long before Calhoun became CEO in January 2020.
Calhoun told his audience of investors and aerospace analysts that he’d like nothing more than to return cash to shareholders. Knowing who your audience is is part of any speaker’s requirement, so in isolation, I’m not going to chop Calhoun up for this statement. The trick is to balance shareholder return against the future of the company.
As I’ve written in the past, returning 100% of free cash flow to shareholders isn’t necessary. Before suspending the dividends and stock buybacks after the MAX grounding, Boeing returned more than $62bn to shareholders over a decade. Using part of this for new airplanes would have been a good approach.
Calhoun declared that even if all the advanced design and manufacturing is ready this decade, he won’t support a new airplane until the next decade when a new engine that can reduce fuel consumption by at least 20% is ready. Any new airplane must hit this target to benefit airlines and the environment, he said.
Well, there are other ways to hit this target. LNA discusses this behind today’s paywall.
In the meantime, Boeing is content to rest on the past.
Oct. 31, 2022, © Leeham News: Boeing last week surprised Wall Street aerospace analysts with a huge loss instead of the expected profit for the third quarter.
But positive cash flow was the metric the analysts focused on. The loss was attributed mostly to big write-offs of five defense programs: the KC-46A, VC-25B, MQ-25, T-7A, and Commercial Crew (the Starliner) programs. Boeing wrote off $2.8bn for these programs in the quarter. The company previously wrote off $8.8bn for these programs.
The specifics: Boeing took charges of $1.2bn for the KC-46 tanker, $766m on Air Force One, $351m for the MQ-25 aircraft carrier tanker drone, $285m for the T-7 jet fighter trainer, and $195m for the Commercial Crew.
All are fixed price contracts that have come back to bite Boeing big time.
Boeing also had a loss of $643m in the quarter at Commercial Airplanes. Global Services reported a profit of $733m and Boeing Capital Corp (BCC)—the leasing unit—eked out a $23m profit.
For the nine months, Commercial Airplanes recorded a loss of $1.74bn. Defense lost $3.66bn. Services reported a profit of $2.1bn and BCC barely recorded a profit of $14m.
But cash flow was positive at $2.9bn. And this is what analysts liked. Yet there was a little smoke-and-mirrors involved in this. Boeing said the cash flow was helped by “higher commercial deliveries, favorable receipt timing, and a tax refund,” as analyst Robert Stallard of Vertical Research put it. The tax refund was $1.5bn, a huge chunk of the cash flow touted by Boeing.
Oct. 24, 2022, © Leeham News: The question to Boeing CEO David Calhoun was put in levity. His response was telling.
Susanne Clark, the president of the US Chamber of Commerce, noted before last month’s Aerospace Summit that Calhoun assumed the CEO position in January 2020.
“It’s been a long 10 years,” she postulated.
“Yes, it’s been a long 20 years,” Calhoun replied.
These two sentences couldn’t describe the situation at Boeing more clearly.
Although Calhoun had been on the Board of Directors since 2009, including serving as lead director, the challenges he faced with the 737 MAX grounding were greater than he expected. Two months after becoming CEO, the COVID-19 pandemic erupted. And seven months later, deliveries of the 787 were suspended.
The MAX and 787 issues went on much longer than anyone expected. (The MAX challenges still aren’t over.) Recovery from the pandemic is going better than forecast.
The Chamber’s Aerospace Summit was an in-person event. The previous one was in March 2020.
Oct. 17, 2022, © Leeham News: The aerospace supply chain faces new strains due to rising energy costs, Airbus CEO Guillaume Faury said last week.
Bloomberg News reports that Faury said some suppliers are shutting down due to high costs.
“We see another thing coming, which is the consequences of energy prices skyrocketing leading to some suppliers trying to adapt, sometimes stop producing, waiting for the situation to normalize,” he said. “That’s very low in the supply chain, but it’s probably something new,” Bloomberg wrote. It was reporting on Faury’s appearance before the UK Aviation Club.
At an unrelated event last month, two top US suppliers said they continue to see financial distress in the supply chain. Some lower-tier suppliers had filed for bankruptcy and more may be expected.
Oct. 3, 2022, © Leeham News: Aerospace suppliers don’t lack demand. But they still have a long way to go to recover from the crisis brought about by the COVID-19 pandemic. The pandemic began in earnest in March 2020. While largely under control today, there are still COVID variants sending people to hospitals and deaths.
Jeff Knittel, the president of Airbus Americas, homed in on the fundamental question during the US Chamber of Commerce Aerospace Summit last month in Washington (DC). Knittel moderated a panel with suppliers Tom Gentile, CEO of Spirit Aerosystems, and Paolo Dal Cin, Senior Vice President, Operations, Supply Chain, Quality, Environmental, Health, and Safety for Raytheon Technologies.
“Is this the beginning or the end or the end of the beginning in terms of [supply chain] disruptions?” Knittel asked. “This has been painful for everyone, and outside our industry also. Where do you see us today in terms of the recovery and next steps for you and the industry?”
“I would say that the recovery has started for the supply chain, but we still have a long way to go,” said Gentile. At the July Farnborough Air Show, there were few orders announced. The whole story was the supply chain.
Sept. 26, 2022, © Leeham News: I sat down with Fred Smith, the founder and now executive chairman of FedEx, on Sept. 15 at the US Chamber of Commerce Aerospace Summit. The first article appears here.
The balance of the interview covered a wide range of topics. I’ll summarize them below.
Sept. 20, 2022, © Leeham News: Blake Scholl, the founder and CEO of Boom, the start-up company, continued to paint an optimistic picture about the Overture Supersonic Transport.
He told the US Chamber of Commerce Aerospace Summit last week that the Overture, a Mach 1.7 88-passenger aircraft concept, will revolutionize international air travel.
But Boom has big challenges ahead—not the least of which is that there is no engine manufacturer so far that has stepped up to provide an engine. The Big Three—GE Aviation, Pratt & Whitney, and Rolls-Royce—have either outright rejected participation or other priorities exist.
Sept. 12, 2022, © Leeham News: Widebody aircraft demand cratered during the COVID-19 pandemic. It’s still depressed.
But the chief executive officer of lessor BOC Aviation sees recovery in the works.
“We’re beginning to see quite a big pickup in demand for widebody aircraft,” Robert Martin told LNA in an interview late last month. “Not now but starting next year. What’s prompting that is people are beginning to realize that China will probably open in the fourth quarter this year for international traffic. Just to give you some statistics, if you go back to 2019, China outbound was more than 70 million passengers. Last year was 1.5 million, and so the amount of uplift is quite full.”