:: June 2016 Letter ::
For analysts like me, Boeing today can be summed up nicely by the following three quotes:
“If I told you that I am and want to be a market leader in the fighter business, you all would tell me that I’m an idiot. Let’s be real clear: we lost JSF.”
“They are attacking us with price in every single campaign. And as a result of that, you know, we’re being pushed to the wall.”
“Maybe you haven't been keeping up on current events, but we just got our asses kicked, pal!...That's it! Game over, man! Game over!”
The first quote was from Leanne Caret, President and CEO of Boeing’s BDS unit (in Aviation Week, June 20). The second was from Ray Conner, President and CEO of Boeing’s BCA unit (in a speech to employees in March). The last quote was from Private Hudson, a space marine played by Bill Paxton in the classic movie Aliens. But if Boeing had a third business unit, Hudson would be qualified to lead it. He conveys the right level of defeatism. After all, BDS, apparently, is retreating from its largest and most profitable business, which is ill-advised. BCA, apparently, is suffering from commodity pricing, which, even if occasionally true, should never be acknowledged. Hudson’s marine squad, of course, is being torn apart by space aliens, which perhaps puts the other executives’ problems in perspective.
Consider BDS. Boeing lost JSF in 2001, but so what? Nobody over the last 15 years would have said that losing JSF meant the end of Boeing as one of the world’s big combat aircraft houses. BDS’s fixed-wing demoralization is actually the result of last October’s LRS-B competition loss, to Northrop Grumman. But consider Caret’s stated BDS priority core markets. These include aircraft sustainment, UAVs and other drones, space systems, helicopters, and military derivatives of commercial jetliners. Combat aircraft are conspicuously absent from the list.
But none of these are fast growth markets (some, like helicopters, are actually shrinking). Military jetliner derivatives sound great, but all the upcoming competitions (JSTARS, Rivet Joint, Compass Call, EP-3 recaps, etc.) are heavily contested, especially by less expensive business jet-based models. Even if Boeing wins one or two, that will merely replace P-8 revenue as it ramps down in the next decade. And none of the new priority markets can come close to replacing the revenue and profits of Boeing’s fixed-wing business. Last year, Boeing Military Aircraft provided $13.5 billion in revenue out of BDS’s $30.4 billion total.
I’d propose an alternative strategy. In addition to pursuing those other segments, BDS should re-double its combat aircraft efforts. Aggressively lobby (as they have) for more USN Super Hornet/Growler procurement. Aggressively push F/A-18s for Canada, Kuwait, and India. Keep pushing for T-X. With or without T-X, discuss a new light fighter with Saab based on their T-X design. Push for that large Qatar F-15 deal, also pursuing that Silent Eagle squadron for Israel in exchange for Israel acquiescence in that Qatar deal. If nothing else, in a few years, rather than exit the combat aircraft market, Boeing should consider making a bid for Northrop’s aircraft unit.
And above all, BDS needs to return to an emphasis on engineering. Relying on other companies like Saab for design work may be necessary now, but it was one of the very worst directions the company took in the last decade (most spectacularly with the 787 development program). Relying on Lockheed Martin for the company’s LRS-B design was undoubtedly a contributing factor in the company’s loss there. The Soviets tried disaggregating design bureaus and manufacturing facilities; DoD, understandably, isn’t in love with the idea. Inadequate engineering resources are also likely behind the company’s damaging KC-46 development program. Finally, BDS needs to stay in the game for DoD’s Sixth Generation fighter requirements, and it needs to pursue these with its own engineers.
Then there’s BCA, which faces challenges, but is also enjoying record numbers (profits, revenues, and backlog). Yes, its profits are being pushed downward by the transition from the 737NG to MAX, and by the 777 output decline. It also faces the gruesome $30 billion 787 deferred production cost overhang, and the 737MAX9 continues to be clobbered by the A321neo. But BCA deliveries are in record territory, and headed higher, while profits remain strong. The 737MAX8 is doing just fine against the A320neo. Most of all, the company is in first place with its twin aisle jet product line. Again, commodity pricing should not play any kind of role in BCA’s thinking.
The strangest aspect of all of this is the role of Chicago, where Boeing corporate leadership continues to send very different messages. Indeed, CEO Dennis Muilenburg seems to have found a very useful role as a company morale-restorer. As he told Chris Davenport at the Washington Post this month, “We expect to be a prime in the fighter jet business for the long run...This is not a business we're getting out of at all.” Also this month, at the Bernstein Strategic Decisions Conference, he painted an exceptionally positive vision of Boeing’s jetliner unit. As he concluded, “So, strong market, unprecedented backlog, we see top and bottom line growth, and a strong cash return to our shareholders.”
This rift between Corporate and the two operating units may result from the absence of any kind of central messaging strategy. Or, it could reflect a genuinely different view of the world from Chicago. After all, as our Chinese friends say, the Emperor is far, and the mountains are high. The truth about the company may be found somewhere in the spaces between Chicago and Seattle, and between Chicago and St. Louis. But no matter how you view Boeing’s strategic position, in terms of messaging, confidence in the company’s products would do BDS and BCA a lot of good.
June will see the first Teal Aircraft Binder B-21 report. Other updates this month include the Trainer/Light Attack Aircraft market overview, plus the LCA, AMX, ALH, Learjet, and Tornado reports. Have a great month.
Yours, ‘Til Boeing Wins The Marine Orbital Assault Vehicle Program,
© Richard Aboulafia 1997-2006, All rights reserved.