This is an audio transcript of the Unhedged podcast episode: ‘Can Boeing come back?’
[MUSIC PLAYING]
Robert Armstrong
When you think of great American companies, the names that come to mind are companies like Coca-Cola, IBM, General Motors, Apple, Microsoft. They’ve all had their ups and downs. One great American firm that is having its downs right now is Boeing. Today on the show, can Boeing make planes great again?
This is Unhedged, the markets and finance podcast from the Financial Times. I am Rob Armstrong, coming to you from fabulous New York City, which is the location of Unhedged world headquarters. And I’m joined today by Claire Bushey, who is the Financial Times’ Chicago correspondent. Claire, how are you?
Claire Bushey
Fine, thanks. How are you, Rob?
Robert Armstrong
I’m really glad you’re on the show. I’m really interested in this company because it has been a great company. It’s been around for decades and decades. Returns to investors have been great. But now we have to ask a very rude question about them, which is: can they make and deliver airplanes to their customers?
Claire Bushey
Well, that is definitely the question that the ratings agency analysts all want answered because their credit rating is kind of hanging in the balance.
Robert Armstrong
If I remember correctly, they’re at the lowest rung of investment grade. So if one more thing goes wrong, they get knocked down to junk.
Claire Bushey
Yeah. The thing that really matters to Boeing like fundamentally as a company is can they make and deliver commercial planes? It sounds incredibly simple and dumb, but like, they’re struggling to do it at the moment.
Robert Armstrong
Are they delivering any planes this year? I mean, just give us the . . . What’s the revenue picture look like for them?
Claire Bushey
Certainly they have been delivering planes. I didn’t mean to create the impression that like, no planes are coming out of Washington State. That’s not true. But at the moment, their factories in Washington state are stopped because their workers have walked off the job as they try to improve their pay and benefits. And earlier in the year, they were slowing production because if you remember, they had this really high-profile quality failure earlier in the year where a panel of the fuselage on a 737 Max flew off the plane at 16,000ft.
Robert Armstrong
I don’t know a lot about planes, Claire, but my understanding is that sort of thing is not supposed to happen.
Claire Bushey
It is frowned upon, yes, particularly by the passengers and crew of the plane where it’s happening.
Robert Armstrong
Right. So there’s a question about labour relations and there’s a question about quality control, which actually goes back to the earlier — they had two Max crashes and there was questions about that design as well.
Claire Bushey
Yes. And it’s actually two separate problems, because the Max crashes were a failure of engineering and what the door panel incident was, was a failure of manufacturing. Basically, you can break it down to like the first time people followed the specifications and the planes crashed. The second time, they didn’t follow the specifications and the plane had a panel fly off.
Robert Armstrong
The people who were building the plane did not follow the specifications.
Claire Bushey
Correct. Typically, you want your doors bolted on and this was not OK.
Robert Armstrong
I mean, those issues have to be related at some level, the labour issue on the one hand and the quality control issue. You would think that this is a highly complex manufactured product. These two issues are related.
Claire Bushey
Yes. I remember being on an earnings call after the crashes and one of the analysts who’d been sort of doing this for a long time and he simply asked, what happened? And I feel like the entire time I have been covering Boeing, that is the question to answer here. What has led to this diminution?
Robert Armstrong
So if we pan out a little bit and look at the question historically, there is a certain story about Boeing that basically the bean counters, rather than the engineers, got in charge of this plane company. And that was the beginning of all the trouble. It was run by a bunch of Jack Welch acolytes or whatever derogatory term you want to use. Do you think that is a fair analysis or a kind of caricature?
Claire Bushey
I do think it’s a fair analysis, although I think it glosses over. You know, there’s a lot of excitement about the new CEO having an engineering background. And I just think it’s worth pointing out that Dennis Muilenburg, who had the Max crashes happen on his watch, was also an engineer. But overall, I think this idea that Boeing became more interested in presenting improved financial returns to its shareholders and that they did that by squeezing the workforce, squeezing their suppliers; you can only do that for so long before eventually you have problems.
Robert Armstrong
I mean, it’s funny because that story really echoes with other American industrial stories. Decades ago, the big American car manufacturers — and I think of GM, but I think the others were probably involved, true — they just squeezed their suppliers to the last penny, to the point where the supply chain broke down and the cars weren’t working optimally.
Claire Bushey
GM is a reference that I have heard before from other people who are very familiar with the aerospace supply chain, and they talked about that, how the architect of that particular strategy for GM. Like you still can’t be at a Detroit dinner party without like you mention his name and somebody spits.
Robert Armstrong
(Laughter) Spits on the ground. It’s like being in the northern UK and somebody mentions Thatcher and then somebody . . .
Claire Bushey
(Laughter) Yes, exactly.
Robert Armstrong
An icy breeze flows through the room. So this is a story often told. I guess another thing was there was a move away from Washington to like Chicago. You know, the headquarters moved away from the factory.
Claire Bushey
Yes. And it was done on purpose to be away from the factories. And, you know, that was not lost on the workforce whatsoever. But Phil Condit was the Boeing CEO who was the architect of that move. And he said at the time that they wanted to move the corporate centre away from Washington state so executives wouldn’t be . . . God, I wish I could remember the exact words, but it was something along the lines of don’t want them caught up in the day-to-day of running the business.
Robert Armstrong
Yes. Who wants that?
Claire Bushey
Yes. And like, what are you doing, sir?
Robert Armstrong
What do you wanna be caught up in? Right. My God.
Claire Bushey
It was a pretty breathtakingly remarkable statement. You know, so they moved the headquarters to Chicago and they never had more than like 800 people here. It might be less than that. It’s maybe 500.
Robert Armstrong
I should mention that Claire is coming to us from windy Chicago.
Claire Bushey
Yes. And I have been to the Boeing office in Chicago, which is no longer the headquarters, by the way. That like in 2022, they moved it to Arlington, Virginia, ostensibly to be closer to their key client, the US government. But it really makes about as much sense as having it in Chicago.
And very significantly, when the new CEO was chosen, Kelly Ortberg, when he started the job in August, he was living in Florida and he moved to Washington state, bought a house. And that has generally been viewed quite favourably across stakeholders. Everyone’s pretty happy he did that.
Robert Armstrong
So, Claire, I am looking at Wall Street estimates for per share earnings for Boeing and for 2024, so far from making money, it’s gonna lose $14 or $15 a share, which is very bad however you slice it. You know, if you look back to 10 years ago, even six years ago, this was a company that could earn $10, $15, $17 a share in a great year. And according to Wall Street, it’s gonna be 2027, 2028 before we even approach those kind of numbers again. Why does this take so long and what needs to be done to get Boeing flying right, as it were?
Claire Bushey
Well, I mean, it takes a long time. First, just aerospace cycles in general are very long. You know, designing, launching a plane is something that takes a long time and . . .
Robert Armstrong
So they’re developing new products. They’re not just trying to get back to being able to make the stuff they used to make.
Claire Bushey
That’s actually a really important question. Boeing has had it hang over its head for years now about when they are going to launch their next clean sheet airplane. And Ortberg, the first time he spoke to investors last week, he specifically brought that up. And I think to me it seemed like he was saying we’ve got a whole bunch of things that we need to get through before then. But I want you to know I’m thinking about this because at the end of the day, as he said, we are a plane maker. We make planes. We must launch a new plane in order to . . . Well, he didn’t go into this part, but in order to continue to be viable against our arch-rival, we must launch a new plane.
Robert Armstrong
That’s Airbus. And what is the kind of new plane? Do you know, what is the kind of new plane that the world wants? There was a period during which everybody wanted a humongous plane, and now they wanted smaller planes. Like what does the next generation of commercial aircraft look like? Do you have any thoughts on that?
Claire Bushey
I think that’s a good question. I don’t think there’s an answer to it yet. Prior to the Max crashes, there was talk of a new midsize aeroplane. So, you know, a little bit more seats than the 737, but not as big as the wide body is. So it’s not clear exactly what Boeing is going to launch at the time they’re going to launch it, but they have got big hurdles to clear before then. And Ortberg kind of laid out what he sees as what they have to do and they have to stabilise the business first and foremost. And that involves figuring out what they need to do to end the strike and making sure that they hold on to their credit rating.
Robert Armstrong
They’ve taken one step forward with the credit agencies and with the balance sheet. Yesterday, they announced they were gonna sell new shares and raise $20bn. So that should help the balance sheet a little.
Claire Bushey
Yes. I don’t know whether their current shareholders will love being diluted but . . .
Robert Armstrong
Well, the stock didn’t crash, right, which I took to be a good sign. I don’t think they were happy, but they didn’t . . . It wasn’t a rush for the exit. I think this news was expected.
Claire Bushey
And they need the money. Like, it takes $10bn to run Boeing. Like, you need $10bn in cash. And so at the end of the third quarter, they were at $10.5bn. So like it was time to go looking for more money.
Robert Armstrong
Yes. One idea that I have heard kicked around, Claire, and this is the kind of idea people always kick around because it makes investment bankers money. But people have talked about Boeing spinning off or selling non-core businesses, namely the defence business and/or the space business. Do we know if that’s really on the table here and do we think that would help?
Claire Bushey
So they said last week that they are in the midst of a total portfolio review. And part of what they wanna do is they wanna focus on what they do best. And at the end of the day, Boeing’s a commercial plane maker. Space is one part of the defence business. They are not going to get rid of the defence business as a whole. The US government is a key client. It’s just, you know, even though they are taking a bath on several fixed price contracts, you know, they are going to continue with those contracts. You know, Kelly Ortberg said walking away is not an option.
The space business specifically, it has been rumoured for a long time that, you know, maybe that would be a thing that could be sold. They had a really embarrassing situation over the summer where their Starliner spacecraft, which is charged with ferrying astronauts to the International Space Station, it took two astronauts to the space station, and then it became a question about whether or not it was safe to bring the astronauts back to earth on that. And so Nasa ended up making the decision in August that they are going to use SpaceX to bring those astronauts back instead.
Robert Armstrong
That is humiliating.
Claire Bushey
It’s not great. Nasa is making this decision out of, you know, a history of having failed to listen to some of their own staffers with catastrophic, deadly results. So they’re certainly coming from a place of like erring on the side of . . .
Robert Armstrong
Extreme caution.
Claire Bushey
Extreme caution. But it’s still a prestige blow for Boeing. And, you know, that particular programme, the Starliner, like that’s never making money. The space station’s being decommissioned in 2030 so it’s like there is no time left to do like their contracted runs and still make money on this.
Robert Armstrong
I guess it’s sort of a two-sided thing. On the one side, just thinking as investor, you might think if they got rid of space, you’d be like, phew. They need to focus on making commercial planes, which is what makes the money, and they need all their attention on that.
On the other hand, being in the space business sort of speaks to your corporate aspirations, your cutting-edge technology, your ability to innovate and all that stuff. So it’s actually, from an investor point of view, it’s kind of a hard call what you would want the company to do there.
Claire Bushey
And it might not even be their call in the end because in order to have a sale, you need to have a buyer and they’re not making money on some of their space programmes. So like . . .
Robert Armstrong
Yes. Come to Unhedged for your cutting-edge economic commentary. In order to sell something, someone has to buy it. (Laughter).
Let’s conclude this conversation with a very broad question, Claire. Is Boeing too big to fail? I think there’s a general feeling among anyway the analyst community for what that is or is not worth, that eventually this company has to be back up and running and strong again because the world needs two plane companies. It’s simply not enough just to have Airbus have a monopoly. And America needs Boeing to work. So is Boeing too big to fail?
Claire Bushey
I certainly think it is. And for the reasons that you bring up, there is no airline in the world that only wants to have one supplier of aircraft. And while there are, you know, other plane makers — Embraer, you know, is focused on regional jets that don’t, you know, have the . . .
Robert Armstrong
The big daddies.
Claire Bushey
Yeah. Thank you. And so customers need it for purposes of maintaining the duopoly. And then the US government needs them for providing weaponry, aircraft, satellites, all sorts of things that you need in order to run a military. And Boeing is a key player in that.
Robert Armstrong
So is it fair to say the question facing investors, it’s not will Boeing recover, it’s how long do I have to wait until this company is strong and generating adequate free cash flow for a good return?
Claire Bushey
I think so. Boeing was known under the CEOs who, you know, their tenure is now being re-examined. It was known for throwing off cash. And I think analysts were taken by surprise when they were told on last week’s call that 2025 is going to be another use-of-cash year. And so it’s just gonna take time. I mean, they did not get in this position overnight. They are not going to get out of it overnight.
[MUSIC PLAYING]
Robert Armstrong
On that timeless piece of wisdom, Claire, we will be back after a short break for Long and Short.
[MUSIC PLAYING]
Listeners, welcome back. This is Long and Short, that portion of our show where we go long things we like and short things we don’t like. Claire, do you have a long or a short for us?
Claire Bushey
I do. I am very long on the sitcom Superstore, which I have finally started watching per a friend’s recommendation. She bothered me for years about it.
Robert Armstrong
I love it. It’s a great show.
Claire Bushey
Yeah, it’s fantastic. It shows the lives of like, normal working people and it makes them the central characters. And it’s like, that’s not something you see a lot, actually, and . . .
Robert Armstrong
And they’re funny and quirky. And I had to get my nephew on that show because he had his job was at Target for a while. And I was like, do you know about Superstore, which is basically about your life? And he was like, what are you talking about? Just shows you the young people don’t appreciate the good things in life. (Claire laughs) Speaking for myself I am, and this is a big change of opinion for me, I’m long Halloween.
Claire Bushey
That’s a change?
Robert Armstrong
That’s a change. You know, I’m a parent and when my kids were small and I had to like deal with all the Halloween and having children who are full of candy for a week straight and all that, I was like, grumble, grumble, grouchy dad, Halloween. And now my kids are big and don’t care about Halloween and I’m sad. And the little monsters really grow up fast and it’s a terrible thing.
Claire Bushey
Well, can I say something that I’m short on that’s related to Halloween?
Robert Armstrong
Please.
Claire Bushey
I am so like, upset and against people who are trying to suck the eeriness and spookiness and the spirit of anarchy out of Halloween because they want to do trick or treating on the weekend during daylight hours. Can’t stand it.
[MUSIC PLAYING]
Robert Armstrong
Yeah. It has to be outlawed. On that spooky and otherworldly note, we will be back in your feed listeners later this week.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Rob Armstrong. Thanks for listening.
[MUSIC PLAYING]
It’s been a tough year for Boeing. It started with a door panel falling off of a plane in mid-flight. Then machinists at the company went on strike. This week, Boeing announced it would raise $19bn in an effort to keep its credit rating from being cut to junk. Today on the show, the FT’s Chicago correspondent Claire Bushey joins Rob Armstrong to discuss whether Boeing is too big to fail – and if it’s worth the wait for investors. Also, we go long Superstore and Halloween.
For a free 30-day trial to the Unhedged newsletter go to: http://www.acphonor.com/interactive/https://www.ft.com/unhedgedoffer
You can email Robert Armstrong at [email protected] and Katie Martin at [email protected].