Podcast: The Good, Bad, Ugly And Hopeful Story At Boeing

Amid ugly write downs and program woes, Boeing launches a new freighter, cashes in on an Airbus dispute and places a half-billion-dollar bet on the future. 

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Rush transcript

Joe Anselmo:

Welcome to this week's Check 6 Podcast. I'm Joe Anselmo, Aviation Week's editorial director.

Boeing's 777X program received a much-needed boost this week, winning an order from Qatar Airways that allowed it to launch a freighter version of the wide body aircraft. Qatar placed firm orders for 34 777X freighters with options for another 16. Qatar also threw in a surprise -- it's committing to buy up to 50 stretched Boeing 737-10s. Those aircraft replace an order for 50 similarly-sized Airbus A321neos that Airbus canceled in January amidst an ongoing legal dispute with the airline. Here to explain what it all means are Guy Norris, Aviation Week's senior propulsion editor, and Jens Flottau, executive editor for Commercial Aviation.

            Another topic for today: Boeing's recent earnings, which on one hand were dismal, but on the other contained signs that the company might finally be turning the corner, nearly three years after the onset of the 737 MAX crisis. Joining us to break all that down is Michael Bruno, Aviation Week senior business editor.

            Guy Norris, let's start with you. Until this week, Boeing's 777X order book had been shrinking. This new order really gives the program a shot in the arm, doesn't it?

Guy Norris:

You're right, Joe. In fact, you use the right word, ‘boost.’ I mean, that's just what Boeing needed at this time. They're still waiting for type inspection, authorization on the aircraft, which is the moment when certification can officially begin for flight testing. So, they're on this poised moment really in the history of the program. Having been delayed so long, this was the perfect time really, I think, to inject new life into it.

            We'd seen the firm order backlog dwindle, slowly erode away to about 311 I think it was. And now of course with this order from Qatar, it's looking more reasonable. It's back to, I think it's 334, I think is the assumed backlog now. So, building back up towards the pre-pandemic numbers that we'd seen in the backlog.

            Just from a big-picture perspective, it's really interesting what's happening here because it's not only just the launch of the brand-new cargo version really. It's also reshuffling the deck as far as Boeing's program plan was concerned.

            Remember when in fact Jens and I, and you, were sitting in the audience in Dubai in 2013 when this whole thing kicked off, there was not a single whisper of a cargo model at that stage, which you wouldn't expect. It was the -8 passenger and -9 passenger. -8 passenger, now that's shuffled even further down the schedule because of this. So, you're going to see the -9 enter service in late '23, the cargo model in '27 and the -8 model following thereafter. We don't know when yet.

            So it's an interesting dynamic to me. It also is representative of the changes going through the widebody business because of the pandemic. A freighter coming immediately after the -9, that wouldn't have happened I don't think, had it not been for the amazing transformation of what's going on in the air cargo business right now. So there you go.

Joe Anselmo:

Jens, there's a bit of a soap opera in the backdrop of all this, sounds like almost scenes from a bad marriage between Qatar and Airbus. What's going on here? Why did Airbus cancel the neo order and, and why is Qatar buying MAXs?

Jens Flottau:

Well, you're going to have to go back a few years to explain all this. The relationship between Qatar Airways and Airbus has been tense for years, emotional even, from both sides, and not in a good way. Akbar Al Baker, the CEO of Qatar, has rejected deliveries, deferred deliveries for more minor reasons than what's... why he's stopped taking deliveries of A350s this time. So, the Airbus people haven't been happy with him for years.

            Now of course, this whole thing exploded over the A350 paint and surface quality issues. Qatar Civil Aviation Authority has grounded the aircraft, 21 A350s. Qatar is suing Airbus for damages in a London court. Subsequently, Airbus has canceled the A321neo order that Qatar had placed. Subsequently, Qatar has bought 50 MAXs. So, it's been getting worse and worse and worse. And you just wonder how both sides will ultimately get out of this.

            I guess my point would be, it's not good for anyone in this. Obviously, it's not good for Airbus. We are at a point where even the IATA CEO Willie Walsh has come up and said he's concerned about this because of the way Airbus may be treating customers. I would argue that it's also not good for Qatar Airways because they need a certain resolution. They cannot depend on a single OEM in the long run, which they seem to be doing right now placing all these Boeing orders. So, it's not good for everyone. If you're not affected, it's a very entertaining dispute. But it's obviously a bad situation

Joe Anselmo:

Qatar's order of the freighters was no surprise, right? We've been talking about that possibility since last year, at least. It was the MAX order that was more of a surprise, right?

Jens Flottau:

Yes, the MAX order. And I have to caution, it's a memorandum of understanding so it's not yet an order. And I'm saying this because I wouldn't rule out an out-of-court resolution of the Airbus/Qatar conflict at some point in the summer. And whether that translates into the 321neo order coming back, I don't know. It's speculation of course. But let's just for now say it's not yet a firm order.

            The cargo order was not a surprise. Qatar has been big in the cargo business for many years. They operate a large fleet of 777s and they've talked about launching either the 350 freighter version or the 777. That they're not launching the A350 is clear, so they went with Boeing.

Joe Anselmo:

Guy, these two orders at list prices, it's a $27 billion injection to a company that could really use the cash, huh?

Guy Norris:

I was just going to say, just to follow on from what Jens was saying. Aside from the mercurial aspect of the jilted lover, we might say, of Qatar Airways, I think it's a real shot in the arm for the MAX program too. At a time when things are, as you mentioned in your introduction, the signs of slow turnaround are beginning to be seen.

            But the key thing about this is it's the -10 we're talking about. And remember, Wall Street's being crying for Boeing to make a move on a substantive new program that's going to take on the A321 head-on. And of course, the whole time they've been saying, "Well, we've got this thing called the MAX 10, which about holds the same amount of passengers, can go across 90% or more of the ranges that most A321 operators will be using it on. And hey, by the way, it's actually starting to pick up some significant orders now."

            You look at United, they ordered 150 of these things last year. So it's starting to build some major momentum. It's still in flight test, of course, so, certification is still out there. But there's obviously a confidence growing, I think, on the baseline marketing of this, that wasn't there last year, and definitely wasn't the year before. So I, I just think it's interesting that Qatar sees this as a viable alternative. It's not just a political football, so interesting.

Jens Flottau:

I'd just like to go back to the freighter market again for a moment. Obviously, Boeing has owned the segment for years or even for decades. And now we're in the situation where a lot of things are changing. Airbus launched the A350 freighter. Now Boeing, the 777X freighter. We know the ICAO limitations are coming up in, I think, '27, '28. So Boeing needs to find a solution for the 767.

            I'm not sure, if Airbus is serious about making inroads into the cargo market, that the 350 freighter is enough. Like what's on the Boeing side, the 777 is probably not enough. So, we might be at a point where more new models will be launched or have to be launched. And I'm just curious to know, Guy, I mean, is there going to be a 787 freighter at some point?

Guy Norris:

Honestly, Jens, I was thinking the same thing this week. I mean, you're right. You mentioned the ICAO limitations, the emissions protocol, which is going to come in and prevent new deliveries from '27, '28 of new build 767s and the current 777 model, which as you know, is still a huge part of Boeing's Everett production skyline right now, particularly with the popularity of the freight market.

            So, I think literally now there must be studies, serious studies, going underway into, "Okay, we've already built in the capability for..." And Boeing does this, has done this since the days of the 707. This can be a freighter. They did it with a 787, despite the fact it's a composite structure. And I think they've got to be seriously studying it now. Now what they need to do is to make the 787-9, which is probably the most optimum of size to fill that gap, they'll need to dramatically beef-up the maximum zero fuel weight capability of that airframe.

            So that's a big investment, it's not an insignificant thing. You don't just take the seats out and put a cargo door in. It's a major, major program. So therefore, it's a big cost. Boeing doesn't want to spend that much money at the moment. So, it's going to have to play this balancing act again. But the clock is ticking, '27, I mean, five years, that's all we're talking about. And that's basically the sort of timeline we're talking about.

            Look at the 777X freighter timeline. It's five years from now. And that's not just a number that they pick out of the sky. That is a schedule that works all the way backwards and includes a little bit of leeway, but not much. So, you bet your bottom dollar, they've got to be thinking about what to do on the other market, the other sectors. And the 787 has got to be in that, at least being in the study area now.

Joe Anselmo:

Well, speaking of Boeing, let's bring Michael Bruno into the conversation. Michael, thanks for your patience in us getting to you. But Boeing's earnings for the fourth quarter were pretty dismal, $3.5 billion charge on the 787 program, another $425 million charge on [KC-46] tanker. Their tanker charges are now more than the value of the initial development contract they won. But you say there's reason for hope, tell us why?

Michael Bruno:

Well, so first of all, go back to what Jens and Guy were just talking about. Guy made the great point that whether you're looking at traders or new midsize aircraft or whatever, Boeing doesn't want to spend the money. And it's very evident why, it's because they really don't have the money despite what seems like lots and lots of money on their balance sheet.

            And I'll explain, I mean, Wall Street investors, financial analysts, they've all gotten quite used to Boeing reporting a lot of red ink in its quarterly and its annual financial results, in recent years. And I won't rehash the recent history, but we just got the fourth quarter earnings and they also mount up for the full year '21 results. And it was just more bad news. The company lost $4.2 billion in net earnings for the fourth quarter. For the whole year, it was 4.3 billion. There was a little money gained earlier in the year, but it turned out to be a loss in the end of $4.3 billion.

            These numbers are better than they were the year before. The net loss for '21 is half the net loss of '20, but revenue was down. It was down 3% for the quarter to $14.8, almost $15 billion for the fourth quarter. The company's net debt sits at $42 billion and it's hovered there for quite a while. Their cash and equivalence that they have on hand are $16 billion. And that's actually off from where it was at the end of September.

            So, a lot of numbers, I'm throwing out billions of dollars here. But the point is, Boeing isn't sitting on a cash pile that it can just go redirect toward a new aircraft or a new freighter version of something. It has to be very judicious with the money it has. But of course, this is all profit and loss I'm talking about. And that's financial engineering, to be honest. I mean, you tell me what you want your profit to be and good accountants will go make it that. Or you tell me what you want the loss to be and they'll figure out a way to get you there too.

            What Wall Street and investors increasingly track is the free cash flow that Boeing generates. This is the money that basically is left over on a quarterly or on an annual basis after you've paid off your immediate bills. The free cash flow is where you get the money to reward shareholders, either through paying dividends or buying back shares that are outstanding in the market. And here is where Boeing actually raised some optimism with everybody who owns a share. And that is because they reported almost 500 million in free cash flow.

            And this is a turn-the-corner moment for Boeing if it's sustainable. If they come back the next four quarters, the rest of this year, 2022, and every quarter they're showing more free cash flow on the books that they're recording, that's what investors want to see because investors are going to get paid back.

            Now, if you're an engineer, if you're a customer, if you're looking for a new aircraft, if you want to get a job, if you're looking for debt repayment, those are all different stories still. But when it comes to investors, they're getting some money back. And of course, if they're satisfied that could bode well for other people down the line.

Joe Anselmo:

Jens, the one interesting thing in those earnings reports was something we didn't hear. Boeing has yet to say what they're going to do in the narrowbody market to counter the tremendous success of the A321neo at Airbus. Everyone is wondering when Boeing will launch a new airplane. What do you make of all that?

Jens Flottau:

Yeah, I've talked to a few people after the earnings. And some of them have expressed disappointment that they didn't say more about the new aircraft. But it is, as Michael says, I think they know they have to do something, but they also know that they can't afford to do something right now. That really summarizes it.

Joe Anselmo:

And, Guy, you wanted weigh in on that topic?

Guy Norris:

I did, yeah. And I think this is fascinating because, as both Michael and Jens have correctly said, it's not a good time to be looking at where and how to invest in this new airplane. But what they are doing is they're investing in everything else but. So they're talking about model-based system engineering developments. They're working through processes and experimenting and proving these new practices in their military aircraft, the T-7 for example. They've appointed this sort of czar who's going to run this system when it gets going.

            So they're actually doing all of the foundational work that will be needed to springboard off. They're doing everything but actually do the airplane, right? The other thing is, a friend of ours, Richard Aboulafia, has been roundly critical of Boeing's excursion into eVTOLs with the Wisk program, for example, $450 million investment. I mean, surely they should be putting it towards the real core stuff.

            But to be honest, that is part of this new future that they're looking at. It's autonomy, it's electric propulsion. These are the sort of things which are going to be the future. I mean, Airbus has got its hands full with hydrogen and new concepts and the clean program. Boeing's got to do the same sort of thing and this is just part of it. So, I think, while Wall Street's still got to see an airplane, if you look behind the scenes, it's kind of happening slowly but surely.

Michael Bruno:

I want to underpin exactly what Guy just said. Because I think the Wisk investment, as time goes on, is going to be very telling for a couple of reasons. There's the up front, what Guy just said, the investment in automation potentially into eVTOLs if that market really does develop into its own sub-sector niche. But what's interesting to me on the financial side is, Boeing may have found a way to basically subsidize research and development on the commercial side of its house, as it has, as all defense contractors do, on defense side.

            If you're in the defense realm, you well know that the government pays for most of the research there. Even so-called independent research and development that companies do supposedly on their own, they actually get reimbursed for a good chunk of that too. It's a lot of reimbursement that the government pays for and the defense contractors don't like to go off and do their own research, because their shareholders don't like them wasting that money.

            On the commercial side, it's always been dependent on companies to fund their own research. But with Wisk, we're seeing an example of where you partner up with the venture capital side, with entrepreneurs somewhere else. Maybe they've unlocked the secret to subsidizing commercial research for the long term.

            The other thing to point out, I think it is worth watching what happens with the model-based engineering, digital twinning, as Guy has been covering a lot of. To me, we are going to need to see some benchmarks, but they're going to emerge at some point where Boeing says, "Look, we've made enough progress internally. We think we've skipped a generation when it comes to the engineering requirements or what it takes to have engineering capacity internally. We can now launch a new aircraft."

            We could all be caught off-guard someday in the not-so-distant future, when Boeing says that. I think we're all sitting around waiting for them to hire tens of thousands of engineers to rebuild an engineering department. That may not happen, they may have found a digital solution around that.

Guy Norris:

Can I just jump in, one quick point which I forgot to mention and Michael just brought this up. Boeing is deep and heavy into the subsonic demonstrator program that NASA is building up. They've got these wind tunnel models, they've been going on for a decade now into the transonic truss-braced wing. People dismiss it perhaps as a science project or something that's not really relevant to the future of single aisles. But this is a potential gateway to at least a near-term replacement for some of the lower half of the 737 family. It might be a game changer so ignore it at your peril, I would say.

Joe Anselmo:

Well, unfortunately we'll have to end it on that note. But thanks to the three of you for a really interesting conversation, one that we will continue in the coming weeks and months no doubt.

 Thank you also to our podcast editor in London, Guy Ferneyhough. That is a wrap for this week's Check 6 Podcast. Listen in every week by subscribing to Check 6 in Apple Podcasts, Google Podcast, Stitcher and Spotify.

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