Podcast: With New Leader, Where Does Boeing Defense Go Now?

Aviation Week editors discuss Ted Colbert's appointment and the challenges he faces as the new head of Boeing's $26 billion defense and space unit.

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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. There were some big changes this week in Boeing's executive ranks. Ted Colbert, the CEO of Boeing Global Services is moving over to become president and CEO of the company's Defense, Space & Security business. He replaces Leanne Caret, who had run the defense unit since 2016 and will retire later this year after spending nearly 35 years at Boeing. Meanwhile, Stephanie Pope, the vice president and CFO at Boeing Commercial Airplanes, is moving over to succeed Colbert at the helm of the Services business. So who is Ted Colbert? And what are the biggest challenges he will inherit as he takes over the Defense & Space business that had $26 billion in revenue last year?

Joining us to provide insights are three Aviation Week editors, Lee Ann Shay leads our MRO coverage and has interviewed Colbert numerous times. Lee Ann is joined by Defense Editor Steve Trimble and Senior Business Editor Michael Bruno. Lee Ann, let's start with you since I think among this group you know Colbert better than anybody else. He was the guy who walked back Boeing's audacious goal of generating $50 billion a year in aftermarket revenues. Tell us a little bit about him in his track record.

Lee Ann Shay:

Thanks, Joe. Ted did a really good job when he came into this role. Like you said, he came into an organization that had a lot of functionality with a goal of $50 billion in revenue by 2025. So it was also a short-term goal. He is an industrial engineer. And he really brought his expertise in looking at the business holistically, looking at supply chain, modifications, digital, parts, and examined the business not in isolated buckets, but looking at the interdependencies and how he could really help optimize the organization across military, commercial, internal and external customers. And that's a big job.

I should mention, before he took on the role at Boeing Global Services, he was the CIO. And one of my favorite quotes from talking to Ted, he said, "A lot of people don't realize that information technology professionals often know a lot more about the business than you do, because they are always trying to figure out how to get things to work. We tend to keep a very systematic mindset and focus on cause and effect, especially in my previous job, the CIO. I tended to focus on the context of the value stream, design, engineering, manufacturing, supply chain, and services. So many decisions we have made affect the whole value stream." So Ted took that background, looked at BGS and also realized that a lot of the things had previously been set up in silos.

And you know that that happens with a lot of functionalities for companies, right? And then they get bigger and they realize they have all these individual buckets. And he tried to really underpin the IT background, making that stronger. Invested a ton of money in the digital backbone that helped optimize some of those things, including supply chain, which was a big thing. And then they added model-based engineering. And so, I think one of the key things that Ted has done over the last few years, during a pandemic, during the MAX crisis, is providing a much more solid foundation for Boeing Global Services.

Joe Anselmo:

Thanks, Lee Ann. Steve Trimble, I wanted to ask you about the state of the business that he's taking over. One thing that strikes me, Jen DiMascio and Michael Bruno and I went and sat down with [Leeanne Caret] right when she started at the helm. And I remember we asked her for her top five or six priorities. And she listed them, and fighter jets was not among them. At the time everyone was thinking, oh, that business is dying on the vine. But she really revived that business for years to come, didn't she?

Steve Trimble:

You have to go back to that time period. 2015 is when Boeing lost the Long-Range Strike Bomber competition. There were even obituaries for the demise of Boeing Defense as a standalone business. But things change. She came in and initially, there was this confusion about where Boeing St. Louis was going in the future. The F/A-18 and F-15 lines had long been expected to basically expire by the end of the decade. But almost right away, they got the Trump Administration to sign on to this extension of F/A-18EF Super Hornet procurement for the U.S. Navy. And then they were able to sell a significantly modified version of the F-15SA for Saudi Arabia to make it the F-15QA for Qatar. And then that became the basis for the F-15EX.

And now that is expected to be in production at least through the end of the decade, and possibly longer, with Egypt now signed up or at least approved to buy it. Indonesia's approved to buy it. Other customers are looking at it. So ,in that sense, he inherits a fighter business that was expected to not exist at this point just five, six years ago, but now has a long-term future in St. Louis. On top of that, there were all the other programs that she brought in with T-X also in St. Louis, the MQ-25 in St. Louis and the MH-139. From that standpoint, she was able to sort of solidify the Boeing Defense business. But at the same time, they employed, I would say, a fairly aggressive bidding style and capture strategy to get these contracts.

And these are things that Ted Colbert is going to have to execute on in a way that doesn't cause any harm to the business that we've seen happen with KC-46, which was also a fixed price program that Boeing bid very aggressively and that was supposed to be low risk, but then turned into this morass of cost overruns. Same thing on Starliner [crew space transport] program. So those things also apply on the MQ-25 and TX, especially, fixed price development programs. All the risk is on Boeing.

But the big thing that Ted Colbert has coming up for him and the thing that I think will probably define his legacy more than anything else is the Next Generation Air Dominance program. Boeing is competing for that. And their ability to capture that is the key for them to extend that defense business beyond basically extending this 50-year-old F-15 design or commercial derivatives, like KC-46, for the next couple decades. To actually have an innovative and new product in the defense market they're going to have to capture a big franchise defense program. And the only one on the table right now is Next Generation Air Dominance, either for the Navy or for the Air Force. So that's definitely got to be one of his big priorities.

Joe Anselmo:

Michael Bruno, I think what Steve is saying is that Boeing bid low on a lot of contracts and is going to really have to execute to bring those in at cost to make any money on them. Is that the right interpretation?

Michael Bruno:

Yes. From a business strategy, that's certainly been the case. It was actually admired to a degree several years ago when things were very different and Boeing was in a different situation financially as the leading defense prime and OEM around the world, it was seen as a very smart, very savvy, kind of a cutthroat business move. But it's business. You underbid your competitors. And you take a big charge up front. And you secure the long-term production of these programs. And it seemed to be working great. But as Steve pointed out, they had KC-46 issues. They've got CST-100 Starliner issues. The T-7, they had to take a charge on that up front. There was an unmanned vehicle they won at about the same time. They also, I think, took a small charge on that. And so I don't think it's an approach business strategy-wise that is going to be continued necessarily.

But the thing I want to get at is to acknowledge for our listeners, everything that happens here at Boeing these days happens under a cloud of what's going to happen with management, because there's just been so many questions about, where is the company going on a long-term basis? Is there a need for a culture change? And not just down in the engineering, but in the whole company writ large. And so anytime there's a major division change, you've got questions coming up about what does this mean for a future CEO? And the interesting thing is, is we seem to be in two different worlds all at the same time. On the one hand, Dave Calhoun, who's CEO and president of Boeing right now, just last year had his contract extended, or I'm sorry, not his contract extended, but the board lifted the requirement for senior executives to have to retire. He doesn't have to leave when he's 65. He can stay until he's 70. And that's another six years, roughly.

And so that seemed to take away the question of who was going to be CEO in the near future. Now, Calhoun doesn't have to stay that long. So you can set up a CEO succession before then. But I would just say that I think the way Wall Street is reading some of what happening with Ted Colbert and Stephanie Pope is that this is the beginning of creating a bench for potential CEO shortlist in the future. I mean, if you're looking five years down the line, these are the kind of moves you want to make. Now you get people like Ted and Stephanie set up so that they can be considered at the appropriate time when Calhoun leaves.

Joe Anselmo:

One of the things Steve had mentioned, Michael, is the condition of the company. If you go back to 2018, it was awashin cash. They were returning boatloads of money to shareholders. So they could afford to bid aggressively on contracts. Colbert's going to be on a much tighter leash, isn't he, in terms of performing, because the company doesn't have all that cash anymore?

Michael Bruno:

It doesn't. The big number that everyone talks about still on Wall Street, outside of what's the free cashflow that's going to be generated, hopefully, starting this year, and I'll get to that in a moment, but the big number people are always reminded of is Boeing now has $42 billion dollars in net debt. And that's just this cloud that overhangs everything. You’ve got to pay that off in the long term to be a very viable going concern that returns shareholders’ money. It's not that Boeing's going out of business. I don't want anybody to come away from this conversation thinking that Boeing is eminently challenged. But they've got this big debt overhang. They've got to address it.

Now, in the near term, the other big number everybody wants to see go up is free cash flow. That's the money that companies use to pay shareholders every year. Boeing, this year, is supposed to become cash flow positive by the end of the year. Now, that's an amazing statement, because Boeing used to be cash flow positive as a given, to the tune of almost $10 billion before the MAX crisis and COVID 19. But for the past couple of years, it's been burning cash. And it remains to be seen whether they can actually become cashflow positive this year.

Lee Ann Shay:

May I hop in and ask a question? One thing on Boeing Global Services is that you have a lot of data that, I think, Ted and team were able to optimize. Right before he took over the role, Stan Deal helped execute the acquisition of KLX. And so then you had just a lot of data, a lot of parts that you had to optimize. On the defense side, data resides in more pockets and is more isolated just because of security concerns. So as far as efficiencies and optimizing the defense side, what kind of constraints are involved?

Michael Bruno:

Steve, you might have a better take on that. I mean, I just know that data writ large, I think, is increasingly not only desired, but the more work you hear the Defense Department and other government agencies put on data, the more questions come up all at the same time. Who's going to control it? How is it going to be secured? Cybersecurity, I think, it was a big deal before Russia re-invaded Ukraine. And it's an even bigger deal now. And it's just something that I think is going to increasingly challenge everybody in the defense sector and as one of the top primes Boeing is not only a key target for hackers, but also is being looked at by the government as somebody to help the government try to figure out what it's going to do on its end. But Steve, I welcome your comments on that, and specifically, in the defense realm.

Steve Trimble:

I think this speaks to the fundamental difference between the commercial market and the defense market, where in the commercial market Boeing is one of the two real manufacturers and has many customers to sell to. Whereas in the defense market, in a lot of different spaces, Boeing is one of several companies and there's only one customer really with the DOD. And so that's a monopsony-type market. So DOD has a lot more power. And what we've seen in the last several years is they've been trying to wield that power a lot more, to go after exactly what Lee Ann is talking about, the data, the intellectual property, design rights. They want to take that away from the manufacturers and own it themselves, because in the defense market, Boeing is, generally speaking, for the most part, not spending their own money to develop the new technology. They are taking money that the government is giving them to develop the technology.

And at some point the government said, "So then why don't we, the government, own the intellectual property and the data rights for this?" And that's become a discussion and a conversation between industry and the government that continues. But that is definitely an impediment in terms of how Boeing can leverage that commercial strategy that's worked so well for them into the defense space going forward. Now, I just also want to just kind of drill down on a couple of those risks and programs that Michael mentioned, MQ-25 and T-X. MQ-25 is a carrier based tanker. They took a charge on that. There's another case where Boeing bid very aggressively on that program. What we've seen so far is, I mean, they've come through certain milestones, but we also saw this bizarre change in that program a year ago.

The Navy initially took on the job of actually doing the ground station, and within the Navy, and then the job of integrating the whole system, the ground system, and the airframe onto the carrier. Midway through that program, the Navy changed their plan and last year awarded Lockheed a contract to do the ground station halfway through the development phase. That's usually not a great sign of program stability. But maybe this is actually what's necessary. I guess, we're going to find out in a couple years when MQ-25 is supposed to actually be ready. So that's one sort of possible headwind going into that. And then the TX program, that was a program where Lockheed said that if they had beat Boeing's bid, they would've had to have lowered their own bid by $5 billion to win that.

There were assessments when the contract awarded that Boeing was bidding that T-7A at a unit price of $9 million, which is very aggressive for essentially -- it's not a high performance like an F-16, but compared to any commercial or civilian aircraft, it's high performance. To make that program profitable, they're going to have to execute on that program much better than we've seen them execute on a lot of their commercial programs, where that kind of performance isn't necessary. That said, I mean, they've done a lot of investments and model-based systems engineering, digital design, the digital thread. And that is what they're relying on to bring that program in, in a profitable way.

Michael Bruno:

But that's so different from manufacturing, right, Steve? I mean, that's the thing I think that still gets lost in this conversation. You can do as much digital engineering as you want to, but you've still got to actually build the thing. You’ve got to join parts. And you’ve got to do it on time and without any problems.

Lee Ann Shay:

And to continue that, it's not just engineering to manufacturing, it's engineering, manufacturing and then optimizing the parts, look at the supply chain and then get feedback from the operators, the feedback for improvements. So it's not a one and done.

Steve Trimble:

Oh, sure. And to be fair to Boeing, I mean, so far, what they've been saying is that those assembly tasks that you're talking about have actually come in on time. And they've been joined together very, very quickly. They had a flight control issue that they said they were able to resolve through software. That was also about a year ago that we found out about that. And there was a financial charge related to that, that Mike mentioned earlier. But like I said, even if everything goes perfectly well, even better than most of the other programs, they are still taking a very aggressive approach to the pricing strategy with the T-7. And it could pay off very well for them. But all the risk is on them. The government has none of the risk on this program, and with MQ-25, and with MH-139. So that's the kind of concern that they would have.

On the other hand, I mean, there are some other headwinds. I mean, it looks like the Air Force is basically saying that they're not going to re-compete the tanker after the KCX-179 aircraft program of record expires in 2029, that they'll just continue buying KC-46s for the next 200 aircraft that they need through about 2042 or 2043. I mean, that's a huge win for Boeing. They don't have to spend a couple /billion or so just to win the next contract. They don't have to bid against a Lockheed Airbus team. And despite all the issues that they've had on the KC-46, it's not going to come back to haunt them, it looks like, unless Congress makes them change course, which could happen.

Joe Anselmo:

Well, on that note, Steve, I think you've just given us a preview about what you and Michael will be writing about in the coming months and years. And Lee Ann, you're going to continue to cover Boeing's aftermarket business, which is coming out of this crisis fairly strongly. Lee Ann will also be at our MRO Americas event at the end of April, where much of that conversation will occur as well.

But unfortunately, we are out of time. So that is a wrap for this week's Check 6 Podcast. Special thanks to our producer in London, Guy Ferneyhough. Join us again next week for another episode. But until then, why not catch up and subscribe to Lee Ann's MRO podcast on the aftermarket? This week also saw the launch of our new podcast focused on airlines, Window Seat. The first episode was on mask mandates. You could find both of those podcasts wherever you're listening to this one. And one final request. If you're listening to us on Apple Podcast and want to support this podcast, please leave us a star rating or a review. Bye for now and stay safe.