(Bloomberg) — As Boeing Co. lurches from one crisis to the next, there has been one constant for the beleaguered planemaker: Its predicament appears to be getting worse.
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From a freak accident that left a door-sized hole in the fuselage of an airborne 737 MAX, to revelations of poor manufacturing, and now a crippling strike that’s entering its second month — the American manufacturing icon hasn’t been able to catch a break since the first days of January. Cash is dwindling, aircraft production is weak, and the stock is headed toward its worst annual performance since the 2008 financial crisis.
Together, these events revealed quality gaps in Boeing and its supply chain, along with a quarter-century-long corrosive culture in which pressure over costs and schedule permeated the decision-making process. Earlier this year, customers finally revolted and the board changed leadership, hiring Kelly Ortberg in August out of retirement to reform the beleaguered manufacturer.
During his two months on the job, Ortberg made a series of crude moves. He fired the head of the Defense and Aerospace Department and tried to stop the strike by accepting a higher offer directly to the workers – a move that backfired and only hardened the union’s resolve.
Core areas
His latest gambit came late Friday, when Ortberg said Boeing would cut 10% of its workforce, equivalent to about 17,000 people. He hinted that more dramatic steps may be needed to get the company back on track.
“We need to be clear about the work we face and realistic about the time it will take to achieve key milestones on the road to recovery,” Boeing’s chief wrote in an Oct. 11 memo to workers. “We also need to focus our resources on performance and innovation in areas core to who we are.”
The comments suggest that under Ortberg’s leadership, Boeing may redouble its efforts in the field for which it is best known: commercial aviation. The unceremonious departure of Ted Colbert as head of the defense and aerospace business has brought that subsidiary’s shortcomings into sharp focus — made more apparent on Friday when Boeing said the unit would take a charge of about $2 billion in the third quarter.
All of this adds to the perception that the company will need more time to regain its footing — the top FAA official said it will take years, not months, before Boeing stabilizes. When Ortberg, 64, hosts his first earnings call as CEO on Oct. 23, investors will want more details about how he intends to comprehensively lead one of the toughest revivals in corporate America, rather than just put out fires. .
“It’s all getting a little technical,” said Nick Cunningham, an analyst at Agency Partners LLP in London. “It’s not a coherent plan per se, it’s just another quarter of big charges, all of the kind that previous management would have had to take anyway, because they reflect current and evolving problems and are not part of the restructuring per se.”
Ratings agencies have warned Boeing that it could fall below investment grade, a move that would make the plane maker the largest so-called fallen angel in American corporate history. The company only has a small reserve plus the $10 billion in cash and short-term securities it needs to avoid sliding into its current position. The toll of the strike increases the urgency to tap the markets sooner rather than later for new financing.
Continuous loop
“For every problem that peaks and is resolved, more problems arise,” Ron Epstein, an analyst at Bank of America, wrote in a note to clients. “All the problems feed into each other, creating a continuous doom cycle with compounding negative impacts.”
Finally, Boeing will record a combined charge of $5 billion for its two largest companies when it officially reports third-quarter earnings, the company said Friday evening in a surprise announcement. Besides the defense and aerospace charges, Boeing will incur additional costs to delay the 777X again, leaving its largest widebody aircraft with a delay of about six years.
There is a lot that is unclear about Boeing’s transformation efforts. Increased production that was supposed to help cash flow has been undermined by the recent strike, and the defense and aerospace business continues to bleed money.
The company still needs to buy back Spirit AeroSystems Holdings Inc., which it parked in an ill-fated move nearly two decades ago, only to see manufacturing quality at its key supplier suffer as a result.
In the long term, Boeing may need to make some tough decisions on unprofitable areas such as its space endeavors. The department made international headlines a few weeks ago when its Starliner capsule returned to Earth without humans on board. It was an ignominious end to the first manned mission in orbit after NASA decided not to risk sending two astronauts back to the faulty spacecraft.
Ortberg has not given any media interviews since taking office, although he has communicated with customers, regulators and Pentagon officials and toured Boeing factories. An engineer by training, Ortberg spent most of his career at what is now Collins Aerospace, a highly regarded avionics equipment manufacturer that is a major supplier to Boeing.
As CEO, Ortberg sought to foster a sense of camaraderie and shared destiny with the workforce. He made a point of moving to Seattle from West Palm Beach, Fla., a departure from his predecessor, who had largely run the company from the other side of the continent.
Drain cash
When the strike began in mid-September, the CEO urged workers to embrace the future and not hold grudges, referring to the 2014 contract that cost them their pensions. He said senior management took solidarity pay cuts when Ortberg announced the furloughs to conserve cash, and that the latest job cuts will also include executives and management.
But with so-called touch labor accounting for less than 5% of the total cost of the commercial aircraft program, some observers wonder why Boeing is not moving with more urgency to end the work stoppages that are adding to its financial distress.
“It’s not the primary driver in terms of Boeing’s profitability,” said Ken Herbert, an analyst at RBC Capital Markets. “What are we waiting for here? And with every passing day, it becomes more turbulent and more draining of liquidity.”
The strike is spreading across Boeing’s supply chain, raising the risk that the recovery at the plane maker’s plants will be slow and stall even once workers return to their jobs. So far, Boeing has not said where the workforce will be reduced, or what it might cost the company in terms of severance.
“Can’t win”
Announcing job cuts in the middle of labor negotiations is also a risky strategy.
On the one hand, Ortberg wants to instill a sense of urgency and shared sacrifice, said George Ferguson, an analyst at Bloomberg Intelligence. But on the other hand, the move threatens to further antagonize the workers Boeing needs to restart jet production, at a time when demand for skilled mechanics is high.
Even before Friday’s announcement, the war of words intensified. Both Boeing and the union filed formal complaints accusing each other of violating the labor negotiation protocol.
“He can’t win without the union,” Ferguson said of Ortberg. “He needs their hearts and souls when they come back to Earth. “If there was ever a honeymoon for the CEO, it appears to be over.”
–With assistance from Siddharth Philip and Danny Lee.
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