Dear Fellow American Defense Industry Horror Story Watchers,
Let’s say a casual industry observer hadn’t been paying much attention to aerospace, nor to Boeing, over the last three years. I’d recommend they read my December 2019 letter. In it, I wrote, “In 2020, [Dave Calhoun] will choose either to be a fantastic nine-month CEO, or he will stay on, becoming a potentially disastrous multi-year CEO.” Now, a brief update: he stayed. That’s really all they need to know.
Actually, they should also know that Calhoun has made a very bad situation much worse. There’s no room here for full or even partial descriptions of program disasters and snafus afflicting Boeing, but here’s a quick litany: 787 production, or lack thereof. KC-46 overruns and delays. 777X. 737MAX10 and MAX7 certification, or lack thereof. Air Force One overruns and delays. Slow 737MAX8/9 deliveries. T-7 overruns and delays. MH-139 delays. With apologies to Tolstoy, all happy programs are alike, but every unhappy program is unhappy in its own way.
The future, somehow, incredibly, looks worse. Air Lease’s Steven Udvar-Hazy and Bank of America’s Ron Epstein think a 777X cancellation is possible, after years of delays and overruns. Incredibly, it transpires that Boeing has already built around 30 777Xs, even though it won’t enter service until 2025, at the earliest, and these planes could easily require expensive modifications (as with 787 and 737MAX).
At a recent investor conference, Calhoun said it would be another two years, at least, before Boeing launched a new jetliner. That frees Airbus to grab 70% of the market, since everyone wants an A321neo. Boeing’s competing 737MAX10 doesn’t have a clear path to certification, and has gotten less than 20% of the A321/MAX10 middle market. Also, since it will have been 20 years since Boeing launched an all-new jetliner, it isn’t clear whether they’ll have the talent needed to start a program in two years anyway. With this announcement, Calhoun is effectively surrendering to Airbus.
Also, this month’s surprise news that the Air Force’s NGAD combat aircraft has entered Engineering and Manufacturing Development means that there’s little chance that Boeing is the mystery prime behind this new combat aircraft. When NGAD was just a prototype, Boeing could have done that, but creating a missionized aircraft is not something the Pentagon would trust Boeing with at this point. Fool me once, shame on you. Fool me twelve times, shame on me.
Boeing’s stock price tells a more direct story: down 36% year-to-date, which is remarkable given its status as a top three US defense prime while defense spending at home and abroad continues to grow off of record levels. Northrop Grumman is up 73%. Lockheed Martin is up 60%. General Dynamics is up 10%. Raytheon is up 5%. It’s a great time to be an aerospace investor. Unless you own Boeing stock. To be fair, the commercial market is a drag on Boeing due to the pandemic, but -36% is an F minus on this year’s report card.
Question One: How did this happen? I spent the previous decade chronicling Jim McNerney’s disastrous tenure as CEO (my final commentary, which I stand by, is here). Calhoun, again, is somehow worse (or, perhaps, he’s simply doing nothing as the enormous McNerney era bill comes due). But one thing McNerney and Calhoun have in common is they’re from the Jack Welch era at GE (along with some key people Calhoun has surrounded himself with). That Welch management legacy is starting to look grotesque in the rear-view mirror.
I’d recommend David Gelles’ just-published book on the subject, The Man Who Broke Capitalism (Thomas Gryta and Ted Mann’s Lights Out: Pride, Delusion, and the Fall of General Electric is another useful account). It’s all in these books: the Welch (and McNerney and Calhoun) single-minded emphasis on shareholder returns above long-term thinking and new product development, the neglect of (and open contempt for) the people who actually develop and build the company’s products, and of course the disaster that ultimately befell GE when this horrible management philosophy went unchecked for many years. It may befall Boeing, too. And Welch also created a fall guy successor, to take the blame after things went off the rails (for McNerney it was the hapless Dennis Muilenburg; for Jack Welch it was Jeff Immelt).
Question Two: What happens next? Boeing can be saved. It still has good people, good legacy products, and a legacy position in an industry with very high entry barriers. It would just take new management, before things get even worse. Normally, the share price disaster would result in decisive action by the company’s board. But McNerney and Calhoun packed Boeing’s board with some of the planet’s most indulgent people, to put it charitably. Gelles’ book recaps Calhoun’s assertion that Boeing’s problems all happened before him, due to a complete lack of oversight, while pointing out that Calhoun neglected to mention that he was a prominent member of the very board that should have provided oversight.
Without new management, what happens, other than continued degradation of Boeing’s position and prospects? Again, perhaps GE provides an answer. In the aftermath of Welch’s reign, GE’s downward slide, coupled with a worship of returns, coupled with a management playbook that simply isn’t that deep, produced a company breakup. I wrote about the prospect of this happening to Boeing here.
Breaking up Boeing is a perfectly awful idea. Boeing’s woes are due to management, and little else. It was once the world’s largest aerospace company, and this is an industry that favors critical mass. There are strong synergies and, often, market counter-cyclicality. There would be huge regulatory challenges to a breakup (unless there’s a Republican administration). The consequences for the defense industrial base, in terms of competition, would be profound (although, again, a lot of the damage has already been done there). And the breakup of a national aerospace champion could have consequences for the country’s employment base, export standing, and overall economy.
But again, there’s the GE precedent, and what Boeing’s GE-trained management says and does. They worship returns, but returns have been disastrous, due to their actions, and they won’t change their actions. Other than a breakup, what could give them the returns they seek?
To end on a cheery note, I’m reminded of Matt Taibbi’s legendary description of Goldman Sachs: “…a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Yours, ‘til Some Kind of Palatable Scenario Presents Itself Here,
Richard Aboulafia