Industry analysts Ron Epstein and Richard Aboulafia join Aviation Week editors to discuss the momentous challenges facing Boeing’s next leader—and who that leader might be.
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Transcript
Joe Anselmo:
Welcome to Aviation Week's Check 6 Podcast. I'm Joe Anselmo, Editorial Director. Boeing is searching for a new CEO after a leadership shakeup that saw Dave Calhoun announce he will step down by the end of the year. His successor will face the daunting task of reviving an American icon. But what exactly needs to be done to fix Boeing and who are the leading candidates to succeed Calhoun?
Joining us to discuss all this are Bank of America's Ron Epstein, the author of a new research note on this very topic. He joins us from the field, so pardon any background noise. AeroDynamic Advisory's Richard Aboulafia, a longtime critic of Boeing's senior management and its board. And rounding out the panelists is Michael Bruno, Aviation Week's lead business editor and the author of a new article titled “The Quarter When Boeing Broke.”
Ron, let's start with you. You put out this detailed note on April 1st on how to fix Boeing. You want to tell our listeners what you said?
Ron Epstein:
Sure. I think we went through a couple things. One, the new management team has to like airplanes. They just can't be professional managers. They have to be a team that's got a passion for aviation. Two, they have to be willing to move the headquarters to Seattle, or at least to one of the other major facilities where you're building stuff. So that management team, they have to be present. They have to work on the culture of the company. And when I think about working on the culture of the company, a big piece of that is creating an environment where you have a free flow of information. I like to frame it as an open market for the truth. And that's to say that good news can go up and down the chain as well as bad news. So everybody at all levels of the company is empowered to make changes and report what's going on and that there's an open environment that everybody feels comfortable if they find an issue to report it to their superior and they figure out how to fix it, as opposed to having some undue pressure to keep pushing something on. I think those are some of the big characteristics.
Another thing, I would prefer a management team that has some technical savvy for a number of reasons. One, they build a technical product. Two, they have to understand something about fabrication and what's going on on the production lines. And then three, probably most importantly, and I know Richard agrees with me on this, Boeing is going to have to do a new airplane and this new CEO is going to have to have, or should I say leadership team, is going to have to have a vision and view on what the company should do and how this sets up the company for the future and can lead the company through the development of this new product.
Joe Anselmo:
Ron, your second bullet point says, "The culture must change." That's not something you do overnight, is it? I mean, people trace these problems back to maybe 1997 when Boeing acquired McDonnell Douglas or at least 2005 when they passed up Alan Mulally to be CEO. This has been going on for a long time, hasn't it?
Ron Epstein:
It has. A culture doesn't, how do I say, change in a bad way overnight and you can't get it to change back in a good way overnight. This is going to be an effort that's going to take time. Investors like to think, "Hey, you know what? We've got in this new management team and they'll have everything fixed next quarter." It's not going to be one of those things. To get the culture back to a place where it needs to be could take a number of years, could take five years, could take 10 years. It's retaining current, good talent. It's attracting talent back to the company that's left. That all takes time. And then you have to, how can I say this, the market for the truth, I don't think there's a better way to say it, has to permeate the company, and that takes time, too. So employees who were maybe uncomfortable saying something to their superiors in the past have to feel comfortable saying things to their superiors now and generating that comfort is just going to take time. And you're a hundred percent right, it doesn't happen overnight.
Joe Anselmo:
Richard, you've been complaining for a long time about the way the company's been run. You got your wish. Stan Deal's out at BCA, Calhoun says he's leaving, what now?
Richard Aboulafia:
First and foremost, everything Ron just said, I’m in complete and very strong agreement. I'm optimistic. And why am I optimistic? It's because frankly, what you had with Calhoun, what you had with the board, what you had with, well, ever since McNerney, is a real worst-case scenario. And you have so many people who either are at Boeing or would like to work at Boeing or would like to come back to Boeing under the right conditions. You've got great technology, some really great jets. All you need is not god-awful leadership. So yes, it is going to take time, but I'm optimistic that if they do it right, they can recover. It'll take the better part of a decade, possibly longer. But they'll be on the right track because of how god-awful it has been.
But obviously, got to start at the top. Why Calhoun is staying around until the end of the year, why he's part of the selection process while continuing to spout utter nonsense about the industry and its products, I don't know. That's an issue, but assuming he leaves either before then or, worst-case scenario, through the year, that's okay. Fine. At least next year will be better. I think everyone on the board has some really tough questions to answer. I'm not saying they should all go. There are some good people on it, but they need to explain what they were doing and they need to get some new board members who actually are good to be independent and technically savvy, just as Ron said, about the executive leadership. And then they need to find someone who is, well, all of the things Ron said. What you have right now, the recent selection process, basically it was a job description that began with, "Must have proficiency in Microsoft Excel, proficiency in Microsoft PowerPoint also a plus." And really nothing else. Nothing else. So, that needs to change and thankfully, there's a good list of candidates out there.
Joe Anselmo:
Michael Bruno, what do you think about what you just heard?
Michael Bruno:
Well, first of all, kudos to Ron and Richard. I want to point out to our audience that whether one agrees with them on any particular subject or not, these two gentlemen have been extremely consistent over the past few years in what they said, so I do want to give them credit for that.
I don't think anybody saw the first quarter of this year turning out the way that it has, so it would be hard to predict that Dave Calhoun would be leaving Boeing in 2024, certainly by the end of the year and potentially sooner. In any CEO process, you want it to go well, first of all, and get the right candidate, but you also don't want it to last too long. So the faster they can get to that good end result, the better off everybody will be. Everybody being everybody who's got a stake in Boeing.
So here we are. Joe, you mentioned at the top of the podcast yeah, we do have this new article in Aviation Week & Space Technology, “The Quarter When Boeing Broke.” The team at Aviation Week, not just me but several editors got together to kind of review and what we thought was sort of a macro sense of some of the strategic issues that the next CEO of Boeing is going to be facing, whoever that person is. And I'll get to those in a moment but I think the question on everybody's lips right now, typically around industry is who? Who's going to lead Boeing? And I think the answer is really, nobody's quite sure, which is part and parcel to this disruptive leadership change that's finally happened here in 2024. Certainly not the way things were planned. Dave Calhoun had a couple of more years before he hit the new retirement cap that the Boeing board set for him when he took over and when he cemented his position back in April of 2021.
So the plan was certainly not to go through this leadership change now, and we don't really know who the next leader could be. You have Stephanie Pope, COO, who's also taking over Boeing Commercial Airplanes at the moment. She is obviously on the shortlist of internal candidates because that's typically what a COO's role is in reality is to be a future CEO if so chosen by the board.
There are other candidates. Lots of people talk about Dave Gitlin on the Boeing board, potentially Mr. [David] Joyce on the board. You don't have many other people on a short list. And each one of the people I've mentioned all have things for them and things against them, depending on who you're talking to in the industry. So I'm not sure there's a clear front-runner internally at the moment.
Externally, there were names floated out. Lots of people immediately ran to Larry Culp, the current CEO of the new GE Aerospace. But I had already heard him talk about, Ron and I were at an investor event last month, in March, when GE was getting ready to stand alone and Mr. Culp made it very clear that he was looking forward to being CEO there. And Joe, you just talked to him and he said the same thing to you, too. So Bill Brown now has a whole new job somewhere else. I think he's running 3M now. He had been a candidate on people's lips after he helped put together the current L3Harris technologies. I'm just fascinated that there's no clear good candidate anywhere so it's going to be very interesting to see what this new search provides.
I want to just quickly hit on what we talk about in the article because if you want to know more about the strategic stuff that we started diving into, please read the article. But Boeing has a whole slew of things here, and they range from what kind of large defense prime does it want to be. And we've got an indication from the current CFO Brian West. They want to remain a large defense prime, just not doing the kind of work that they're doing right now at the Defense and Space division. Because they're losing money on it, and they're not delivering the product. They also, of course, want to be a large commercial aircraft OEM. But the question there is how much of an OEM? And by that I mean vertical integration. They're supposedly in talks... Well, they are in talks to acquire Spirit AeroSystems and supposedly those are bona fide, those are genuine talks to try to bring in their major supplier there. How else could they go vertical integration if they so choose to do it?
And then finally, aftermarket. It's been one of the bright spots at Boeing, certainly, where they're the division that's making money at the moment. But the aftermarket in general is going very well right now, but how much longer will that last and how key will it be to the company's strategy as a business model? So lots of questions for Boeing to figure out, whoever the next leader is.
Joe Anselmo:
Richard, you heard Michael just toss out a few names. I was wondering if you had some others. I saw one of Ron's peers, a guy named Rob Spingarn from Melius Research, tossed out the name Gwynne Shotwell at SpaceX. That was certainly an intriguing name to hear. Any other names you've come across as potential Boeing leaders?
Richard Aboulafia:
I think I'll repeat Ron's line, someone with a passion for aviation, someone with technical savvy. And to the very top of the list rises Pat Shanahan at Spirit. Given his storied career at Boeing, and I'm sure one reason he left in addition to the job offer in the White House was just how frustrating it is to be somebody with technical skills at a company that only values Microsoft Excel. And that leads us to the tricky question of Stephanie Pope, who is exactly cut from the same cloth as Dave Calhoun. What a disaster, that would be highly ill-advised. Pat Shanahan by contrast would be fantastic. I think Gwynne Shotwell is very intriguing.
I don't know why she would want to make a lateral move, but Kathy Warden stands out as one of the finest leaders in defense and aerospace out there. It would've been great if Larry Culp would've considered it. And you got to wonder, are there other people at Danaher, because that was a really well-run company that was transformed in a lot of ways. And yeah, Dave Gitlin, again, once he answers a few questions about what he saw and tried to do on the board would be a very good choice, too. So I think it's almost certainly someone from outside. It's not inconceivable that they would get it from inside, but given the propensity of McNerney and Calhoun to promote finance-oriented mediocrities that didn't threaten them, it's not a terribly deep bench of internal candidates.
Joe Anselmo:
Ron, did we miss anything there?
Ron Epstein:
I can't really throw out names, but a couple things that we did write about, and I think this is important. Beyond the technical skills and the ability to change a culture, this new leadership team is going to have to win hearts and minds. And that goes back to winning hearts and minds of employees, hearts and minds of customers, airlines, hearts and minds of the flying public. Sadly, Boeing's become a meme many times over. Just as an example of this, this past weekend I was wearing one of my favorite T-shirts, it's an old Boeing T-shirt that has a tear in it and I can't tell you the number of people who kind of laughed and said, "Hey, that's kind of a appropriate, your Boeing shirt has a hole in it."
So they're going to have to win hearts and minds across the spectrum. Rebuild relationships with the regulator. They're going to have to deal with the Department of Justice. They're going to have to deal with the NTSB. So not only does this leadership have to, like aircraft, have some level of technical skills, understand something about fabrication, they have this heavy lift in terms of winning hearts and minds across pretty much every vector that the company touches. So that's going to take, I think, a pretty special person and a pretty special team of people. Because most likely, how the old expression goes, it's going to take a village. This isn't just one person, but it's one person who's going to have to surround themselves with a very capable team to get it all done.
Joe Anselmo:
I should note, Ron, that you began your career at Boeing. What does the Boeing of today look like compared to the Boeing you worked at?
Ron Epstein:
To be clear, I was a very junior engineer at McDonnell Douglas, and I was there for the merger. And my impression from the cheap seats was engineering at Boeing, particularly aerospace engineering, aircraft design was high church. I mean, they were the priests of the place. At McDonnell it was a little bit different, you know, tactical aircraft. The folks that do aerodynamics were maybe a little bit lower down on the food chain and low observables, and you had other concerns with tactical aircraft. But I remember being very excited when the merger happened because it was like, wow, we were merging with this storied company that had some engineers who were just luminaries in aircraft design and in aerospace engineering.
And in fact, it reminds me, as one quick little anecdote, I remember being a very junior engineer going up to Seattle, visiting a team that was... I was doing computational fluid dynamics visiting the team in Seattle that was doing that. I sat down with one of these very, very famous engineers that they had and he said he was basically like, "Hey, kid. What's it take to be successful to Boeing company?" And of course I was like, "Well, you have to work hard and be diligent." And he said, "You know, that all helps, but in the end, it really helps if you like airplanes." So I always kind of carried that with me the rest of my career that if you're really excited and passionate about what the company does and you work hard and you're diligent, it should all work out.
Richard Aboulafia:
I absolutely agree. It's so important to love the product. And again, winning hearts and minds, that sort of passion really shows. And I keep coming back to Herb Kelleher, one of the greatest airline executives, aviation executives ever, who said, "You take care of your people, they take care of your customers, that takes care of your stock price." And they've been reversing that at Boeing for the longest time. They don't about airplanes at the top, they don't care about people at the top, they don't understand technologies at the top. That all needs to change completely. And here again, I'm bizarrely hopeful, because if you do change completely, it's not too late to restore this company to industry leadership.
Michael Bruno:
I just want to add, if you listen to what Ron and Richard talk about, they definitely make sense and they lay out a great case for what we should be looking for, hopefully, in the next CEO of Boeing. But I think it's worth remembering that this is going to be a long process. And I'm talking about the change, the culture change Ron talked about. The shareholder change that Richard just alluded to. Yes, the profits can follow if the product is great and returns to high quality, but none of this is going to happen quickly. And I'd be curious, Ron, Richard, when it comes to a restructuring at Boeing, how long do you think this is going to last? Is this a two year, five year? Is it this decade or next? When do we get to the end point of a restructured Boeing?
Ron Epstein:
Let me jump in on this. I think it's a continuing thing. You're never there. I mean, not to kind of bring out the cliches of continuous improvement, but the company can always do better. But I think what you're getting at is when do we get a lot of this behind us that we can feel like, all right, they've got their mojo back. And I would just take a guess, it's probably at least five years. Not shorter than that, probably longer than that, but it's at least five years. Because it's a big organization and changing big organizations just takes a lot of time. So I would say five to 10 years.
And you have to have a management team that is not afraid to talk to the street about that. I think one of the most difficult things, and I've said this in the past, for management teams of companies like Boeing and others where you have very, very long cycle development programs, could be upwards of a decade, products that live in the market that have lifecycles of multiple decades. And sometimes you have investors who are investing for a day, a week, a month. Things get misaligned, and I think it's a very careful dance that has to be had when management teams are interacting with those investors, because sometimes what those investors want doesn't line up with what's best for the company. And you need a management team that's bold enough to say, "Hey, you know what? I understand what you want, but that's not good for the company, particularly in the long term. And if we do that, we might get some short-term gains, but we'd really be selling out the company for the future." And you need a management team that's very comfortable addressing that.
Michael Bruno:
Richard, how long do you think it'll go?
Richard Aboulafia:
Well, I agree with that timeframe, but here again, I'm optimistic. The game plan has been dividends, buybacks, and ultimately divestitures. I mean, that is a ridiculously shallow operating manual for a company, and it's what the management team knew, nothing more. I think you start talking about the future, you get a very strong sense of customer interest. People are out there with a lot of money looking for good ideas for the future. You start instead of abolishing the strategy department and abolishing plans for new product development, why don't you start talking about them? And that attracts talent, that attracts money.
I think that could be a pretty steep uphill recovery if you instead are focusing on, well, dividends, buybacks, and divestitures, you actually just focus on the future. I think five years is very reasonable to get most of the way back, especially since by the end of that, you're going to have a pretty clear view the next generation of aircraft and maybe even a concrete plane that's been launched. I think that would be enormously galvanizing for the company. So again, being optimistic, I'll go with five years, maybe even a little less.
Joe Anselmo:
Richard, that's a great setup for my final question because we're running short on time, but Dave Calhoun said that the next Boeing airplane is going to cost $50 billion to develop and had everyone scratching their head like, "Where did you get that number?" Ron, you and your team did your own analysis and you calculate more like $30 billion, right, for a new family of airplanes?
Ron Epstein:
That's about right. $30 billion, and we gave them some cushion in there for things not to go right. That $50 billion number is a ginormous number, so I don't know where he came up with that number. By any stretch of the imagination if you were to do a new family of narrowbody, or let's call it narrowbody-type aircraft, because who knows exactly what the configuration could be, but call it something, 200 seats, plus or minus some seats, maybe something a little smaller, something a little bit bigger, blowing through $50 billion is just a humongous amount of money. So I really don't know how they got there. $30 billion, it's reasonable. Maybe if you have a lot of troubles, $35 billion. Our friends at Embraer could probably do it for far less than half of that, right? They could probably do it for, call it somewhere between $5-10 billion, probably at the lower end of that, so $50 billion just seems unrealistically huge.
Richard Aboulafia:
I think it reflects his rather shallow comprehension of the industry. It's up there with his, "Well, you've got to have a 30% cost improvement," or whatever the number was he used. A complete ignorance of history. A complete ignorance of the industry. I'm not even so sure, I'm almost always in lockstep with Ron, I'm not so sure where $30 billion comes from, because you had the two worst wide-body program disasters in history, 787 and A380, that I think we're in that range. But if it's a narrowbody and it's not a disaster, I'm not so sure why it would be more than $20 billion. And then Bombardier required a lot of medical intervention, but it was, what, $6 or $7 billion to do the C Series. As Ron said, Embraer, it would probably be in the single digits, too. And even with inflation adjusted dollars and whatever else, the whole 777 was less than $10 billion. So just looking at history, I'm not so sure why or how it could be more than $20 billion. But again, Ron's done a lot of work on that, so I wouldn't discount his findings.
Joe Anselmo:
Ron, in the interest of fairness, you want to defend yourself here?
Ron Epstein:
I don't think there's much to defend. I think we've just built in more buffer for things to not go right.
Richard Aboulafia:
Nothing wrong with that.
Joe Anselmo:
On that note, Ron, Richard, Michael, thanks to all you for taking the time to provide your insights. Obviously we'll be back many times talking about Boeing in the coming months and years, but for now, that is a wrap for this week's Check 6. A special thanks to our podcast editor in London, Guy Ferneyhough. To our listeners, we stopped asking every week because sometimes it just becomes white noise, but if you've enjoyed our episodes so far this year on the Boeing crisis, Airbus, the Blackbird, China's H-20 and Comac, the F16, Starship, and all the rest, please consider supporting us by writing a review on Apple Podcasts. Join us again next week for another Check 6.
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