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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.

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Speaker 2: I'm Tracy Allaway.

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Speaker 3: And I'm Joe Wisenthal Boeing.

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Speaker 2: Have you Boeing?

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Speaker 3: Keep that in?

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Speaker 2: Don't keep that in?

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Speaker 3: No, keep that in? Now, you gotta keep it in.

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Speaker 2: I've said before I have a soft spot for Boeing,

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Speaker 2: So that's why I'm mixing Boeing and Joe up. Okay, Joe,

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Speaker 2: have you seen Boeing shares recently?

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Speaker 3: Actually, I haven't looked at a while, except, you know,

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Speaker 3: like we did an episode on Boeing about three or

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Speaker 3: four weeks ago, so not good. Yeah, and they have

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Speaker 3: not recovered much, so not good.

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Speaker 2: So shares are down twenty percent since the start of

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Speaker 2: the year, which is never a good sign when you

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Speaker 2: lose a fifth of your market value in about six weeks.

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Speaker 2: But probably one of the more damning things that has

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Speaker 2: happened recently in terms of the share price is do

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Speaker 2: you remember when the company announced it was pausing seven

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Speaker 2: thirty seven production for a day and the shares went

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Speaker 2: up like six percent. That seems bad when the market

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Speaker 2: is rewarding you for not making your signature product.

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Speaker 3: There's two funny things to me again. Funny you know

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Speaker 3: all the caveats that that tells. It's funny that Boeing

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Speaker 3: has the reputation of being the company that's obsessed with

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Speaker 3: its share price and pleasing shareholders. Airbus doesn't. And of

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Speaker 3: course air Bus is a much better share performance than Boeing.

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Speaker 3: It's done phenomenally well over the years. And it's also

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Speaker 3: just kind of crazy, sitting aside competition, that Boeing is

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Speaker 3: still nowhere near its peak in twenty nineteen, despite what

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Speaker 3: we know to be like a booming global market for aviation,

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Speaker 3: Like that's one thing we know, like pre pandemic, post pandemic,

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Speaker 3: just absolute boom. You always hear about this expansion of

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Speaker 3: new airlines in the Middle East and Asia and et cetera.

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Speaker 3: And so we know that there's this huge general bull

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Speaker 3: market going on and Boeing doesn't seem to have capitalized

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Speaker 3: on any of it.

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Speaker 2: Well, not just a booming market in commercial aircraft, which

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Speaker 2: you're totally correct, as you observe, it has been a

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Speaker 2: busy few years, but also we've had so much defense spending,

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Speaker 2: that's right, and things like the IRA and things like that,

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Speaker 2: and even with that happening in the background, America's premier

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Speaker 2: aerospace and defense company just doesn't seem to have benefited

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Speaker 2: from it. The share price has basically been flat for

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Speaker 2: the last three years.

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Speaker 3: Kind of amazing, and I think it's worrisome, right because

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Speaker 3: you know, setting aside, you know the concerns of Boeing shareholders,

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Speaker 3: and they're probably pretty unhappy, Like if US wants to

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Speaker 3: be a big manufacturing powerhouse and again or be able

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Speaker 3: to build more complex stuff domestically, it's really a bad

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Speaker 3: sign that the sort of premier you domestic manufacturer for

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Speaker 3: global markets, one of only two companies that basically controls

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Speaker 3: the commercial jet industry, is getting worse at building plans.

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Speaker 2: Yes, absolutely so. We have previously recorded an episode on

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Speaker 2: Boeing with our Bloomberg colleague Peter Robinson. He's also the

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Speaker 2: author of Flying Blind, The seven thirty seven Max Tragedy

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Speaker 2: and the Fall of Boeing, and we talked about what

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Speaker 2: the Alaska Airlines door blowout actually meant for the company,

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Speaker 2: and also the emphasis that Boeing seemed to place on

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Speaker 2: financial performance and ironically its stock price versus a culture

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Speaker 2: of safety and engineering. But I feel like there is

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Speaker 2: so much more we can say about this topic and

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Speaker 2: so much more to dig into, and I'm really happy

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Speaker 2: that we do, in fact have the perfect guest for

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Speaker 2: today's episode. This is the guy, the aerospace guy. Back

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Speaker 2: when I was covering airlines and aerospace in like two

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Speaker 2: thousand and six, he was the expert back then, and

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Speaker 2: in twenty twenty four, almost two decades, he is still

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Speaker 2: the guy to talk to on aerospace. So I'm very

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Speaker 2: happy to say that we're going to be speaking with

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Speaker 2: Richard Aboulafia again, a longtime aerospace analyst and managing director

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Speaker 2: at Aerodynamic Advisory. So Richard, thank you so much for

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Speaker 2: coming on all thoughts, It's good to talk to you again.

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Speaker 4: Yeah, same here, Tracy, thanks so much for having me on.

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Speaker 4: Thrilled to be here.

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Speaker 2: You know, I should say, in addition to being the

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Speaker 2: aerospace guy and just an all round expert on this industry,

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Speaker 2: you also have a reputation for telling it like it is,

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Speaker 2: and I think at this point a lot of the

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Speaker 2: cultural changes at Boeing are probably well known, but you

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Speaker 2: point into a pretty interesting development that I will confess

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Speaker 2: I hadn't even noticed it happened late last year where

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Speaker 2: the current Boeing CEO David Calhoun basically dissolved the company's

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Speaker 2: strategy department. What was that about.

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Speaker 4: Yeah, I mean that's a mystery, but like all good mysteries,

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Speaker 4: it just sort of lends itself to theorizing and indeed

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Speaker 4: conspiracy theorizing, and the most obvious statement was we don't

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Speaker 4: have a future. Not only was it the dissolution of

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Speaker 4: the company wide strategy department, but there was a wholesale

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Speaker 4: gutting of a lot of the business unit strategy department.

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Speaker 4: So it wasn't a devolution story. It was we don't

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Speaker 4: care story, which was of course as baffling as it gets.

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Speaker 4: It sort of fits in with this nagging feeling in

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Speaker 4: the back of my mind that the really awful performance

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Speaker 4: is kind of okay to the folks at the top,

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Speaker 4: because ultimately their playbook is well about as deep as

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Speaker 4: the jackwelch Ge playbook, which is, if things go to hell,

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Speaker 4: you simply break up the company, and in that case,

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Speaker 4: you know, performance doesn't matter the future and strategy doesn't matter.

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Speaker 4: You simply think you know. And indeed, maybe maybe the

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Speaker 4: bad performance is kind of a plaus in as strange

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Speaker 4: way to regulators in every body, involved, customers, whatever. It

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Speaker 4: almost becomes a relief when the company has broken up. That's,

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Speaker 4: of course an extreme departure scenario, but I can't think

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Speaker 4: of any other explanations for doing that.

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Speaker 3: Well, maybe what is a strategy department and what is it?

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Speaker 3: So they said, I think, I guess it was in

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Speaker 3: November that their strategy boss was leaving, that the strategy

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Speaker 3: teams would be folded into the business units that they support.

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Speaker 3: What do these words actually mean in practice? Is what

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Speaker 3: are strategy teams? I thought everyone did strategy.

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Speaker 4: Business, Yeah, everyone does, right, It's kind of impossible to

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Speaker 4: imagine a large corporation not having a strategy function. What

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Speaker 4: is the strategy? Is about the future. A strategy is

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Speaker 4: about allocating capital for future technology development, for future acquisitions,

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Speaker 4: for allocating people, for developing people and their skills and capabilities. Basically,

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Speaker 4: it coordinates resources across business units and within the business units.

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Speaker 4: Of course, it thinks about new products to develop. Their

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Speaker 4: competitors are and are likely to be, and what key

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Speaker 4: enabling technology is You're needed to compete in the future.

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Speaker 2: One of the reasons we wanted to talk to you

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Speaker 2: is because you are well connected in this industry in

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Speaker 2: addition to being an expert on it, But can you describe,

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Speaker 2: like the mood at Boeing at the moment, or how

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Speaker 2: people within aerospace and defense actually feel about this company.

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Speaker 4: After thirty five years. I've never seen anything like it,

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Speaker 4: and it kind of resembles that common trope and horror films.

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Speaker 4: Very often the call comes from inside the house, you know.

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Speaker 4: I mean, I spent last week in Seattle, and you know,

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Speaker 4: it's nothing short of horrifying. But it also sort of

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Speaker 4: illustrates one of the strange aspects of this the so

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Speaker 4: called crisis, which is that the problem is purely at

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Speaker 4: the top. There are a lot of really good people

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Speaker 4: at Boeing, and a lot of really good products and

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Speaker 4: a lot of really good technologies. You just have some

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Speaker 4: people who are really, really bad at their job at

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Speaker 4: the top. So as you can imagine people within the company,

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Speaker 4: and there are and many good ones are often mortified

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Speaker 4: by what's happening.

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Speaker 3: Well, so I understand in the abstract we could say

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Speaker 3: things like, oh, the bean counters took over and they

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Speaker 3: don't have a as much of an engineering culture or

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Speaker 3: safety culture, or they just worry about the stock price,

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Speaker 3: and I get all like, why that's all bad, and

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Speaker 3: I guess on a sort of theoretical level, it sounds

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Speaker 3: very bad. But why do we talk concrete? If you're

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Speaker 3: an engineer at Boeing today working on something, how is

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Speaker 3: your life different than it was, say, twenty years ago?

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Speaker 4: Well, there's no future, right, And you know the astonishing

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Speaker 4: thing like what do you.

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Speaker 3: Like day to day? Like? Like what what?

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Speaker 4: Like?

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Speaker 3: What is some some boss, some boss three levels up

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Speaker 3: has made decisions and various properties have changed. So how

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Speaker 3: does like how does it like manifest itself on a

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Speaker 3: sort of day to day basis or quarter to quarter basis,

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Speaker 3: where it's not as a compelling of a place to work,

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Speaker 3: like what has changed about the nature of the job.

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Speaker 4: You need something to dream for, you need something that

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Speaker 4: represents the future. And you know, Dave Calhoun, the CEO

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Speaker 4: at the top of the heap, said about oh, a

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Speaker 4: year and four months ago that don't worry, we won't

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Speaker 4: be launching anything new for at least another decade. Other

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Speaker 4: than sheer demoralization and encouraging the competition. I mean, the

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Speaker 4: only way to explain it is that he's the best

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Speaker 4: CEO Airbus could ask for. But from the standpoint of

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Speaker 4: being an engine you're getting the heart of your question, Joe.

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Speaker 4: If you're an engineer, you hear that what are you

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Speaker 4: working for exactly? You're coming up with work packages on

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Speaker 4: the basis of I don't know, minor tweaks of existing products,

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Speaker 4: stuff that's already in the pipeline. You know, it's a

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Speaker 4: tight market for technical labor. You're probably going to be

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Speaker 4: pretty interested in going to work for somebody else. So

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Speaker 4: you might also notice that the demographics are changing because

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Speaker 4: the young and enthusiastic folks who have a future are

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Speaker 4: leaving or not joining, and that too, of course, is

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Speaker 4: a significant change in the fabric of your workplace.

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Speaker 2: So you mentioned launching something new, and this kind of

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Speaker 2: goes to the heart of you know, I guess the

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Speaker 2: current crisis within Boeing, but also the origins of the

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Speaker 2: safety issues and the idea that instead of doing a

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Speaker 2: clean sheet aircraft as it's called, Boeing decided to make

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Speaker 2: amendments to its existing seven thirty seven model, and that

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Speaker 2: resulted in the seven thirty seven Max and its stablemates,

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Speaker 2: and then that led to the crashes which claimed I

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Speaker 2: think almost three hundred and fifty lives and the resulting

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Speaker 2: controversy over Boeing and what we're basically discussing now. But

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Speaker 2: just to back up, could you maybe talk about what

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Speaker 2: are the decisions or the factors that go into whether

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Speaker 2: or not to design a completely new aircraft.

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Speaker 4: Well, I'm afraid I must disagree with that narrative. I

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Speaker 4: thought the Max was the right decision at the time.

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Speaker 4: There were few enabling technologies for a new jet in

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Speaker 4: that class except turbine, so put a new engine in it.

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Speaker 4: We didn't know then the sheer popularity of the middle market.

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Speaker 4: Even if we did, I'm not so sure that would

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Speaker 4: have changed anything. What was important is that the Max

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Speaker 4: go ahead and then the company do what it does

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Speaker 4: every decade, launch a new product, and in that case,

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Speaker 4: that product would have been a notch above the Max.

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Speaker 4: You know. As for the development of the Max, there

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Speaker 4: were cultural problems at play that led to the mcast

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Speaker 4: problems and the tragedies that resulted. But it wasn't economics.

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Speaker 4: I mean, the economic difference between mcast done right and

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Speaker 4: mcast done poorly is zero zilch. This was purely a

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Speaker 4: cultural driver that led to these tragedies. Now, if you've

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Speaker 4: got the Max out of the you know, okay, it

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Speaker 4: was the right thing to do. It should have been

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Speaker 4: done different, but it was the right thing to do.

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Speaker 4: What should have happened next is they should have said, okay,

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Speaker 4: look back in the past, we had this other aircraft

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Speaker 4: in that middle segment, the seven to five seven. It's dead.

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Speaker 4: We need to think about a replacement. And they were

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Speaker 4: thinking about a replacement, and that was the first thing

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Speaker 4: Dave Calhoun killed when he came in.

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Speaker 3: How would you characterize the cultural failings that led to

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Speaker 3: those tragedies?

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Speaker 4: Very simply a disconnect between the people at the top

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Speaker 4: and the people who are focused on the core business

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Speaker 4: of the company, which is of course designing and building aircraft.

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Speaker 4: You know, the folks at the top. And this started

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Speaker 4: under Jim mcnernee back in the late two thousand, you know,

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Speaker 4: first decade of the two thousands. He decided that the

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Speaker 4: supplier base and the workforce were mere disposable commodities that

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Speaker 4: should be crunched. They should be regarded as one giant

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Speaker 4: atm you take money out of them, there's no consequences.

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Speaker 4: People will always want to work there, and people will

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Speaker 4: always want to be suppliers our way or the highway.

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Speaker 4: This was bound to have consequences, and it just got

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Speaker 4: worse and worse through the twenty tens, and as a consequence,

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Speaker 4: you had a badly demoralized workforce. Now as part of

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Speaker 4: his strategy, of course, McNerney back in the twenty tens,

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Speaker 4: it became necessary to replace people on the board with

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Speaker 4: people who had no technical degrees. They were one step

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Speaker 4: away from being complete randos who sold accordions. And you know,

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Speaker 4: the most farcical moment was Nicki Haley was on it

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Speaker 4: and she left because she didn't think the company should

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Speaker 4: be taking government money. It's a defense contractor, She's like, seriously,

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Speaker 4: So it was. It was a bizarre organization designed to

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Speaker 4: rubber stamp and not much more. It's gotten a little

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Speaker 4: bit better in the aftermath of the Mcast tragedies, but

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Speaker 4: oh boy, that terrible culture of bad governance and that

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Speaker 4: complete disconnect with the people who were charged with actually

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Speaker 4: doing their jobs, a complete lack of redress and inability

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Speaker 4: to push bad information. You know, I remember very well

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Speaker 4: on seven eight h seven when the seven eighty seven Dreamliner,

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Speaker 4: their last clean sheet designed, was rolled in and I

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Speaker 4: was talking to McNerney and he told me, like, this

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Speaker 4: plan's going to fly in September, well maybe October. No,

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Speaker 4: I didn't say that, and it took someone, It took

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Speaker 4: someone completely outside, a way lower down on the organization

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Speaker 4: chart to say, actually, Richard, that plane is filled with sand.

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Speaker 4: It's not flying for another year, which was correct, and

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Speaker 4: he's not going to be caught in a lie. He

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Speaker 4: simply had no way of knowing, and there was no

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Speaker 4: mechanism with which to transmit bad information up the food channel.

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Speaker 2: On the topic of culture, the other thing that tends

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Speaker 2: to come up is the acquisition of McDonald douglas and

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Speaker 2: the idea that well, you brought in these new executives

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Speaker 2: and they had much more of a numbers based focus.

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Speaker 2: And I'm always kind of curious is that true? First

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Speaker 2: of all? And then secondly, why did they seem to

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Speaker 2: wield so much influence within Boeing given that they were

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Speaker 2: the company being acquired, like presumably they were, you know,

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Speaker 2: in terms of social hierarchy on a lower rung.

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Speaker 4: Yeah, it's a complicated one. And of course the bitter

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Speaker 4: joke told it Boeing is that, you know, McDonald douglas

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Speaker 4: used Boeing's money to buy Boeing. You know, a bizarre

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Speaker 4: chain of events. There were all sorts of interpersonal reasons,

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Speaker 4: minor scandals and whatever else that resulted in a decapitation

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Speaker 4: of some of the key Boeing executives, and as a consequence,

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Speaker 4: McDonald douglas folks were there to fill the void because

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Speaker 4: they were kind of squeaky clean, until they too were toppled.

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Speaker 4: A couple of them were toppled by scandals too. It

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Speaker 4: was a bizarre chain of events, now, is it true? Well,

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Speaker 4: you know, there's no question McDonald douglas was far more

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Speaker 4: financially focused. It had been on a thirty year glide

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Speaker 4: path towards irrelevant because of this focus on you know,

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Speaker 4: finance and nothing more between, you know, the creation of

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Speaker 4: McDonald douglas in nineteen sixty seven and it's absorption into Boeing.

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Speaker 4: It was pretty clear the way things were going all

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Speaker 4: those years. Having said that, it was still an aerospace company, right,

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Speaker 4: What happened in the mid two thousands with Jim McNerney

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Speaker 4: and now Dave Calhoun is that jack welch ge culture,

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Speaker 4: which has nothing to do whatsoever with aerospace. They might

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Speaker 4: as well be hedge fund managers or somebody who's merely

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Speaker 4: concerned with numbers, and has no knowledge of the industry

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Speaker 4: whatsoever came to rule. So, yes, you can put some

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Speaker 4: of the blame in McDonald douglas people, but really it's

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Speaker 4: more that Jack Welch influence or that exposed heritage of

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Speaker 4: Jack Welch influence about seven or eight years later.

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Speaker 3: Jumping back towards the present, So you mentioned the comment

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Speaker 3: from the CEO last year where they're like, we're not

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Speaker 3: we're not in any rush to introduce a new clean

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Speaker 3: sheet plane. I assume that that's kind of the thing

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Speaker 3: shareholders like to hear because it means, you know, you're

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Speaker 3: not going to have a big upfront budget, that you

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Speaker 3: have a lot of no pun intended runways still left

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Speaker 3: with the existing product set. What are how do they

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Speaker 3: what are the costs of launching a brand new product?

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Speaker 3: And how do companies think about the cost benefits of

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Speaker 3: like when to launch one versus when to just try to,

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Speaker 3: you know, get more out of the existing product.

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Speaker 4: Yeah, that's that's, you know, a contentcious issue, an important

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Speaker 4: area of discussion. I'm kind of an outlier. I don't

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Speaker 4: think it would have mattered at all to investors, and indeed,

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Speaker 4: there would have been more positives than negatives. And you know,

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Speaker 4: if you look at it, this is a company now

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Speaker 4: with forty billion a net debt, down from forty five

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Speaker 4: or so a couple of years ago. So to start

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Speaker 4: a new program would be maybe two billion incremental per

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Speaker 4: year in independent research and development funding for you know,

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Speaker 4: probably about six years seven years with over could go higher.

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Speaker 4: Now that's obviously a drag on shareholder returns, but put

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Speaker 4: it in another way. We're now in a situation where

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Speaker 4: Airbus is competing, jets are getting hundreds thousands of orders.

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Speaker 4: They're losing market share at Boeing, wouldn't Some investors have

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Speaker 4: been galvanized by the site of Boeing getting those orders

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Speaker 4: with its new jet and said, what a great place

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Speaker 4: to park my cash because this is a long term

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Speaker 4: growth story. I'm not concerned with dividends and buybacks. I

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Speaker 4: just really like the idea. In a land where there's

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Speaker 4: plenty of capital available, not a lot of good ideas

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Speaker 4: out there, this is a safe bed.

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Speaker 3: Well, is there some part of the market, so like, theoretically,

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Speaker 3: is there some part of the market that right now

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Speaker 3: Boeing would be competing better in if it had a

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Speaker 3: different product, or like I mean, I don't know. I

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Speaker 3: don't know what the end buyer is. But if you're

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Speaker 3: sort of dreaming what they or imagining what that next

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Speaker 3: plane would look like, what is the end buyer that

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Speaker 3: they're not tapping into that maybe going to Airbus.

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Speaker 4: This has been apparent for at least a decade. Basically,

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Speaker 4: there's this middle market of about two hundred to two

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Speaker 4: hundred and thirty seats, about five thousand nautical miles. It's

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Speaker 4: a fragmentation machine. It allows people to bypass crowded hubs

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Speaker 4: and fly point to point where they want to go.

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Speaker 4: Now right now, Airbus has a license to mint money

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Speaker 4: with the A three twenty one Neo. It's not very

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Speaker 4: good at that frankly, that mid market, but it's the

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Speaker 4: one product you can buy if you're an airline. So

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Speaker 4: guess what everyone is buying it. The order book for

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Speaker 4: the three twenty one Neo is now about the same

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Speaker 4: as the order book for all variants of the seven

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Speaker 4: thirty seven Max family. And last year, after Dave Calhoun

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Speaker 4: said don't worry, we won't compete in that class, they

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Speaker 4: sold a record thirteen hundred of those jets. And what's

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Speaker 4: frustrating is it's not a very good jet. You could

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Speaker 4: defeat it the way Boeing has always defeated the Boeing

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Speaker 4: has had a second mover philosophy. Seven sixty seven, Triple seven,

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Speaker 4: seven eighty seven, Triple seven, three hundred R all of

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Speaker 4: them were responses, and they all did somewhere between five

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Speaker 4: and ten percent better than the jets they went against.

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Speaker 4: They won. That's how the company conquered the universe.

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Speaker 2: This just reminds me it's kind of ancient history. But

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Speaker 2: wasn't there an argument that when Airbus actually started developing

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Speaker 2: the eight three twenties, I guess it would have been

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Speaker 2: in the nineteen eighties that Boeing could have and probably

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Speaker 2: should have, in retrospect, just like immediately killed it and

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Speaker 2: gone head to head by developing a new aircraft.

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Speaker 4: Yeah. I don't believe that, because the three twenty is

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Speaker 4: a good plane, but you know, the response to it

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Speaker 4: basically well, it was right in the middle of the

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Speaker 4: seven thirty seven, three four, five hundred series, which continued

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Speaker 4: to do pretty well, and they replaced it with the

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Speaker 4: NG it did amazing. So I'm just you know, this

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Speaker 4: is clearly the Max is clearly the last stop on

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Speaker 4: the seven thirty seven line, no question of that, and

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Speaker 4: it really is having a hard time scaling it up

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Speaker 4: to be that middle market machine. Matter of fact, it's impossible,

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Speaker 4: so there are limits. But the seven thirty seven intes

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Speaker 4: of itself, I think is actually a pretty good product.

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Speaker 4: It's how it was executed that's the problem.

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Speaker 2: So this was actually going to be my next question,

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Speaker 2: but Calhoun says they're not going to develop anything for

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Speaker 2: ten years, which could mean that they don't have a

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Speaker 2: clean sheet aircraft flying like until twenty forty or something

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Speaker 2: like that. And at the same time, Airbus is taking

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Speaker 2: massive amounts of market share. The two used to be

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Speaker 2: Boeing and Airbus used to be fairly evenly match. That

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Speaker 2: is definitely no longer the case. But A, what does

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Speaker 2: Boeing do in this situation to catch up? And then

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Speaker 2: I guess B is there actually a desire to catch up?

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Speaker 4: This looks like a glide slope towards oblivion, because remember

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Speaker 4: it's not just the loss of market share, it's also

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Speaker 4: the demographics. You know, engineering workforces have that muscle memory

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Speaker 4: that needs to be maintained. And it's been since two

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Speaker 4: thousand and four that they've launched, since they've last launched

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Speaker 4: a clean sheet design. They've done some good work since.

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Speaker 4: But again you're talking about an aging engineering workforce that's

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Speaker 4: not attracting new people. Well, they have the kind of

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Speaker 4: core skills needed to create a new jet in the

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Speaker 4: twenty thirties. I have no idea.

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Speaker 3: That is such a fascinating point that. I mean, we

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Speaker 3: talk about it in some context, this idea of like

398
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Speaker 3: internal no how, but I hadn't thought about this idea.

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Speaker 3: If you have nobody, or if it's been decades since

400
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Speaker 3: you've done you've started a plane from scratch, do you

401
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Speaker 3: still have anyone there? What makes a good plane? I

402
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Speaker 3: have no idea. I fly. I don't really pay much attention.

403
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Speaker 3: I never know what kind of aircraft amounta. You know,

404
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Speaker 3: if it gets me there, that's fine. When you say

405
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Speaker 3: it's a good plan or it's not a very good plane.

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Speaker 3: When you're talking about the newest airbust one, what makes

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Speaker 3: a good plane?

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Speaker 4: Well, you know, obviously safety is table stakes get that

409
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Speaker 4: out of the way. But the most important thing is

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Speaker 4: to acknowledge that your customers, and you need to talk

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Speaker 4: with at least fifteen or twenty of them before launching

412
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Speaker 4: a jet, have incredibly narrow profit margins, which means if

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Speaker 4: you can do specific routes for them, that's you know,

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Speaker 4: five or ten percent better, you win. That's what happens.

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Speaker 3: This is it's about fuel efficiency, the cost of like

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Speaker 3: a McCant, like how much repair they need, like.

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Speaker 4: Your total operating costs. You know, it's a function of

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Speaker 4: fuel efficiency and of course maintainability, but really fuel efficiency. Now,

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Speaker 4: revenue two is important, so things like belly cargo, the

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Speaker 4: ability to put revenue producing cargo under the hold of

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Speaker 4: the jet. Obviously, getting passenger configuration right, that's absolutely key.

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Speaker 4: And then there's the extraneous stuff like you know, little frills,

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Speaker 4: passenger comfort, you know, blue lights, whatever. That matters a

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Speaker 4: whole heck of a lot less than the importance. The

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Speaker 4: three twenty one neo is, you know, the latest development

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Speaker 4: of that nineteen eighties era a three twenty family. It

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Speaker 4: should have bigger wings to do longer routes, and more

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Speaker 4: powerful engines. It should have, you know, basically, it should

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Speaker 4: be more of a proper mid market jet rather than

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Speaker 4: a scaled up one hundred and fifty seater that's trying

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Speaker 4: to do the job. Is it catastrophic? No, That's why

432
00:23:56,760 --> 00:24:00,159
Speaker 4: everyone wants it. You know, it's it's good enough. But

433
00:24:00,240 --> 00:24:03,480
Speaker 4: the point is that in an industry where everyone has

434
00:24:03,520 --> 00:24:07,440
Speaker 4: two percent profit margins, if they're super lucky and super good, yes,

435
00:24:07,600 --> 00:24:11,000
Speaker 4: you can beat that by five or ten percent in efficiency,

436
00:24:11,080 --> 00:24:14,440
Speaker 4: probably more like fifteen or twenty I'm thinking at the stage.

437
00:24:14,800 --> 00:24:17,000
Speaker 4: So there's no reason not to build it. And when

438
00:24:17,160 --> 00:24:19,520
Speaker 4: Dave Calhoun said we're not going to do anything new,

439
00:24:19,560 --> 00:24:22,760
Speaker 4: he said, well, we need at least a thirty percent improvement,

440
00:24:22,960 --> 00:24:25,560
Speaker 4: which is complete nonsense in the context of how this

441
00:24:25,680 --> 00:24:27,000
Speaker 4: business actually operates.

442
00:24:27,280 --> 00:24:29,840
Speaker 2: I just I suddenly had a sort of blast from

443
00:24:29,880 --> 00:24:32,400
Speaker 2: the past where I remembered wasn't there a moment in

444
00:24:32,640 --> 00:24:34,119
Speaker 2: I guess it would have been like two thousand and

445
00:24:34,160 --> 00:24:37,280
Speaker 2: seven or two thousand and eight when easy Jet designed

446
00:24:37,400 --> 00:24:39,679
Speaker 2: its own aircraft or said it was going to design

447
00:24:39,720 --> 00:24:43,280
Speaker 2: its own aircraft and it had like little propellers on

448
00:24:43,320 --> 00:24:46,000
Speaker 2: the wings, but like weird propellers. It was the jet

449
00:24:46,040 --> 00:24:50,760
Speaker 2: but also propellers. Am I like completely misremembering that? No?

450
00:24:50,840 --> 00:24:53,760
Speaker 4: And you know, just for comic relief, there's always that

451
00:24:53,800 --> 00:24:57,080
Speaker 4: moment when a discount carrier pretends to actually have engineers,

452
00:24:57,119 --> 00:24:58,560
Speaker 4: which is always adorable.

453
00:25:00,760 --> 00:25:03,960
Speaker 3: Just real quickly when you say the seven thirty seven

454
00:25:04,040 --> 00:25:07,880
Speaker 3: Max family can't really be a great middle market jet.

455
00:25:07,920 --> 00:25:09,280
Speaker 3: What is the constraint there?

456
00:25:09,720 --> 00:25:12,480
Speaker 4: You know it gets this is arcane. But you know

457
00:25:12,600 --> 00:25:15,600
Speaker 4: the clearance under a seven thirty seven wing allows for

458
00:25:15,680 --> 00:25:17,480
Speaker 4: about sixty nine inches of fin.

459
00:25:17,400 --> 00:25:20,640
Speaker 3: We like ourcane. So these details about clearance under the wing,

460
00:25:20,760 --> 00:25:23,119
Speaker 3: this is catnip for us. So good, Oh, go on,

461
00:25:23,200 --> 00:25:25,679
Speaker 3: go okay, these are the details we live for, So

462
00:25:25,720 --> 00:25:26,360
Speaker 3: explain that.

463
00:25:26,640 --> 00:25:30,040
Speaker 4: Ultimately, you know, an engine's fuel efficiency is a function

464
00:25:30,119 --> 00:25:32,080
Speaker 4: of its bypass ratio, the amount of air that goes

465
00:25:32,080 --> 00:25:34,440
Speaker 4: around the core rather than through the core. You want

466
00:25:34,440 --> 00:25:37,280
Speaker 4: a nice big fan and the A three twenty you

467
00:25:37,280 --> 00:25:40,680
Speaker 4: can accommodate eighty one inches of fan. Seven thirty seven

468
00:25:40,800 --> 00:25:43,520
Speaker 4: Max is out if you will hahaha at sixty nine

469
00:25:43,680 --> 00:25:44,320
Speaker 4: and change.

470
00:25:44,920 --> 00:25:47,640
Speaker 2: So I'm conscious. We've been talking a lot about the

471
00:25:47,680 --> 00:25:51,760
Speaker 2: commercial aircraft sign up Boeing, but obviously defense and military

472
00:25:51,800 --> 00:25:55,080
Speaker 2: applications are a huge part of the business. Are we

473
00:25:55,200 --> 00:25:59,639
Speaker 2: hearing anything from I guess the government and specifically the

474
00:25:59,680 --> 00:26:05,160
Speaker 2: depart of Defense about recent travis at Boeing and what

475
00:26:05,240 --> 00:26:07,440
Speaker 2: they could actually mean for US security?

476
00:26:08,560 --> 00:26:11,240
Speaker 4: We should be God, we should be, are we? No?

477
00:26:11,560 --> 00:26:15,800
Speaker 4: It's the strangest thing. You know. Obviously, the Air Force

478
00:26:15,840 --> 00:26:19,000
Speaker 4: in particular has had serious issues with the cost overruns

479
00:26:19,000 --> 00:26:22,880
Speaker 4: and delays on the next generation tanker, the next generation trainer,

480
00:26:23,280 --> 00:26:27,119
Speaker 4: Air Force one, whatever else. But in terms of a

481
00:26:27,160 --> 00:26:30,199
Speaker 4: holistic look at what this means for the US defense

482
00:26:30,240 --> 00:26:35,199
Speaker 4: industrial base in national security, there's been a shocking absence

483
00:26:35,560 --> 00:26:36,680
Speaker 4: of interest.

484
00:26:36,680 --> 00:26:40,639
Speaker 3: Speaking of defense and speaking of the military purposes this.

485
00:26:40,920 --> 00:26:42,840
Speaker 3: Maybe this is like a little tangent, but I think

486
00:26:42,840 --> 00:26:44,680
Speaker 3: it relates to some other things. I've been reading through

487
00:26:44,760 --> 00:26:49,360
Speaker 3: some of your notes in preparation for this conversation. One

488
00:26:49,440 --> 00:26:52,480
Speaker 3: of the things that I did not realize previously is

489
00:26:52,560 --> 00:26:57,960
Speaker 3: how many countries have at some point tried to establish

490
00:26:58,040 --> 00:27:02,000
Speaker 3: a domestic fighter jet operation, and quite a few. I

491
00:27:02,000 --> 00:27:05,119
Speaker 3: don't know how many succeeded. Why has there been so

492
00:27:05,240 --> 00:27:08,720
Speaker 3: much of a proliferation of homegrown attempts to build a

493
00:27:08,760 --> 00:27:11,520
Speaker 3: fighter jet? And then like, why do we still see

494
00:27:11,600 --> 00:27:15,920
Speaker 3: so few companies around the world making inroads at all

495
00:27:16,119 --> 00:27:17,159
Speaker 3: in the commercial space?

496
00:27:18,240 --> 00:27:23,320
Speaker 4: Yeah, great question, Probably because the definition of good enough

497
00:27:23,359 --> 00:27:26,240
Speaker 4: in defense is very different from the definition of good wondering,

498
00:27:27,520 --> 00:27:29,880
Speaker 4: you know, I mean, if you build a good enough

499
00:27:29,960 --> 00:27:32,040
Speaker 4: jet that's for your own you know, well, we can't.

500
00:27:32,800 --> 00:27:35,199
Speaker 4: We have to provide some kind of fallback plan and

501
00:27:35,240 --> 00:27:38,280
Speaker 4: the event we're cut off you know, where there's an

502
00:27:38,320 --> 00:27:41,800
Speaker 4: embargo or what have you, or we just want jobs

503
00:27:41,800 --> 00:27:43,960
Speaker 4: and we're you know, willing to take a few higher

504
00:27:43,960 --> 00:27:48,119
Speaker 4: casualties as a consequence, Yes, the casual you know, there

505
00:27:48,160 --> 00:27:50,320
Speaker 4: could be a problem with higher casualties in the event

506
00:27:50,359 --> 00:27:52,440
Speaker 4: of an actual war. That's why, you know, we look

507
00:27:52,480 --> 00:27:55,680
Speaker 4: at these new emerging players and often say, basically, it's

508
00:27:55,720 --> 00:27:57,879
Speaker 4: the folks in the lab coats battling with the folks

509
00:27:57,880 --> 00:27:59,760
Speaker 4: in the flight jackets. And the folks in the flight

510
00:27:59,840 --> 00:28:02,280
Speaker 4: jack gets want best value for money and the folks

511
00:28:02,320 --> 00:28:05,600
Speaker 4: in the lab codes want to do something cool in country.

512
00:28:05,720 --> 00:28:08,359
Speaker 4: The commercial world is different. It's a global business, and

513
00:28:08,720 --> 00:28:11,719
Speaker 4: if people have two percent margins, they're doing pretty good.

514
00:28:12,119 --> 00:28:16,200
Speaker 4: So if they buy something that's six or seven percent

515
00:28:16,320 --> 00:28:19,280
Speaker 4: worse than the other guy, they they might as well

516
00:28:19,320 --> 00:28:23,520
Speaker 4: go and make children's confectionery or something. It's just totally pointless.

517
00:28:24,200 --> 00:28:29,119
Speaker 2: So obviously Boeing gets money from the government in terms

518
00:28:29,119 --> 00:28:32,959
Speaker 2: of defense contracts and things like that, although sometimes Boeing executives,

519
00:28:32,960 --> 00:28:35,600
Speaker 2: as you pointed out earlier, don't seem to want to

520
00:28:35,640 --> 00:28:39,880
Speaker 2: recognize that fact, But how would you characterize I guess

521
00:28:39,960 --> 00:28:44,240
Speaker 2: the differences in public funding between I have to be

522
00:28:44,320 --> 00:28:48,600
Speaker 2: careful how I phrase this question between Boeing and Airbus.

523
00:28:49,080 --> 00:28:52,680
Speaker 4: Historically, air Bus got a lot more launchade, which enabled

524
00:28:52,680 --> 00:28:55,840
Speaker 4: it to do some mightily stupid things, the A three

525
00:28:55,920 --> 00:28:58,720
Speaker 4: eighty being perhaps the worst product launch in the history

526
00:28:58,720 --> 00:29:04,160
Speaker 4: of the business and theoretically replayable launch. It wasn't what

527
00:29:04,200 --> 00:29:06,200
Speaker 4: it sounded like. You know, yes, if you succeed, you

528
00:29:06,240 --> 00:29:09,240
Speaker 4: repay it, but if you fail, you know, well, sucks

529
00:29:09,240 --> 00:29:12,920
Speaker 4: to be U tax payer. End of story. Boeing didn't

530
00:29:12,960 --> 00:29:16,040
Speaker 4: really get that. You know, there was some NASA technology

531
00:29:16,080 --> 00:29:21,800
Speaker 4: development of funding, but that's pretty that's kind of ecumenical

532
00:29:21,840 --> 00:29:25,680
Speaker 4: throughout the industry and just doesn't move the needle. Airbus

533
00:29:25,760 --> 00:29:30,280
Speaker 4: would counter that Boeing of course had significant defense revenue,

534
00:29:30,400 --> 00:29:33,920
Speaker 4: and Boeing, of course would counter that Airbus was not

535
00:29:34,040 --> 00:29:37,480
Speaker 4: without its defense side, which is also true. So it

536
00:29:37,560 --> 00:29:40,840
Speaker 4: became kind of he said, he said, you know, it's

537
00:29:40,920 --> 00:29:45,280
Speaker 4: just I don't think you can draw any conclusions. It

538
00:29:45,400 --> 00:29:48,960
Speaker 4: is pretty clear that Boeing to a certain extent, did

539
00:29:49,040 --> 00:29:52,720
Speaker 4: best when it ignored the issue altogether. Air Bus got

540
00:29:52,880 --> 00:29:55,880
Speaker 4: enormous subsidies to build a plane called the A three forty,

541
00:29:55,920 --> 00:29:59,000
Speaker 4: which was also a piece of junk. Boeing said, yeah,

542
00:29:59,080 --> 00:30:01,640
Speaker 4: we're just going to do the t and we're not

543
00:30:01,640 --> 00:30:05,720
Speaker 4: going to get government subsidies, and they covered air Bus

544
00:30:05,760 --> 00:30:08,720
Speaker 4: on that. So I think it is if you look

545
00:30:08,720 --> 00:30:12,280
Speaker 4: at purely the numbers, an issue. But in the you know,

546
00:30:12,400 --> 00:30:15,720
Speaker 4: the real world of actually building and launching new products,

547
00:30:15,720 --> 00:30:17,480
Speaker 4: it's a It's a bit of a known issue.

548
00:30:17,840 --> 00:30:20,760
Speaker 3: So as long as we're talking about government support or

549
00:30:20,800 --> 00:30:26,560
Speaker 3: state champion manufacturing companies, I have a very general question,

550
00:30:26,600 --> 00:30:29,320
Speaker 3: which is how does Embra air exist? And I mean

551
00:30:29,320 --> 00:30:31,000
Speaker 3: that in the sense that there aren't a lot of

552
00:30:31,040 --> 00:30:35,240
Speaker 3: advanced manufacturing companies in Latin America. There really aren't very

553
00:30:35,280 --> 00:30:38,680
Speaker 3: many commercial plane makers anywhere in the entire world. We

554
00:30:38,720 --> 00:30:40,720
Speaker 3: know China has been working on it for a long time.

555
00:30:41,240 --> 00:30:43,840
Speaker 3: How is there talk to Can you tell me? Just

556
00:30:43,880 --> 00:30:46,320
Speaker 3: out of my own curiosity? At some point, I want

557
00:30:46,360 --> 00:30:50,400
Speaker 3: to do an episode on this about how Brazil managed

558
00:30:50,400 --> 00:30:55,000
Speaker 3: to produce as a reasonably successful jet making company.

559
00:30:55,280 --> 00:30:58,040
Speaker 4: Oh, we need another episode. I mean I love this topic.

560
00:30:58,200 --> 00:31:00,240
Speaker 2: I would be I would love to just you want

561
00:31:00,240 --> 00:31:02,840
Speaker 2: to We've been talking about.

562
00:31:03,280 --> 00:31:06,080
Speaker 3: A number story. But what is this sort of like

563
00:31:06,320 --> 00:31:09,520
Speaker 3: you know, the short the tweet length version, the tweet.

564
00:31:09,320 --> 00:31:11,320
Speaker 4: Length thro oh god, one and forty characters.

565
00:31:12,760 --> 00:31:14,280
Speaker 2: If you pay, you can go longer.

566
00:31:14,640 --> 00:31:19,360
Speaker 4: Okay, yes, right, certified X or whatever. You know. First

567
00:31:19,400 --> 00:31:22,960
Speaker 4: of all, remember they did a bunch of incredibly smart

568
00:31:22,960 --> 00:31:26,520
Speaker 4: things in the nineteen nineties, but for thirty years before that,

569
00:31:26,600 --> 00:31:30,960
Speaker 4: they were a ridiculous playground for some fascist hunt I

570
00:31:31,000 --> 00:31:34,680
Speaker 4: mean nothing more. They got a couple of right products,

571
00:31:34,720 --> 00:31:37,520
Speaker 4: and then they privatized it became their own company, and

572
00:31:37,560 --> 00:31:41,280
Speaker 4: they they they became just absolutely the best aircraft I

573
00:31:41,280 --> 00:31:44,200
Speaker 4: think company on the on the planet, and by some metrics.

574
00:31:44,480 --> 00:31:46,080
Speaker 4: You know. I always like to joke if this was

575
00:31:46,240 --> 00:31:48,760
Speaker 4: a restaurant, this would be the restaurant where chefs from

576
00:31:48,760 --> 00:31:51,200
Speaker 4: all the other restaurants would go and eat after there.

577
00:31:51,240 --> 00:31:54,160
Speaker 4: You know, it's just has enormous respect and they tend

578
00:31:54,200 --> 00:31:56,840
Speaker 4: to get products right. The other thing they did so

579
00:31:56,880 --> 00:31:59,360
Speaker 4: that they're with that aspect of lock after many decades

580
00:31:59,400 --> 00:32:02,480
Speaker 4: of trying and not doing so good. But then also

581
00:32:02,600 --> 00:32:05,040
Speaker 4: they did the exact opposite of what China's doing. Now.

582
00:32:05,040 --> 00:32:07,600
Speaker 4: What China is doing is saying you've got to transfer

583
00:32:07,640 --> 00:32:10,480
Speaker 4: technology and we're giving you no intellectual property protection, so

584
00:32:10,560 --> 00:32:12,720
Speaker 4: show up with your latest and best from I don't know,

585
00:32:12,840 --> 00:32:16,240
Speaker 4: nineteen seventy nine. And as a result, they're producing perfectly

586
00:32:16,280 --> 00:32:20,040
Speaker 4: crap airplanes. Embraer said, actually, we don't want you to

587
00:32:20,080 --> 00:32:22,680
Speaker 4: transfer technology. We want to integrate what you've got kind

588
00:32:22,680 --> 00:32:25,720
Speaker 4: of a Dell computer model, and you've got IP protection,

589
00:32:25,960 --> 00:32:27,960
Speaker 4: and we're just out to build the best computers for

590
00:32:28,080 --> 00:32:31,200
Speaker 4: a airplane we can. And it's worked brilliantly.

591
00:32:47,920 --> 00:32:49,680
Speaker 2: I just remember the first time I ever went to

592
00:32:49,760 --> 00:32:53,840
Speaker 2: Paris was to attend an embryor event. And it's funny

593
00:32:53,920 --> 00:32:56,760
Speaker 2: you say it's well regarded, because I remember going there

594
00:32:57,000 --> 00:32:59,720
Speaker 2: and they had like it was in a fancy building,

595
00:33:00,080 --> 00:33:03,320
Speaker 2: just sort of being blown away by the optics around

596
00:33:03,320 --> 00:33:07,960
Speaker 2: this particular company. But maybe talk to us about COMAC,

597
00:33:08,440 --> 00:33:12,000
Speaker 2: because I'm conscious we're sort of hitting all these different nationalities,

598
00:33:12,040 --> 00:33:15,000
Speaker 2: but we haven't yet spoken about China. China of course

599
00:33:15,280 --> 00:33:19,760
Speaker 2: making a big push into this particular area in part

600
00:33:19,920 --> 00:33:23,600
Speaker 2: for strategic and you know, security considerations as well.

601
00:33:24,280 --> 00:33:26,560
Speaker 4: Yeah, I mean, in a lot of ways, COMAC is

602
00:33:26,600 --> 00:33:29,520
Speaker 4: sort of an insurance policy against autarchy in the event

603
00:33:29,560 --> 00:33:32,280
Speaker 4: of total decoupling between China and the West. At least

604
00:33:32,320 --> 00:33:35,920
Speaker 4: they may be able to produce their own aircraft. The problem,

605
00:33:35,960 --> 00:33:38,360
Speaker 4: of course, is that nobody had the conversation with President

606
00:33:38,440 --> 00:33:42,800
Speaker 4: she that these aren't really Chinese aircraft. They're Western systems

607
00:33:43,160 --> 00:33:47,360
Speaker 4: and engines and avionics all assembled with Chinese aluminum over them.

608
00:33:47,680 --> 00:33:52,000
Speaker 4: So you know, if there is decoupling, these things die quickly.

609
00:33:53,280 --> 00:33:58,040
Speaker 4: Maybe they'll rectify that by building their entire aerospace industry out.

610
00:33:58,080 --> 00:34:00,800
Speaker 4: That'll take many decades and hundreds of millions of dollars.

611
00:34:00,800 --> 00:34:04,480
Speaker 4: Good luck with that. The other problem with that comeback,

612
00:34:04,520 --> 00:34:08,480
Speaker 4: of course, is it reflects President Cheese desired to basically

613
00:34:08,560 --> 00:34:12,040
Speaker 4: turn the economy away from the private sector and towards

614
00:34:12,120 --> 00:34:15,640
Speaker 4: data owned enterprises, the exact opposite of what Embre Air did.

615
00:34:16,239 --> 00:34:18,600
Speaker 4: So there are so many and it's all right frustrating

616
00:34:18,640 --> 00:34:22,319
Speaker 4: because you look at China, great market, great talent, and

617
00:34:22,440 --> 00:34:25,239
Speaker 4: great resources. The only thing they could be doing to

618
00:34:25,280 --> 00:34:28,080
Speaker 4: screw that up on the aircraft front is what they're doing.

619
00:34:28,480 --> 00:34:32,960
Speaker 3: Wait, so they're bad plans, Oh, they're what's wrong with them?

620
00:34:33,000 --> 00:34:35,359
Speaker 3: Because I will lead like I mean, I know they're

621
00:34:35,400 --> 00:34:37,200
Speaker 3: selling a lot more, but of course they're selling to

622
00:34:37,280 --> 00:34:40,719
Speaker 3: domestic Chinese airlines, so it doesn't say very much. Necessarily,

623
00:34:41,000 --> 00:34:43,600
Speaker 3: they have put in applications. I think they do want

624
00:34:43,600 --> 00:34:46,920
Speaker 3: to theoretically sell into the European market at some point.

625
00:34:47,120 --> 00:34:49,799
Speaker 3: They're trying to get approval. But what is your assessment

626
00:34:49,960 --> 00:34:51,640
Speaker 3: of where these plans fall short or why?

627
00:34:52,239 --> 00:34:54,600
Speaker 4: First of all, selling is one thing, building is another.

628
00:34:54,760 --> 00:34:58,359
Speaker 4: I mean they've been selling for about fifteen twenty years now.

629
00:34:58,440 --> 00:35:00,160
Speaker 3: Okay, they do have some in the air now, so

630
00:35:00,200 --> 00:35:00,840
Speaker 3: what is wrong?

631
00:35:01,160 --> 00:35:03,720
Speaker 4: Yeah, they've they have delivered three see nine one nines

632
00:35:03,920 --> 00:35:06,160
Speaker 4: and about a one hundred or so ARJ twenty one

633
00:35:06,200 --> 00:35:09,880
Speaker 4: regional jets. The ARJ twenty one was the first produced

634
00:35:10,040 --> 00:35:13,759
Speaker 4: mass produced aircraft in China. Jet liner aircraft produced in China,

635
00:35:13,760 --> 00:35:16,360
Speaker 4: and it's massively heavier than where it should be and

636
00:35:16,480 --> 00:35:19,200
Speaker 4: has systems that were introduced in Western jets back in

637
00:35:19,239 --> 00:35:24,160
Speaker 4: the seventies. You know, again a reflection of people's skittishness

638
00:35:24,160 --> 00:35:29,279
Speaker 4: about transferring intellectual property with no intellectual property protection. So

639
00:35:29,640 --> 00:35:33,160
Speaker 4: they're bringing their latest invest from decades ago. Now the

640
00:35:33,239 --> 00:35:35,399
Speaker 4: nine one nine looks a little better. We'll see if

641
00:35:35,440 --> 00:35:39,160
Speaker 4: they build it in significant numbers. They have yet to

642
00:35:39,320 --> 00:35:43,320
Speaker 4: establish the kind of massive global support apparatus which costs

643
00:35:43,320 --> 00:35:46,680
Speaker 4: an awful lot of money. The nine one nine two

644
00:35:47,200 --> 00:35:49,840
Speaker 4: is you know, same design parameters. Bring us your latest

645
00:35:49,840 --> 00:35:52,640
Speaker 4: invest and know we won't protect your IP. So I'm

646
00:35:52,719 --> 00:35:55,000
Speaker 4: having a hard time believing that it will be a

647
00:35:55,000 --> 00:35:57,880
Speaker 4: whole lot better. But again, they could change it all tomorrow.

648
00:35:57,920 --> 00:36:01,919
Speaker 4: They could say we're privatizing, we're giving up protection. All

649
00:36:01,960 --> 00:36:03,759
Speaker 4: we want to do is be like embra or I'd

650
00:36:03,800 --> 00:36:05,400
Speaker 4: be terrified they'd conquer the world.

651
00:36:06,120 --> 00:36:07,920
Speaker 2: This is kind of an unfair question, but would you

652
00:36:08,000 --> 00:36:10,200
Speaker 2: rather fly in a seven thirty seven Max or a

653
00:36:10,239 --> 00:36:11,080
Speaker 2: C nine to one nine.

654
00:36:12,640 --> 00:36:14,320
Speaker 4: You know, at the end of the day, the safety

655
00:36:14,360 --> 00:36:16,839
Speaker 4: of the Max is in the hands of the regulators,

656
00:36:16,920 --> 00:36:19,880
Speaker 4: And yes, the regulators can be under resource, but they

657
00:36:19,920 --> 00:36:24,279
Speaker 4: do their job. And that I think we simply have

658
00:36:24,760 --> 00:36:28,600
Speaker 4: the safety system in the world that speaks to that reality.

659
00:36:28,680 --> 00:36:31,840
Speaker 4: Our regulators do their job, you know. For comic relief

660
00:36:31,840 --> 00:36:34,359
Speaker 4: in all of this, you've got these politicians like JD.

661
00:36:34,520 --> 00:36:36,960
Speaker 4: Vans who've spent a lifetime trying to quote kill the

662
00:36:37,120 --> 00:36:40,480
Speaker 4: government and now saying, what's government doing for me? Why

663
00:36:40,520 --> 00:36:43,799
Speaker 4: isn't it keeping me safe here? When that's a problem. Right?

664
00:36:43,920 --> 00:36:45,760
Speaker 4: They need more resources, pure and simple.

665
00:36:45,960 --> 00:36:48,400
Speaker 2: Actually, this is exactly what I wanted to ask you,

666
00:36:48,440 --> 00:36:51,120
Speaker 2: because we did speak about the FAA a little bit

667
00:36:51,280 --> 00:36:55,120
Speaker 2: with our colleague Pete, but would more resources for the

668
00:36:55,200 --> 00:37:00,120
Speaker 2: regulator help in this instance because there were also accusation

669
00:37:00,280 --> 00:37:02,799
Speaker 2: that like maybe it wasn't understaffing, but maybe it was

670
00:37:02,880 --> 00:37:05,720
Speaker 2: just a too cozy relationship with Boeing.

671
00:37:06,360 --> 00:37:10,040
Speaker 4: You know, it could could easily be. But more resources

672
00:37:10,120 --> 00:37:13,960
Speaker 4: give you more relative power, you know, to explain, Look,

673
00:37:14,120 --> 00:37:16,799
Speaker 4: we're going to be making your life very difficult and

674
00:37:16,880 --> 00:37:19,160
Speaker 4: coming up the works that unless you play a ball now,

675
00:37:19,280 --> 00:37:22,239
Speaker 4: is there that coziness if so, that needs to be

676
00:37:22,360 --> 00:37:25,000
Speaker 4: understood and rooted out. Maybe it's not a resource, Maybe

677
00:37:25,000 --> 00:37:27,759
Speaker 4: it's a cultural thing there too. I don't see how

678
00:37:27,800 --> 00:37:30,680
Speaker 4: more resources couldn't help real.

679
00:37:30,640 --> 00:37:32,759
Speaker 3: Quickly on MBRER because I realized I didn't. I don't

680
00:37:32,800 --> 00:37:35,399
Speaker 3: know this. It's still it's a really tiny company. Who

681
00:37:35,440 --> 00:37:36,520
Speaker 3: is their market?

682
00:37:37,320 --> 00:37:40,560
Speaker 4: Well, they produce what you might call somewhere in between

683
00:37:40,719 --> 00:37:43,960
Speaker 4: regional jets and mainline jets. So you've got regional airlines

684
00:37:44,000 --> 00:37:46,160
Speaker 4: like you know, SkyWest or whoever, and then you've got

685
00:37:46,600 --> 00:37:50,080
Speaker 4: a few mainline carriers here and there that also used.

686
00:37:50,120 --> 00:37:51,960
Speaker 4: It's kind of a no man's land of a market.

687
00:37:52,040 --> 00:37:54,960
Speaker 4: But a really good jet. They also have a significant

688
00:37:54,960 --> 00:37:58,520
Speaker 4: military side, and then they've got a really superb and

689
00:37:58,600 --> 00:38:02,080
Speaker 4: successful business jets side. They decided years ago to get

690
00:38:02,120 --> 00:38:05,480
Speaker 4: into that market and they've been doing really well there.

691
00:38:05,360 --> 00:38:08,120
Speaker 3: On the C nine one nine do we have I

692
00:38:08,120 --> 00:38:11,480
Speaker 3: mean we must, but from a sort of spec standpoint

693
00:38:11,480 --> 00:38:17,279
Speaker 3: when it comes to fuel efficiency, maintenance needs per mile, whatever,

694
00:38:17,520 --> 00:38:21,600
Speaker 3: whatever metric you like to use, do we have good

695
00:38:21,680 --> 00:38:23,400
Speaker 3: data on that and do you have just like a

696
00:38:23,440 --> 00:38:25,520
Speaker 3: sense on like on paper, how it stacks up?

697
00:38:25,840 --> 00:38:28,960
Speaker 4: Not really, no, I mean it has Leap one C

698
00:38:29,400 --> 00:38:34,839
Speaker 4: engines from General Electric working with Saffron under CFM, which

699
00:38:34,840 --> 00:38:37,160
Speaker 4: should be too radically different from the Leap one a's

700
00:38:37,239 --> 00:38:40,600
Speaker 4: on Airbus and Leap one b's on Boeings. But we

701
00:38:40,680 --> 00:38:45,200
Speaker 4: don't know. There's just not enough data, maintainability, no idea whatsoever,

702
00:38:45,280 --> 00:38:47,759
Speaker 4: and the fact that it's only in service an extremely

703
00:38:47,760 --> 00:38:51,000
Speaker 4: small numbers two or three aircraft means we just can't

704
00:38:51,080 --> 00:38:54,200
Speaker 4: for some time. And again it doesn't reflect the establishment

705
00:38:54,200 --> 00:38:57,120
Speaker 4: of a giant support apparatus that they still need to do.

706
00:38:57,680 --> 00:38:59,240
Speaker 4: So no no data whatsoever.

707
00:38:59,400 --> 00:39:03,480
Speaker 3: So expanding through put must be difficult even for Airbus,

708
00:39:03,520 --> 00:39:06,239
Speaker 3: even with a huge order book, because they're probably needs to.

709
00:39:06,280 --> 00:39:08,920
Speaker 3: You know, even if everyone wanted to buy Airbus tomorrow

710
00:39:08,920 --> 00:39:11,000
Speaker 3: and sort of depart Boeing. You know, there's always so

711
00:39:11,080 --> 00:39:13,520
Speaker 3: much you can build it a given factory. How much

712
00:39:13,560 --> 00:39:16,920
Speaker 3: of a constraint is that on sort of short term

713
00:39:17,120 --> 00:39:21,160
Speaker 3: market share gains? And does that put a sort of

714
00:39:21,560 --> 00:39:24,359
Speaker 3: floor under Boeing's market cap the fact that people need

715
00:39:24,400 --> 00:39:27,400
Speaker 3: planes and it's not trivial to just sort of build

716
00:39:27,440 --> 00:39:29,920
Speaker 3: new facilities to expand from an airbus.

717
00:39:29,680 --> 00:39:32,920
Speaker 4: Perspective, absolutely, because remember it's not just the airbus facilities,

718
00:39:33,000 --> 00:39:35,480
Speaker 4: is all their suppliers. Oh yeah, And they've had a

719
00:39:35,560 --> 00:39:38,680
Speaker 4: rough time between you know, all the challenges in the

720
00:39:38,719 --> 00:39:41,680
Speaker 4: industry in the COVID nineteen pandemic and everything else like that,

721
00:39:42,440 --> 00:39:44,840
Speaker 4: so they're having a hard time gearing up. Seventy percent

722
00:39:44,880 --> 00:39:47,520
Speaker 4: plus at the value of a plane comes from the suppliers,

723
00:39:49,120 --> 00:39:51,479
Speaker 4: So it's it's now the cyndy can be yet again

724
00:39:52,200 --> 00:39:56,000
Speaker 4: thinks that Boeing top management says, industry with high barriers

725
00:39:56,000 --> 00:39:58,640
Speaker 4: to entry, high switching cost, real challenge and ramping up

726
00:39:58,640 --> 00:40:02,160
Speaker 4: At Airbus, we've only got a three year time horizon

727
00:40:02,200 --> 00:40:06,120
Speaker 4: from our own standpoint here, So who cares? Customers have

728
00:40:06,160 --> 00:40:08,839
Speaker 4: nowhere else to go but to stay with us as

729
00:40:08,840 --> 00:40:11,560
Speaker 4: we figure out how to ramp up. And when we

730
00:40:11,640 --> 00:40:15,120
Speaker 4: get that, you know, operating cash flow resumed, we'll give

731
00:40:15,160 --> 00:40:18,720
Speaker 4: it to investors. They'll reward us. We can then exit

732
00:40:18,840 --> 00:40:22,600
Speaker 4: and worry about someone else cleaning up after us.

733
00:40:22,960 --> 00:40:27,319
Speaker 2: Wait, how sticky is airline brand loyalty? Because of course

734
00:40:27,360 --> 00:40:31,680
Speaker 2: you do have famous examples. Southwest obviously springs to mind,

735
00:40:31,840 --> 00:40:35,520
Speaker 2: and it's entire fleet of seven thirty sevens. But how

736
00:40:35,560 --> 00:40:39,200
Speaker 2: difficult would it actually be for someone like a Southwest

737
00:40:39,280 --> 00:40:41,120
Speaker 2: to just say, you know what, we're going to move

738
00:40:41,160 --> 00:40:42,920
Speaker 2: to a mixed fleet and we're going to have some

739
00:40:43,080 --> 00:40:46,560
Speaker 2: a three twenties plus seven thirty sevens, or even we're

740
00:40:46,560 --> 00:40:49,640
Speaker 2: going to transition our entire fleet eventually away from Boeing.

741
00:40:50,320 --> 00:40:52,600
Speaker 4: There's no loyalty at all. It used to be that

742
00:40:52,640 --> 00:40:57,400
Speaker 4: there were you know, sort of homogeneity virtues if you will,

743
00:40:57,560 --> 00:41:03,480
Speaker 4: in fleet planning in terms of efficiency, right, efficiency, training, logistics.

744
00:41:03,520 --> 00:41:07,920
Speaker 4: That's all out the window because airlines have realized that frankly,

745
00:41:07,960 --> 00:41:10,839
Speaker 4: the ability to play off two suppliers against each other

746
00:41:11,320 --> 00:41:15,040
Speaker 4: gives you advantages when it comes to negotiating price. So

747
00:41:15,760 --> 00:41:17,759
Speaker 4: and that and the fact that very often airlines are

748
00:41:17,800 --> 00:41:20,239
Speaker 4: virtual anyway, a lot of their maintenance provided by a

749
00:41:20,280 --> 00:41:24,840
Speaker 4: third party player, and ditto for their training, means that, frankly,

750
00:41:24,960 --> 00:41:27,000
Speaker 4: is just not that big a challenge to operate a

751
00:41:27,040 --> 00:41:30,200
Speaker 4: heterogeneous fleet. And if you're like an airline like say Delta,

752
00:41:30,640 --> 00:41:34,200
Speaker 4: that has an in house maintenance department, you're even using

753
00:41:34,200 --> 00:41:37,239
Speaker 4: that as a virtue. You're basically establishing yourself as a

754
00:41:37,320 --> 00:41:41,040
Speaker 4: kind of sustainment center of excellence for a whole variety

755
00:41:41,080 --> 00:41:41,640
Speaker 4: of customers.

756
00:41:41,680 --> 00:41:45,560
Speaker 2: In the business you mentioned price, and of course the

757
00:41:45,680 --> 00:41:49,239
Speaker 2: actual price is paid for aircrafts by airlines tends to

758
00:41:49,280 --> 00:41:53,120
Speaker 2: be a closely guarded secret. So you'll see headlines that say,

759
00:41:53,280 --> 00:41:56,800
Speaker 2: like so and so orders x billion worth of aircraft,

760
00:41:56,800 --> 00:42:00,520
Speaker 2: but that's at the list prices, and almost all those

761
00:42:00,560 --> 00:42:03,800
Speaker 2: prices are adjusted or discounted. What are you hearing about

762
00:42:03,920 --> 00:42:07,879
Speaker 2: discounts on Boeing planes right now? Is that something that's

763
00:42:07,880 --> 00:42:09,520
Speaker 2: happening or could happen in the future.

764
00:42:10,320 --> 00:42:13,000
Speaker 4: We're kind of a poster child for deflation in this business.

765
00:42:13,400 --> 00:42:15,319
Speaker 4: You know, you look at the price paid for an

766
00:42:15,320 --> 00:42:18,480
Speaker 4: A three twenty or seven thirty seven. It's stayed shockingly

767
00:42:18,520 --> 00:42:21,480
Speaker 4: consistent over the past couple decades. A few ups and downs,

768
00:42:21,480 --> 00:42:24,480
Speaker 4: but pretty pretty flat, which means, of course every year

769
00:42:24,520 --> 00:42:28,719
Speaker 4: we're losing a couple percent in inflation. That's not good.

770
00:42:28,920 --> 00:42:31,360
Speaker 4: Now lately Airbus has gotten a bit more pricing power

771
00:42:31,480 --> 00:42:34,680
Speaker 4: because of Boeing's problems, and Boeing has had to incentivize

772
00:42:34,719 --> 00:42:38,800
Speaker 4: people for the massive delays, for the problems, the groundings, whatever.

773
00:42:39,440 --> 00:42:42,239
Speaker 4: So yes, it's very clear that there's a divergence in

774
00:42:42,320 --> 00:42:45,800
Speaker 4: pricing power, but it's in the context of an industry

775
00:42:45,840 --> 00:42:48,680
Speaker 4: that's kind of gotten a bit deflationary over the years.

776
00:42:49,239 --> 00:42:51,880
Speaker 2: So just to sum it all up, I realize we've

777
00:42:51,920 --> 00:42:55,520
Speaker 2: covered a lot of ground in this conversation, but if

778
00:42:55,600 --> 00:43:00,200
Speaker 2: you were to bet, what would you say Boeing's future is,

779
00:43:00,200 --> 00:43:01,359
Speaker 2: how do you see this playing out?

780
00:43:02,280 --> 00:43:05,440
Speaker 4: You know, to quote Joe Strummer, the future is unwritten

781
00:43:06,280 --> 00:43:08,239
Speaker 4: at the end of the day. The biggest mystery here

782
00:43:08,280 --> 00:43:10,600
Speaker 4: is why the board hasn't acted and done the right thing,

783
00:43:11,120 --> 00:43:14,480
Speaker 4: or government or an activist investors or somebody and said, okay,

784
00:43:14,800 --> 00:43:17,520
Speaker 4: people at the top, there are so many people counting

785
00:43:17,560 --> 00:43:20,000
Speaker 4: on you. They're all really good and frankly, you're just

786
00:43:20,040 --> 00:43:22,720
Speaker 4: not very good at your job. Please leave. Why hasn't

787
00:43:22,760 --> 00:43:25,200
Speaker 4: that happened. If it happens tomorrow, they'll be on the

788
00:43:25,200 --> 00:43:28,080
Speaker 4: long road back. We could be having a very different conversation.

789
00:43:28,200 --> 00:43:30,320
Speaker 4: By the end of the decade. They can even return

790
00:43:30,360 --> 00:43:33,319
Speaker 4: to market leadership. If it doesn't happen, they'll lurch from

791
00:43:33,360 --> 00:43:37,360
Speaker 4: crisis to crisis, disaster to disaster, hopefully not fatal ones,

792
00:43:37,920 --> 00:43:40,440
Speaker 4: and it won't be a pretty story in terms of

793
00:43:40,800 --> 00:43:41,920
Speaker 4: revenue and market share.

794
00:43:42,200 --> 00:43:44,440
Speaker 2: All right, Richard abou Lafia, it was so good to

795
00:43:45,040 --> 00:43:47,799
Speaker 2: talk to you after so many years. It was great

796
00:43:47,840 --> 00:43:49,560
Speaker 2: to catch up. Thank you for coming on all thoughts.

797
00:43:49,760 --> 00:43:52,240
Speaker 4: Oh really, my pleasure. Good speaking with you too. Thanks,

798
00:43:52,360 --> 00:43:52,959
Speaker 4: thank you, Richard.

799
00:43:53,000 --> 00:43:55,799
Speaker 3: That was great, and we really at some point let's

800
00:43:55,880 --> 00:43:58,200
Speaker 3: do Yeah, let's do the MBRA air episode because I'm

801
00:43:58,200 --> 00:44:00,319
Speaker 3: like fascinated by that story. And so if you think

802
00:44:00,320 --> 00:44:02,280
Speaker 3: there's a full episode you want to talk about, Okay,

803
00:44:02,280 --> 00:44:03,080
Speaker 3: we'll make it happen.

804
00:44:03,360 --> 00:44:05,120
Speaker 4: You should go there too.

805
00:44:05,320 --> 00:44:20,560
Speaker 2: Yeah, let's go, Joe. I want to say that was

806
00:44:20,600 --> 00:44:24,600
Speaker 2: a fun conversation, but actually it was in some respects,

807
00:44:24,600 --> 00:44:26,960
Speaker 2: but it was also kind of depressing.

808
00:44:27,239 --> 00:44:29,560
Speaker 3: Definitely depressing, but there was a lot in there that

809
00:44:29,600 --> 00:44:32,560
Speaker 3: I found very interesting. Perhaps the most important thing that

810
00:44:32,600 --> 00:44:35,120
Speaker 3: I hadn't really thought about, is the idea of getting

811
00:44:35,160 --> 00:44:38,520
Speaker 3: out of practice of launching a new product. Yeah, because

812
00:44:38,560 --> 00:44:41,480
Speaker 3: the idea that like, okay, internal know how we talk

813
00:44:41,520 --> 00:44:43,400
Speaker 3: about that all the time in terms of just the

814
00:44:43,480 --> 00:44:45,839
Speaker 3: day to day building. But then there's the separate thing

815
00:44:45,880 --> 00:44:47,600
Speaker 3: of every once in a while, maybe once in a

816
00:44:47,680 --> 00:44:50,400
Speaker 3: decade or something, you launch a new product which is

817
00:44:50,440 --> 00:44:52,960
Speaker 3: a different skill, upfront, costs, r and D, all that.

818
00:44:53,360 --> 00:44:55,399
Speaker 3: But if you go too long without doing that, then

819
00:44:55,440 --> 00:44:56,920
Speaker 3: you have no one on the team moved on it.

820
00:44:57,160 --> 00:44:57,239
Speaker 1: No.

821
00:44:57,280 --> 00:45:00,880
Speaker 2: And also just the sheer length of the development cycle

822
00:45:01,000 --> 00:45:04,440
Speaker 2: for aircraft, so you know, the last time Boeing launched

823
00:45:04,440 --> 00:45:08,799
Speaker 2: something was literally decades ago. And now the idea that, well,

824
00:45:08,840 --> 00:45:11,960
Speaker 2: if they don't launch anything in the next ten years,

825
00:45:12,000 --> 00:45:14,640
Speaker 2: then it could actually be you know, you could have

826
00:45:14,680 --> 00:45:17,960
Speaker 2: a whole generation of engineers that basically retire and are

827
00:45:18,000 --> 00:45:21,200
Speaker 2: gone by twenty forty when this thing is actually in

828
00:45:21,280 --> 00:45:24,280
Speaker 2: the air and flying. It's just it's kind of amazing

829
00:45:24,400 --> 00:45:26,919
Speaker 2: the lead times and I guess how much the planemakers

830
00:45:26,960 --> 00:45:30,600
Speaker 2: actually have to think on these super long time scales.

831
00:45:30,800 --> 00:45:34,240
Speaker 2: The other thing I found interesting, obviously, the public funding

832
00:45:34,400 --> 00:45:37,960
Speaker 2: debate has always been a hot topic issue and continues

833
00:45:37,960 --> 00:45:40,719
Speaker 2: to be so. But the idea of well, even if

834
00:45:40,719 --> 00:45:44,359
Speaker 2: there were cultural issues at the FAA, if you gave

835
00:45:44,440 --> 00:45:48,120
Speaker 2: them more resources at a minimum, it might end up

836
00:45:48,280 --> 00:45:51,640
Speaker 2: with like more power for that organization, I think was

837
00:45:51,680 --> 00:45:54,320
Speaker 2: the word Rich used. I thought that was kind of interesting.

838
00:45:54,520 --> 00:45:56,880
Speaker 3: Interesting. You was so negative on the on Comac. That

839
00:45:56,920 --> 00:45:58,440
Speaker 3: was sort of interesting because you just think like all

840
00:45:58,480 --> 00:46:01,600
Speaker 3: these like Chinese manufacturer companies are just gonna eat everyone's lunch.

841
00:46:01,600 --> 00:46:02,120
Speaker 3: Maybe they're not.

842
00:46:03,000 --> 00:46:05,720
Speaker 2: I think that's been a sort of long running question

843
00:46:06,120 --> 00:46:09,560
Speaker 2: with planes for obvious reasons and the safety concerns there.

844
00:46:09,760 --> 00:46:12,600
Speaker 2: But okay, well we definitely need to do an Emberer

845
00:46:12,800 --> 00:46:16,400
Speaker 2: episode and I'm down to go to Brazil if you

846
00:46:16,440 --> 00:46:19,080
Speaker 2: want to, Uh, let's do it. The other thing I

847
00:46:19,120 --> 00:46:22,799
Speaker 2: thought was interesting was he pushed back slightly on the

848
00:46:23,160 --> 00:46:26,560
Speaker 2: clean sheet idea for the Max and the notion that

849
00:46:26,600 --> 00:46:30,440
Speaker 2: Boeing should have designed an entirely new aircraft, which I

850
00:46:30,480 --> 00:46:32,799
Speaker 2: also thought was kind of interesting. And you don't hear

851
00:46:32,960 --> 00:46:36,200
Speaker 2: that often. But in the meantime, shall we leave it there?

852
00:46:36,360 --> 00:46:37,080
Speaker 3: Let's leave it there.

853
00:46:37,360 --> 00:46:40,480
Speaker 2: This has been another episode of the Odd Blots podcast.

854
00:46:40,520 --> 00:46:43,560
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy alloway and.

855
00:46:43,520 --> 00:46:45,960
Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart.

856
00:46:46,200 --> 00:46:49,640
Speaker 3: Follow our producers Kerman Rodriguez at Kerman Arman, dash Ol

857
00:46:49,640 --> 00:46:52,680
Speaker 3: Bennett at Dashbot, Kilbrooks at cal Brooks. Thank you to

858
00:46:52,719 --> 00:46:55,680
Speaker 3: our producer Moses onm. For more Odd Lots content, go

859
00:46:55,719 --> 00:46:58,320
Speaker 3: to Bloomberg dot com slash odd Lot for your transcript

860
00:46:58,320 --> 00:47:01,040
Speaker 3: blog in the newsletter and check out a discord Discord

861
00:47:01,080 --> 00:47:03,880
Speaker 3: dot ggshlines.

862
00:47:02,800 --> 00:47:05,879
Speaker 2: And if you enjoy odd Lots. If you find these

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