WEBVTT - A Longtime Aerospace Analyst Questions Boeing's Future 0:00:03.200 --> 0:00:18.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:20.160 --> 0:00:23.599 Hello and welcome to another episode of the All Thoughts podcast. 0:00:23.680 --> 0:00:25.040 I'm Tracy Allaway. 0:00:24.800 --> 0:00:26.599 And I'm Joe Wisenthal Boeing. 0:00:26.720 --> 0:00:27.720 Have you Boeing? 0:00:28.880 --> 0:00:29.360 Keep that in? 0:00:29.480 --> 0:00:30.120 Don't keep that in? 0:00:30.200 --> 0:00:32.040 No, keep that in? Now, you gotta keep it in. 0:00:32.240 --> 0:00:34.800 I've said before I have a soft spot for Boeing, 0:00:34.960 --> 0:00:38.960 So that's why I'm mixing Boeing and Joe up. Okay, Joe, 0:00:39.520 --> 0:00:41.320 have you seen Boeing shares recently? 0:00:42.280 --> 0:00:44.159 Actually, I haven't looked at a while, except, you know, 0:00:44.280 --> 0:00:47.240 like we did an episode on Boeing about three or 0:00:47.240 --> 0:00:51.000 four weeks ago, so not good. Yeah, and they have 0:00:51.080 --> 0:00:52.720 not recovered much, so not good. 0:00:52.840 --> 0:00:56.280 So shares are down twenty percent since the start of 0:00:56.280 --> 0:00:59.680 the year, which is never a good sign when you 0:00:59.760 --> 0:01:02.600 lose a fifth of your market value in about six weeks. 0:01:02.680 --> 0:01:05.920 But probably one of the more damning things that has 0:01:05.959 --> 0:01:08.520 happened recently in terms of the share price is do 0:01:08.560 --> 0:01:12.360 you remember when the company announced it was pausing seven 0:01:12.520 --> 0:01:14.800 thirty seven production for a day and the shares went 0:01:14.880 --> 0:01:18.560 up like six percent. That seems bad when the market 0:01:18.600 --> 0:01:21.880 is rewarding you for not making your signature product. 0:01:22.080 --> 0:01:25.400 There's two funny things to me again. Funny you know 0:01:26.040 --> 0:01:28.840 all the caveats that that tells. It's funny that Boeing 0:01:28.920 --> 0:01:32.480 has the reputation of being the company that's obsessed with 0:01:32.520 --> 0:01:35.760 its share price and pleasing shareholders. Airbus doesn't. And of 0:01:35.760 --> 0:01:38.759 course air Bus is a much better share performance than Boeing. 0:01:38.800 --> 0:01:41.240 It's done phenomenally well over the years. And it's also 0:01:41.280 --> 0:01:44.360 just kind of crazy, sitting aside competition, that Boeing is 0:01:44.360 --> 0:01:49.000 still nowhere near its peak in twenty nineteen, despite what 0:01:49.040 --> 0:01:53.600 we know to be like a booming global market for aviation, 0:01:53.760 --> 0:01:56.480 Like that's one thing we know, like pre pandemic, post pandemic, 0:01:56.600 --> 0:01:59.200 just absolute boom. You always hear about this expansion of 0:01:59.280 --> 0:02:01.720 new airlines in the Middle East and Asia and et cetera. 0:02:01.920 --> 0:02:04.559 And so we know that there's this huge general bull 0:02:04.600 --> 0:02:06.920 market going on and Boeing doesn't seem to have capitalized 0:02:06.960 --> 0:02:07.400 on any of it. 0:02:07.480 --> 0:02:11.000 Well, not just a booming market in commercial aircraft, which 0:02:11.240 --> 0:02:14.640 you're totally correct, as you observe, it has been a 0:02:14.639 --> 0:02:19.440 busy few years, but also we've had so much defense spending, 0:02:19.639 --> 0:02:22.960 that's right, and things like the IRA and things like that, 0:02:23.040 --> 0:02:27.880 and even with that happening in the background, America's premier 0:02:28.120 --> 0:02:32.400 aerospace and defense company just doesn't seem to have benefited 0:02:32.440 --> 0:02:35.560 from it. The share price has basically been flat for 0:02:35.600 --> 0:02:36.480 the last three years. 0:02:36.960 --> 0:02:39.680 Kind of amazing, and I think it's worrisome, right because 0:02:40.680 --> 0:02:44.560 you know, setting aside, you know the concerns of Boeing shareholders, 0:02:44.560 --> 0:02:48.200 and they're probably pretty unhappy, Like if US wants to 0:02:48.200 --> 0:02:51.680 be a big manufacturing powerhouse and again or be able 0:02:51.720 --> 0:02:55.480 to build more complex stuff domestically, it's really a bad 0:02:55.600 --> 0:03:00.560 sign that the sort of premier you domestic manufacturer for 0:03:00.600 --> 0:03:04.800 global markets, one of only two companies that basically controls 0:03:04.840 --> 0:03:09.120 the commercial jet industry, is getting worse at building plans. 0:03:09.240 --> 0:03:13.640 Yes, absolutely so. We have previously recorded an episode on 0:03:13.760 --> 0:03:17.280 Boeing with our Bloomberg colleague Peter Robinson. He's also the 0:03:17.320 --> 0:03:20.320 author of Flying Blind, The seven thirty seven Max Tragedy 0:03:20.360 --> 0:03:23.040 and the Fall of Boeing, and we talked about what 0:03:23.080 --> 0:03:26.600 the Alaska Airlines door blowout actually meant for the company, 0:03:26.639 --> 0:03:30.280 and also the emphasis that Boeing seemed to place on 0:03:30.520 --> 0:03:35.240 financial performance and ironically its stock price versus a culture 0:03:35.280 --> 0:03:38.440 of safety and engineering. But I feel like there is 0:03:38.520 --> 0:03:41.400 so much more we can say about this topic and 0:03:41.440 --> 0:03:43.960 so much more to dig into, and I'm really happy 0:03:44.120 --> 0:03:46.840 that we do, in fact have the perfect guest for 0:03:46.960 --> 0:03:52.080 today's episode. This is the guy, the aerospace guy. Back 0:03:52.080 --> 0:03:55.080 when I was covering airlines and aerospace in like two 0:03:55.120 --> 0:03:57.920 thousand and six, he was the expert back then, and 0:03:58.000 --> 0:04:01.240 in twenty twenty four, almost two decades, he is still 0:04:01.480 --> 0:04:04.680 the guy to talk to on aerospace. So I'm very 0:04:04.720 --> 0:04:07.120 happy to say that we're going to be speaking with 0:04:07.280 --> 0:04:12.120 Richard Aboulafia again, a longtime aerospace analyst and managing director 0:04:12.400 --> 0:04:16.240 at Aerodynamic Advisory. So Richard, thank you so much for 0:04:16.279 --> 0:04:18.480 coming on all thoughts, It's good to talk to you again. 0:04:18.880 --> 0:04:21.120 Yeah, same here, Tracy, thanks so much for having me on. 0:04:21.279 --> 0:04:21.960 Thrilled to be here. 0:04:22.360 --> 0:04:24.560 You know, I should say, in addition to being the 0:04:24.680 --> 0:04:29.440 aerospace guy and just an all round expert on this industry, 0:04:29.720 --> 0:04:32.640 you also have a reputation for telling it like it is, 0:04:33.480 --> 0:04:35.359 and I think at this point a lot of the 0:04:35.480 --> 0:04:41.200 cultural changes at Boeing are probably well known, but you 0:04:41.279 --> 0:04:45.760 point into a pretty interesting development that I will confess 0:04:45.839 --> 0:04:49.920 I hadn't even noticed it happened late last year where 0:04:49.960 --> 0:04:55.880 the current Boeing CEO David Calhoun basically dissolved the company's 0:04:56.240 --> 0:04:58.920 strategy department. What was that about. 0:04:59.640 --> 0:05:03.640 Yeah, I mean that's a mystery, but like all good mysteries, 0:05:03.680 --> 0:05:06.279 it just sort of lends itself to theorizing and indeed 0:05:06.279 --> 0:05:10.800 conspiracy theorizing, and the most obvious statement was we don't 0:05:10.800 --> 0:05:14.400 have a future. Not only was it the dissolution of 0:05:14.440 --> 0:05:16.960 the company wide strategy department, but there was a wholesale 0:05:17.000 --> 0:05:19.800 gutting of a lot of the business unit strategy department. 0:05:19.839 --> 0:05:23.200 So it wasn't a devolution story. It was we don't 0:05:23.240 --> 0:05:27.480 care story, which was of course as baffling as it gets. 0:05:28.080 --> 0:05:30.479 It sort of fits in with this nagging feeling in 0:05:30.520 --> 0:05:33.800 the back of my mind that the really awful performance 0:05:33.880 --> 0:05:36.080 is kind of okay to the folks at the top, 0:05:36.720 --> 0:05:40.280 because ultimately their playbook is well about as deep as 0:05:40.320 --> 0:05:43.200 the jackwelch Ge playbook, which is, if things go to hell, 0:05:43.640 --> 0:05:46.839 you simply break up the company, and in that case, 0:05:47.240 --> 0:05:50.479 you know, performance doesn't matter the future and strategy doesn't matter. 0:05:51.279 --> 0:05:54.839 You simply think you know. And indeed, maybe maybe the 0:05:54.920 --> 0:05:57.800 bad performance is kind of a plaus in as strange 0:05:57.839 --> 0:06:01.600 way to regulators in every body, involved, customers, whatever. It 0:06:01.640 --> 0:06:05.680 almost becomes a relief when the company has broken up. That's, 0:06:05.680 --> 0:06:08.000 of course an extreme departure scenario, but I can't think 0:06:08.040 --> 0:06:09.560 of any other explanations for doing that. 0:06:09.680 --> 0:06:13.600 Well, maybe what is a strategy department and what is it? 0:06:13.680 --> 0:06:15.960 So they said, I think, I guess it was in 0:06:16.040 --> 0:06:20.919 November that their strategy boss was leaving, that the strategy 0:06:21.040 --> 0:06:24.880 teams would be folded into the business units that they support. 0:06:25.000 --> 0:06:29.120 What do these words actually mean in practice? Is what 0:06:29.160 --> 0:06:31.640 are strategy teams? I thought everyone did strategy. 0:06:31.279 --> 0:06:34.880 Business, Yeah, everyone does, right, It's kind of impossible to 0:06:34.920 --> 0:06:38.039 imagine a large corporation not having a strategy function. What 0:06:38.120 --> 0:06:40.520 is the strategy? Is about the future. A strategy is 0:06:40.520 --> 0:06:45.039 about allocating capital for future technology development, for future acquisitions, 0:06:45.400 --> 0:06:52.040 for allocating people, for developing people and their skills and capabilities. Basically, 0:06:52.320 --> 0:06:57.359 it coordinates resources across business units and within the business units. 0:06:57.400 --> 0:07:00.240 Of course, it thinks about new products to develop. Their 0:07:00.240 --> 0:07:02.520 competitors are and are likely to be, and what key 0:07:02.640 --> 0:07:05.440 enabling technology is You're needed to compete in the future. 0:07:06.000 --> 0:07:07.680 One of the reasons we wanted to talk to you 0:07:07.920 --> 0:07:11.080 is because you are well connected in this industry in 0:07:11.120 --> 0:07:15.160 addition to being an expert on it, But can you describe, 0:07:15.200 --> 0:07:17.960 like the mood at Boeing at the moment, or how 0:07:18.080 --> 0:07:22.400 people within aerospace and defense actually feel about this company. 0:07:22.520 --> 0:07:25.080 After thirty five years. I've never seen anything like it, 0:07:25.120 --> 0:07:28.640 and it kind of resembles that common trope and horror films. 0:07:28.760 --> 0:07:31.680 Very often the call comes from inside the house, you know. 0:07:31.880 --> 0:07:36.400 I mean, I spent last week in Seattle, and you know, 0:07:36.440 --> 0:07:38.880 it's nothing short of horrifying. But it also sort of 0:07:38.920 --> 0:07:41.720 illustrates one of the strange aspects of this the so 0:07:41.840 --> 0:07:44.720 called crisis, which is that the problem is purely at 0:07:44.720 --> 0:07:46.480 the top. There are a lot of really good people 0:07:46.640 --> 0:07:48.360 at Boeing, and a lot of really good products and 0:07:48.360 --> 0:07:51.840 a lot of really good technologies. You just have some 0:07:52.200 --> 0:07:55.200 people who are really, really bad at their job at 0:07:55.200 --> 0:07:59.120 the top. So as you can imagine people within the company, 0:07:59.440 --> 0:08:02.720 and there are and many good ones are often mortified 0:08:02.800 --> 0:08:03.640 by what's happening. 0:08:03.960 --> 0:08:07.080 Well, so I understand in the abstract we could say 0:08:07.120 --> 0:08:09.520 things like, oh, the bean counters took over and they 0:08:09.560 --> 0:08:12.360 don't have a as much of an engineering culture or 0:08:12.480 --> 0:08:14.640 safety culture, or they just worry about the stock price, 0:08:14.680 --> 0:08:16.520 and I get all like, why that's all bad, and 0:08:16.800 --> 0:08:19.120 I guess on a sort of theoretical level, it sounds 0:08:19.200 --> 0:08:21.320 very bad. But why do we talk concrete? If you're 0:08:21.320 --> 0:08:26.800 an engineer at Boeing today working on something, how is 0:08:26.840 --> 0:08:30.400 your life different than it was, say, twenty years ago? 0:08:30.920 --> 0:08:33.839 Well, there's no future, right, And you know the astonishing 0:08:33.840 --> 0:08:34.440 thing like what do you. 0:08:34.559 --> 0:08:36.719 Like day to day? Like? Like what what? 0:08:36.800 --> 0:08:36.920 Like? 0:08:36.960 --> 0:08:40.240 What is some some boss, some boss three levels up 0:08:40.240 --> 0:08:42.920 has made decisions and various properties have changed. So how 0:08:42.960 --> 0:08:45.720 does like how does it like manifest itself on a 0:08:45.760 --> 0:08:49.240 sort of day to day basis or quarter to quarter basis, 0:08:49.640 --> 0:08:52.439 where it's not as a compelling of a place to work, 0:08:52.480 --> 0:08:54.640 like what has changed about the nature of the job. 0:08:55.000 --> 0:08:57.640 You need something to dream for, you need something that 0:08:57.880 --> 0:09:03.200 represents the future. And you know, Dave Calhoun, the CEO 0:09:03.280 --> 0:09:06.400 at the top of the heap, said about oh, a 0:09:06.520 --> 0:09:08.920 year and four months ago that don't worry, we won't 0:09:08.920 --> 0:09:13.320 be launching anything new for at least another decade. Other 0:09:13.400 --> 0:09:17.400 than sheer demoralization and encouraging the competition. I mean, the 0:09:17.440 --> 0:09:19.680 only way to explain it is that he's the best 0:09:19.679 --> 0:09:23.480 CEO Airbus could ask for. But from the standpoint of 0:09:23.480 --> 0:09:25.320 being an engine you're getting the heart of your question, Joe. 0:09:25.320 --> 0:09:27.360 If you're an engineer, you hear that what are you 0:09:27.440 --> 0:09:30.800 working for exactly? You're coming up with work packages on 0:09:30.880 --> 0:09:34.480 the basis of I don't know, minor tweaks of existing products, 0:09:34.679 --> 0:09:37.840 stuff that's already in the pipeline. You know, it's a 0:09:37.880 --> 0:09:41.000 tight market for technical labor. You're probably going to be 0:09:41.040 --> 0:09:44.480 pretty interested in going to work for somebody else. So 0:09:44.800 --> 0:09:47.600 you might also notice that the demographics are changing because 0:09:47.640 --> 0:09:50.800 the young and enthusiastic folks who have a future are 0:09:50.920 --> 0:09:54.280 leaving or not joining, and that too, of course, is 0:09:54.280 --> 0:09:57.239 a significant change in the fabric of your workplace. 0:09:58.080 --> 0:10:01.120 So you mentioned launching something new, and this kind of 0:10:01.120 --> 0:10:03.760 goes to the heart of you know, I guess the 0:10:03.840 --> 0:10:08.320 current crisis within Boeing, but also the origins of the 0:10:08.480 --> 0:10:11.080 safety issues and the idea that instead of doing a 0:10:11.120 --> 0:10:15.199 clean sheet aircraft as it's called, Boeing decided to make 0:10:15.200 --> 0:10:18.880 amendments to its existing seven thirty seven model, and that 0:10:19.000 --> 0:10:22.920 resulted in the seven thirty seven Max and its stablemates, 0:10:23.000 --> 0:10:26.360 and then that led to the crashes which claimed I 0:10:26.440 --> 0:10:29.679 think almost three hundred and fifty lives and the resulting 0:10:30.080 --> 0:10:33.480 controversy over Boeing and what we're basically discussing now. But 0:10:33.880 --> 0:10:35.920 just to back up, could you maybe talk about what 0:10:36.440 --> 0:10:39.920 are the decisions or the factors that go into whether 0:10:40.160 --> 0:10:43.960 or not to design a completely new aircraft. 0:10:44.480 --> 0:10:47.480 Well, I'm afraid I must disagree with that narrative. I 0:10:47.520 --> 0:10:49.680 thought the Max was the right decision at the time. 0:10:49.720 --> 0:10:53.120 There were few enabling technologies for a new jet in 0:10:53.160 --> 0:10:56.480 that class except turbine, so put a new engine in it. 0:10:57.040 --> 0:10:59.800 We didn't know then the sheer popularity of the middle market. 0:11:00.520 --> 0:11:02.400 Even if we did, I'm not so sure that would 0:11:02.400 --> 0:11:06.600 have changed anything. What was important is that the Max 0:11:06.640 --> 0:11:09.559 go ahead and then the company do what it does 0:11:09.640 --> 0:11:12.760 every decade, launch a new product, and in that case, 0:11:12.800 --> 0:11:15.520 that product would have been a notch above the Max. 0:11:16.120 --> 0:11:19.200 You know. As for the development of the Max, there 0:11:19.240 --> 0:11:22.080 were cultural problems at play that led to the mcast 0:11:22.200 --> 0:11:26.439 problems and the tragedies that resulted. But it wasn't economics. 0:11:26.480 --> 0:11:30.959 I mean, the economic difference between mcast done right and 0:11:31.120 --> 0:11:35.120 mcast done poorly is zero zilch. This was purely a 0:11:35.200 --> 0:11:40.480 cultural driver that led to these tragedies. Now, if you've 0:11:40.480 --> 0:11:42.760 got the Max out of the you know, okay, it 0:11:42.840 --> 0:11:44.280 was the right thing to do. It should have been 0:11:44.280 --> 0:11:45.880 done different, but it was the right thing to do. 0:11:46.920 --> 0:11:49.480 What should have happened next is they should have said, okay, 0:11:49.520 --> 0:11:52.119 look back in the past, we had this other aircraft 0:11:52.120 --> 0:11:54.960 in that middle segment, the seven to five seven. It's dead. 0:11:55.280 --> 0:11:57.320 We need to think about a replacement. And they were 0:11:57.360 --> 0:11:59.920 thinking about a replacement, and that was the first thing 0:12:00.080 --> 0:12:01.839 Dave Calhoun killed when he came in. 0:12:02.880 --> 0:12:08.080 How would you characterize the cultural failings that led to 0:12:08.120 --> 0:12:08.960 those tragedies? 0:12:10.120 --> 0:12:12.840 Very simply a disconnect between the people at the top 0:12:12.880 --> 0:12:16.000 and the people who are focused on the core business 0:12:16.040 --> 0:12:19.160 of the company, which is of course designing and building aircraft. 0:12:19.800 --> 0:12:22.160 You know, the folks at the top. And this started 0:12:22.240 --> 0:12:25.800 under Jim mcnernee back in the late two thousand, you know, 0:12:25.840 --> 0:12:29.880 first decade of the two thousands. He decided that the 0:12:29.960 --> 0:12:35.040 supplier base and the workforce were mere disposable commodities that 0:12:35.040 --> 0:12:38.520 should be crunched. They should be regarded as one giant 0:12:38.520 --> 0:12:41.600 atm you take money out of them, there's no consequences. 0:12:42.040 --> 0:12:45.000 People will always want to work there, and people will 0:12:45.000 --> 0:12:47.880 always want to be suppliers our way or the highway. 0:12:48.640 --> 0:12:51.200 This was bound to have consequences, and it just got 0:12:51.240 --> 0:12:54.720 worse and worse through the twenty tens, and as a consequence, 0:12:54.800 --> 0:12:58.240 you had a badly demoralized workforce. Now as part of 0:12:58.240 --> 0:13:01.880 his strategy, of course, McNerney back in the twenty tens, 0:13:02.440 --> 0:13:05.320 it became necessary to replace people on the board with 0:13:05.400 --> 0:13:08.240 people who had no technical degrees. They were one step 0:13:08.240 --> 0:13:12.160 away from being complete randos who sold accordions. And you know, 0:13:12.800 --> 0:13:15.160 the most farcical moment was Nicki Haley was on it 0:13:15.200 --> 0:13:18.679 and she left because she didn't think the company should 0:13:18.679 --> 0:13:22.960 be taking government money. It's a defense contractor, She's like, seriously, 0:13:24.240 --> 0:13:27.679 So it was. It was a bizarre organization designed to 0:13:27.760 --> 0:13:29.920 rubber stamp and not much more. It's gotten a little 0:13:29.960 --> 0:13:33.080 bit better in the aftermath of the Mcast tragedies, but 0:13:33.360 --> 0:13:38.120 oh boy, that terrible culture of bad governance and that 0:13:38.160 --> 0:13:41.439 complete disconnect with the people who were charged with actually 0:13:41.960 --> 0:13:46.319 doing their jobs, a complete lack of redress and inability 0:13:46.320 --> 0:13:49.280 to push bad information. You know, I remember very well 0:13:49.360 --> 0:13:52.160 on seven eight h seven when the seven eighty seven Dreamliner, 0:13:52.240 --> 0:13:55.440 their last clean sheet designed, was rolled in and I 0:13:55.559 --> 0:13:59.520 was talking to McNerney and he told me, like, this 0:13:59.559 --> 0:14:02.120 plan's going to fly in September, well maybe October. No, 0:14:02.840 --> 0:14:06.000 I didn't say that, and it took someone, It took 0:14:06.440 --> 0:14:09.720 someone completely outside, a way lower down on the organization 0:14:09.880 --> 0:14:13.720 chart to say, actually, Richard, that plane is filled with sand. 0:14:14.000 --> 0:14:17.480 It's not flying for another year, which was correct, and 0:14:17.840 --> 0:14:19.520 he's not going to be caught in a lie. He 0:14:19.640 --> 0:14:22.280 simply had no way of knowing, and there was no 0:14:22.400 --> 0:14:25.880 mechanism with which to transmit bad information up the food channel. 0:14:43.800 --> 0:14:46.360 On the topic of culture, the other thing that tends 0:14:46.400 --> 0:14:50.720 to come up is the acquisition of McDonald douglas and 0:14:50.800 --> 0:14:53.600 the idea that well, you brought in these new executives 0:14:53.600 --> 0:14:56.760 and they had much more of a numbers based focus. 0:14:56.840 --> 0:15:00.600 And I'm always kind of curious is that true? First 0:15:00.640 --> 0:15:04.120 of all? And then secondly, why did they seem to 0:15:04.160 --> 0:15:07.360 wield so much influence within Boeing given that they were 0:15:07.440 --> 0:15:11.600 the company being acquired, like presumably they were, you know, 0:15:12.040 --> 0:15:14.440 in terms of social hierarchy on a lower rung. 0:15:15.840 --> 0:15:18.360 Yeah, it's a complicated one. And of course the bitter 0:15:18.440 --> 0:15:21.800 joke told it Boeing is that, you know, McDonald douglas 0:15:21.880 --> 0:15:26.880 used Boeing's money to buy Boeing. You know, a bizarre 0:15:26.960 --> 0:15:29.960 chain of events. There were all sorts of interpersonal reasons, 0:15:31.080 --> 0:15:34.840 minor scandals and whatever else that resulted in a decapitation 0:15:35.080 --> 0:15:39.840 of some of the key Boeing executives, and as a consequence, 0:15:40.040 --> 0:15:42.480 McDonald douglas folks were there to fill the void because 0:15:42.480 --> 0:15:45.960 they were kind of squeaky clean, until they too were toppled. 0:15:46.160 --> 0:15:48.960 A couple of them were toppled by scandals too. It 0:15:49.000 --> 0:15:52.040 was a bizarre chain of events, now, is it true? Well, 0:15:52.360 --> 0:15:54.480 you know, there's no question McDonald douglas was far more 0:15:54.520 --> 0:15:58.600 financially focused. It had been on a thirty year glide 0:15:58.640 --> 0:16:02.040 path towards irrelevant because of this focus on you know, 0:16:02.600 --> 0:16:05.440 finance and nothing more between, you know, the creation of 0:16:05.520 --> 0:16:08.920 McDonald douglas in nineteen sixty seven and it's absorption into Boeing. 0:16:08.960 --> 0:16:11.040 It was pretty clear the way things were going all 0:16:11.080 --> 0:16:15.160 those years. Having said that, it was still an aerospace company, right, 0:16:16.760 --> 0:16:19.160 What happened in the mid two thousands with Jim McNerney 0:16:19.160 --> 0:16:22.080 and now Dave Calhoun is that jack welch ge culture, 0:16:22.560 --> 0:16:27.160 which has nothing to do whatsoever with aerospace. They might 0:16:27.200 --> 0:16:29.960 as well be hedge fund managers or somebody who's merely 0:16:30.000 --> 0:16:33.160 concerned with numbers, and has no knowledge of the industry 0:16:33.280 --> 0:16:37.480 whatsoever came to rule. So, yes, you can put some 0:16:37.520 --> 0:16:40.280 of the blame in McDonald douglas people, but really it's 0:16:40.320 --> 0:16:44.040 more that Jack Welch influence or that exposed heritage of 0:16:44.080 --> 0:16:47.000 Jack Welch influence about seven or eight years later. 0:16:47.360 --> 0:16:51.760 Jumping back towards the present, So you mentioned the comment 0:16:51.840 --> 0:16:53.960 from the CEO last year where they're like, we're not 0:16:54.000 --> 0:16:57.120 we're not in any rush to introduce a new clean 0:16:57.200 --> 0:17:02.520 sheet plane. I assume that that's kind of the thing 0:17:02.600 --> 0:17:04.800 shareholders like to hear because it means, you know, you're 0:17:04.840 --> 0:17:06.719 not going to have a big upfront budget, that you 0:17:06.720 --> 0:17:10.280 have a lot of no pun intended runways still left 0:17:10.359 --> 0:17:15.199 with the existing product set. What are how do they 0:17:15.320 --> 0:17:19.800 what are the costs of launching a brand new product? 0:17:20.160 --> 0:17:23.000 And how do companies think about the cost benefits of 0:17:23.080 --> 0:17:26.040 like when to launch one versus when to just try to, 0:17:26.760 --> 0:17:28.639 you know, get more out of the existing product. 0:17:29.200 --> 0:17:33.760 Yeah, that's that's, you know, a contentcious issue, an important 0:17:33.880 --> 0:17:37.080 area of discussion. I'm kind of an outlier. I don't 0:17:37.080 --> 0:17:39.680 think it would have mattered at all to investors, and indeed, 0:17:39.680 --> 0:17:42.119 there would have been more positives than negatives. And you know, 0:17:42.200 --> 0:17:43.960 if you look at it, this is a company now 0:17:43.960 --> 0:17:46.920 with forty billion a net debt, down from forty five 0:17:47.000 --> 0:17:49.520 or so a couple of years ago. So to start 0:17:49.560 --> 0:17:53.080 a new program would be maybe two billion incremental per 0:17:53.160 --> 0:17:56.879 year in independent research and development funding for you know, 0:17:57.040 --> 0:18:00.960 probably about six years seven years with over could go higher. 0:18:01.760 --> 0:18:07.200 Now that's obviously a drag on shareholder returns, but put 0:18:07.200 --> 0:18:09.200 it in another way. We're now in a situation where 0:18:09.200 --> 0:18:13.080 Airbus is competing, jets are getting hundreds thousands of orders. 0:18:13.440 --> 0:18:17.639 They're losing market share at Boeing, wouldn't Some investors have 0:18:17.760 --> 0:18:21.280 been galvanized by the site of Boeing getting those orders 0:18:21.320 --> 0:18:23.600 with its new jet and said, what a great place 0:18:23.640 --> 0:18:26.080 to park my cash because this is a long term 0:18:26.160 --> 0:18:31.479 growth story. I'm not concerned with dividends and buybacks. I 0:18:31.600 --> 0:18:34.240 just really like the idea. In a land where there's 0:18:34.440 --> 0:18:37.600 plenty of capital available, not a lot of good ideas 0:18:37.600 --> 0:18:39.520 out there, this is a safe bed. 0:18:39.560 --> 0:18:43.680 Well, is there some part of the market, so like, theoretically, 0:18:43.760 --> 0:18:46.719 is there some part of the market that right now 0:18:47.080 --> 0:18:49.879 Boeing would be competing better in if it had a 0:18:49.920 --> 0:18:52.000 different product, or like I mean, I don't know. I 0:18:52.040 --> 0:18:54.160 don't know what the end buyer is. But if you're 0:18:54.200 --> 0:18:56.800 sort of dreaming what they or imagining what that next 0:18:56.840 --> 0:18:59.639 plane would look like, what is the end buyer that 0:18:59.640 --> 0:19:02.000 they're not tapping into that maybe going to Airbus. 0:19:02.560 --> 0:19:05.000 This has been apparent for at least a decade. Basically, 0:19:05.040 --> 0:19:07.119 there's this middle market of about two hundred to two 0:19:07.240 --> 0:19:10.520 hundred and thirty seats, about five thousand nautical miles. It's 0:19:10.520 --> 0:19:13.920 a fragmentation machine. It allows people to bypass crowded hubs 0:19:14.000 --> 0:19:16.280 and fly point to point where they want to go. 0:19:16.840 --> 0:19:20.040 Now right now, Airbus has a license to mint money 0:19:20.080 --> 0:19:22.640 with the A three twenty one Neo. It's not very 0:19:22.640 --> 0:19:25.439 good at that frankly, that mid market, but it's the 0:19:25.480 --> 0:19:27.560 one product you can buy if you're an airline. So 0:19:27.640 --> 0:19:30.520 guess what everyone is buying it. The order book for 0:19:30.600 --> 0:19:33.119 the three twenty one Neo is now about the same 0:19:33.320 --> 0:19:36.080 as the order book for all variants of the seven 0:19:36.160 --> 0:19:39.320 thirty seven Max family. And last year, after Dave Calhoun 0:19:39.440 --> 0:19:41.920 said don't worry, we won't compete in that class, they 0:19:41.920 --> 0:19:45.080 sold a record thirteen hundred of those jets. And what's 0:19:45.119 --> 0:19:48.720 frustrating is it's not a very good jet. You could 0:19:48.800 --> 0:19:51.919 defeat it the way Boeing has always defeated the Boeing 0:19:51.960 --> 0:19:56.800 has had a second mover philosophy. Seven sixty seven, Triple seven, 0:19:56.920 --> 0:20:00.040 seven eighty seven, Triple seven, three hundred R all of 0:20:00.080 --> 0:20:04.120 them were responses, and they all did somewhere between five 0:20:04.160 --> 0:20:06.480 and ten percent better than the jets they went against. 0:20:06.680 --> 0:20:09.560 They won. That's how the company conquered the universe. 0:20:10.040 --> 0:20:12.760 This just reminds me it's kind of ancient history. But 0:20:12.840 --> 0:20:16.480 wasn't there an argument that when Airbus actually started developing 0:20:16.520 --> 0:20:18.600 the eight three twenties, I guess it would have been 0:20:18.600 --> 0:20:22.280 in the nineteen eighties that Boeing could have and probably 0:20:22.320 --> 0:20:26.639 should have, in retrospect, just like immediately killed it and 0:20:26.680 --> 0:20:29.560 gone head to head by developing a new aircraft. 0:20:30.240 --> 0:20:32.520 Yeah. I don't believe that, because the three twenty is 0:20:32.520 --> 0:20:35.680 a good plane, but you know, the response to it 0:20:35.720 --> 0:20:38.719 basically well, it was right in the middle of the 0:20:38.760 --> 0:20:42.080 seven thirty seven, three four, five hundred series, which continued 0:20:42.119 --> 0:20:43.879 to do pretty well, and they replaced it with the 0:20:44.080 --> 0:20:48.199 NG it did amazing. So I'm just you know, this 0:20:48.320 --> 0:20:50.240 is clearly the Max is clearly the last stop on 0:20:50.280 --> 0:20:52.719 the seven thirty seven line, no question of that, and 0:20:52.760 --> 0:20:56.080 it really is having a hard time scaling it up 0:20:56.119 --> 0:20:58.760 to be that middle market machine. Matter of fact, it's impossible, 0:20:59.200 --> 0:21:02.080 so there are limits. But the seven thirty seven intes 0:21:02.240 --> 0:21:04.840 of itself, I think is actually a pretty good product. 0:21:04.840 --> 0:21:06.720 It's how it was executed that's the problem. 0:21:07.240 --> 0:21:09.320 So this was actually going to be my next question, 0:21:09.440 --> 0:21:12.600 but Calhoun says they're not going to develop anything for 0:21:12.960 --> 0:21:15.040 ten years, which could mean that they don't have a 0:21:15.040 --> 0:21:18.840 clean sheet aircraft flying like until twenty forty or something 0:21:18.880 --> 0:21:22.560 like that. And at the same time, Airbus is taking 0:21:22.640 --> 0:21:25.879 massive amounts of market share. The two used to be 0:21:26.040 --> 0:21:28.960 Boeing and Airbus used to be fairly evenly match. That 0:21:29.080 --> 0:21:33.280 is definitely no longer the case. But A, what does 0:21:33.359 --> 0:21:35.919 Boeing do in this situation to catch up? And then 0:21:35.920 --> 0:21:38.920 I guess B is there actually a desire to catch up? 0:21:40.200 --> 0:21:42.960 This looks like a glide slope towards oblivion, because remember 0:21:43.000 --> 0:21:45.200 it's not just the loss of market share, it's also 0:21:45.240 --> 0:21:49.359 the demographics. You know, engineering workforces have that muscle memory 0:21:49.359 --> 0:21:52.080 that needs to be maintained. And it's been since two 0:21:52.119 --> 0:21:55.080 thousand and four that they've launched, since they've last launched 0:21:55.119 --> 0:21:57.760 a clean sheet design. They've done some good work since. 0:21:58.320 --> 0:22:02.760 But again you're talking about an aging engineering workforce that's 0:22:02.840 --> 0:22:05.520 not attracting new people. Well, they have the kind of 0:22:05.560 --> 0:22:07.840 core skills needed to create a new jet in the 0:22:07.840 --> 0:22:09.880 twenty thirties. I have no idea. 0:22:10.640 --> 0:22:13.199 That is such a fascinating point that. I mean, we 0:22:13.240 --> 0:22:16.320 talk about it in some context, this idea of like 0:22:16.359 --> 0:22:18.520 internal no how, but I hadn't thought about this idea. 0:22:18.520 --> 0:22:21.080 If you have nobody, or if it's been decades since 0:22:21.119 --> 0:22:23.800 you've done you've started a plane from scratch, do you 0:22:23.840 --> 0:22:26.879