Dear Fellow Forlorn New Jetliner Lovers,
“Let’s just say you’re at the market buying potatoes. And that ten-pound bag of potatoes costs…$400.” Jack Donaghy’s economics lesson to his maid on 30 Rock was meant as a funny comment on the rich being removed from reality. But sometimes, outlandish cost guesstimates reflect a different truth. For example, outgoing Boeing CEO Dave Calhoun’s recent comments to CNBC that his successor will be responsible for “a $50 billion investment” to develop a new jet is ridiculous. So ridiculous you have to ask why he’s conjured up such a preposterous figure.
First, $50 billion is a joke, the equivalent of Donaghy’s $400 bag of potatoes. The new jet family is likely to be a single aisle. In 2011, then-CFO James Bell estimated the cost of a new single aisle family at $10-12 billion. With inflation, that’s around $15 billion today. Embraer, admittedly a leaner and better-run company, did the smaller E-1 and E-2 series for around $2 billion each. And fun fact: Boeing Commercial’s total Independent R&D budget over the last 25 years (1999-2023) was…$50.3 billion. That covered a lot of programs.
Second, Calhoun knows that $50 billion is a joke. C’mon. He doesn’t know the industry, but he does know money and finance; Oscar Wilde said that some people – like him – know the price of everything and the value of nothing. He’s been affiliated with Boeing since 2009. He made the cost-based decision as CEO to shelve the New Midsized Airplane, which was expected to cost around $20 billion and would have been larger and more expensive to develop than a new single-aisle jet.
Third, throwing around a nonsensical $50 billion nonrecurring bill clearly damages the business case for a new jet, which fits in with a pattern with Calhoun. In June 2022, he stated, “If you go back in history on new airplanes, they were never really started until the propulsion package brought somewhere around a 10%, 15%, 20% improvement over the last one.” This was complete nonsense – the 777, 767, 787, 737NG, and others didn’t have a 10-20% advantage over the competition. They were modestly better, and when your airline customers have single-digit profit margins, being modestly better wins.
A few months later, Calhoun said that Boeing would not introduce a new jetliner until the mid-2030s. Basically, he told airlines that it was time to get in line for an A321neo. They listened to him. As a result, Airbus scored over 1,300 A321neo orders last year, a record by a wide margin. So, the A321neo order book is around the same size as the entire 737MAX order book. Calhoun really just doesn’t want to spend the money on a new jet, presumably because it would detract from the message to investors that most future cash flow will be returned to them, and not to engineers. His compensation is tied to this stock performance, of course. Boeing’s market position is mere collateral damage.
Fourth, consider the implications of not doing a new jet. After a multi-decade hiatus from launching a clean-sheet product, and with Calhoun’s nothing-new-this-decade message, Boeing continues to send a message to regulators, Congress, customers, and the traveling public that they are no longer an engineering company. They’re also alienating engineering recruits, making the demographics of their engineering department even more challenging. The ongoing de-prioritization of engineering will do nothing good for the company’s efforts to promote a better manufacturing culture, which means nothing good for quality and safety. Meanwhile, that loss of market share and business volume is having a ripple effect across the supply chain. Because the 737 is a US-centric production program, there are ripple effects across the economy. There are also national security implications: Boeing’s ability to design and create new aircraft has atrophied across the board – civil and military.
Fifth, consider Calhoun’s position. According to Boeing’s 2024 Proxy Statement, for some reason I can’t comprehend, he earned almost $33 million last year (Boeing’s business unit chiefs, paid just one-third as much, might want to start a union). It’s a reasonable bet that his net worth is several times that amount. According to the proxy statement, even though he’s been forced out of the CEO job, he wants to stay on Boeing’s board, presumably to continue trying to stop the company from doing the right thing and launching a new jet. Clearly, this is his long-term mission.
I’m not at all against high levels of wealth, and I won’t wade into the debate over excessive executive compensation, but consider the impact to Boeing of Calhoun’s cash lust. The stock price consequences of doing, or not doing a new jet are debatable – Boeing’s stock performance has been miserable for reasons that are completely unrelated to new product development spending, and launching a new jet might even have a galvanizing effect on investor sentiment toward the company. But the net result of this stock performance is likely an accounting error for a very wealthy man.
By contrast, the impact of Boeing doing a new jet or not doing a new jet, from the standpoint of US economic competitiveness, US national security, and peoples’ jobs, is immense. And yet, assuming he made that calculation, it appears he simply wants to focus on his personal wealth while completely ignoring the company and the greater good.
Jack Donaghy’s ignorance of real-world costs was humorously obtuse. What’s at work with Calhoun seems to fall more under the heading of evil. Lawful evil, to put it in Dungeons & Dragons terms, but evil nevertheless.
I won’t end this letter railing against sociopathic jetliner development cost inflation. Instead, I’ll end on a note of hope. Surely, there’s someone talented and hard-working out there who’s willing to take the CEO job and accept a mere $33 million per year in compensation – and I know this sounds crazy – without trying to go further and game the system, in order to get even richer. There must be someone who won’t deliberately sabotage the company’s future for their own personal gain. If Boeing gets rid of Calhoun completely, and replaces him with the exact opposite kind of leader, the company can still recover.
Yours, Until the Board Appoints Sam Bankman-Fried As CEO,
Richard Aboulafia