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:: December 2019 Letter ::

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Dear Fellow C-Suite Watchers,

Person of the year awards go to people who did something noteworthy in the past year. Instead, why not appoint a person in advance, for the year ahead? That’s more exciting, since that person has yet to do the something for which he or she is being recognized. Incoming Boeing CEO Dave Calhoun is the perfect recipient of this, for the choice he will make. In 2020, he will choose either to be a fantastic nine-month CEO, or he will stay on, becoming a potentially disastrous multi-year CEO. This is a pivotal decision for Boeing, and for the industry.

Calhoun is replacing Dennis Muilenburg because the latter CEO’s year has been disastrous. The company’s communications with Congress, the FAA, international regulators, airline and lessor customers, suppliers, the victims’ families, and pretty much the entire outside world were a master class in bad crisis management. This month’s 737MAX line shutdown, with no guidance at all provided to suppliers, was the final swirl in a downward spiral. The company’s legal department chief, another key player in Boeing’s MAX strategy, has also departed.

Calhoun, by contrast, handles himself well in public, and hopefully can get MAX recertification back on track. Until the MAX returns, it’s important to have a stabilizing force at the top. Yet when Muilenburg was appointed in 2015, he was given a horrible hand to play, and Calhoun was part of that context. Muilenburg played his cards disastrously, but this context is important.

The seeds of the MAX disaster were planted years ago. As I wrote in my February 2013 letter, Boeing needs to rethink the relationship between engineering and management, and where engineers fit into the leadership team. They didn’t re-think, and Muilenburg inherited a mess.

The 737MAX crash victims’ families, while understandably angry, directed their anger away from the people that indirectly created the circumstances that led to the MAXs problems. They also helped drive out Boeing’s first engineer CEO since 2003. Again, Muilenburg’s public appearances were tone-deaf, but it’s also possible that he was the fall guy for a dysfunctional system that might just be re-asserting itself.

For the past two decades Boeing obsessed over Return on Net Assets (RONA). This destructive term simultaneously encapsulated both an overemphasis on shareholder returns and a diminution of engineers, who became just another expense to be minimized. Under CEO Jim McNerney, the RONA cult grew, but he also prioritized a destructive approach to labor-management relations. Engineers were further marginalized, and communications between aircraft people in Seattle and the top managers in Chicago were badly strained. But management did return a remarkable $78 billion to shareholders over the last 15 years.

This is where Calhoun’s resume is concerning. Aside from a few years at GE Aircraft Engines, he hasn’t been an aerospace executive. Much of his experience has been in top management in Jack Welch-era GE, the same as McNerney. Much of his recent experience has been with private equity, which can be useful in leaning out fat companies, but that’s hardly Boeing’s problem right now. And, as fellow commentator Scott Hamilton put it, “He’s been on the Board since 2009. He’s been part of the Board policy-making that led to the cost-cutting some say had deleterious impact on the development of the MAX. He’s been part of the Board decisions that shareholder value is the No. 1 priority at Boeing.” In short, Calhoun looks a lot like the people who brought Boeing to the position it’s in today.

Boeing’s focus on investor returns has “worked” for the past few decades thanks to investments made long ago. Today, it faces a huge challenge in the middle market (200/260-seats, 4,500-5,000 nmi). This market is growing fast, thanks to airline route fragmentation, and will keep growing for years to come. Airbus has been getting most of it. They’ve sold 3,200 A321neos since it was launched in 2011, or three times as many as the 1,049 757s sold over 25 years.

This is the wrong time for inaction. Boeing faces a serious crisis in this mid-market, one that will endure for years after MAX returns. Whether it builds the NMA, or a new large single aisle (my preference), it needs to do something. It can’t just take the R&D budget to repair the $15-20 billion hole dug by the MAX disaster and then resume aggressive dividends and buybacks.

Given this middle market challenge, Boeing needs a CEO with an understanding of aviation markets, program management, and most of all, engineering. That really isn’t Dave Calhoun. The best thing he can do, after the MAX problem is fixed, is to find a new CEO, one with this background, from inside or outside the company. If he does that, he’ll be regarded as a fantastic interim leader, the guy who declared victory and gracefully left the path clear for a better future.

If Calhoun does not do this – that is, if he just stays on and continues returning cash to investors and not investing in the future – that would make Boeing a poster child for late stage capitalism. A 50-50 duopoly can easily shift to 60-40, in Airbus’s favor, thanks to this mid-market situation. As McDonnell Douglas showed us in the 1980s, when market share begins to fall below a certain level, it’s hard to reverse.

The signs are not encouraging. As November’s Aviation Strategy noted, “Put another way, over the 12 months to end September 2019 Boeing increased borrowing by a net $10.7 bn but only $2 bn of this has gone to build up cash reserves while $2.3 bn went to cover the large Free Cashflow deficit and a remarkable $6.4 bn was used to support the share price through dividend payments and share buybacks.” [Emphasis added.] The buybacks have since paused, but dividends have continued. In other words, Boeing had a choice: either halt 737MAX production and jeopardize supply chain companies, or halt dividends. I’m thinking the decision didn’t take them long to make. Again, Calhoun was an active board member through this. In the future, they’re likely to make the same choice, prioritizing shareholder returns over new product development.

Ben Franklin, when asked what kind of government the Constitutional Convention had just established, said, “A Republic, if you can keep it.” This quote, now popular here in Washington DC, illustrates how fragile institutions can be. Just over 100 years ago, Bill Boeing, if asked what he had just established, might have said, “An aviation company, if you can keep it.” With Dave Calhoun’s appointment, we’ll learn a lot about Boeing’s future in 2020. We will soon know if Boeing will keep morphing into a shareholder cash return organization, or if it will return to its aircraft engineering roots.

With that, let’s hope for a better 2020, for Boeing, for the industry, and for the world.

Yours, ‘Til Next December Brings A New Person Of The Year For 2021,
Richard Aboulafia
 

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