Ass Boeing co. lurching from crisis to crisis, there has been one constant for the embattled aircraft manufacturer: its situation seems to be getting worse.
From a freak accident that blew a door-sized hole in the fuselage of the airline’s 737 Max to revelations of a rogue labor force and a crippling strike now entering its second month — the US manufacturing icon hasn’t been able to catch a break since. the first days of January. Cash is dwindling, aircraft production is anemic and stocks are heading for their worst annual return since the 2008 financial crisis.
Together, the episodes have revealed quality lapses at Boeing and its supply chain, along with a quarter-century of corrosive culture where cost and schedule pressures drive decision-making. Earlier this year, customers finally revolted and management shook up the leadership, hiring Kelly Ortberg in August to fix the certified manufacturer due to retirement.
In his two months on the job, Ortberg has made drastic moves. He removed the head of the Defense and Space division and tried to short-circuit the strike by taking a higher offer directly from the workers—a move that backfired and only hardened the union’s resolve.
Basic Areas
His latest maneuver came late Friday, when Ortberg said Boeing would cut 10 percent of its workforce, the equivalent of about 17,000 people. And he indicated that more dramatic steps would be needed to get the company back on track.
“We must be clear about the work ahead and be realistic about the time it will take to achieve key milestones on the road to recovery,” Boeing’s chief wrote in an Oct. 11 memo to employees. “Also, we must focus our resources on performance and innovation in areas that are essential to who we are.”
Commentators suggest Ortberg’s Boeing could double down on what it’s known for: commercial aviation. Ted Colbert’s unceremonious departure as head of the defense and space business put the shortcomings of those subsidiaries into sharp relief — made even more striking Friday when Boeing said it would take a charge of about $2 billion in the third quarter.
It all adds up to a perception that it will take longer for the company to regain its footing—the top Federal Aviation Administration official has said it’s a matter of years, not months, before Boeing stabilizes. When Ortberg, 64, makes his first earnings call as CEO on Oct. 23, investors will want more details about how he plans to lead one of corporate America’s toughest revivals, rather than put out fires.
“It’s all getting a bit hand-to-mouth,” said Nick Cunningham, an analyst at Agency Partners LLP in London. “It is not a coherent plan, in itself, it is just another quarter of the big charges, which the previous management should have done anyway, because they reflect existing and developing problems and are not part of a restructuring. “
Ratings agencies have warned Boeing that it could go below investment grade, a move that would make the planemaker the biggest fallen angel in US corporate history. The company has only a small buffer of $10 billion in cash and short-term securities to avoid a slide into the situation. The toll of the strike increases the need to tap the market as soon as possible to obtain new financing.
Continuous loop
“For every problem that gets to the head and is cut off, more problems arise,” Ron Epstein, analyst. Bank of Americahe wrote in a note to clients. “All the problems feed into each other, creating a continuous vicious circle while compounding the negative effects.”
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All told, Boeing will record $5 billion for its two largest businesses when it formally reports third-quarter earnings, the company said in a surprise announcement Friday afternoon. In addition to defense and space charges, Boeing will pay additional costs to retire its 777X model again, leaving its largest widebody jet with a six-year delay.
Much remains unclear about Boeing’s turnaround efforts. A surge in production that was supposed to help cash flow has been dampened by recent strikes, and the defense and space business continues to hemorrhage cash.
The company has yet to buy back Spirit AeroSystems Holdings Inc., which it spun off in a bad move nearly two decades ago, saw the manufacturing quality of its main supplier suffer.
Longer term, Boeing will have to make tough calls in unprofitable areas, such as its space efforts. The division made global headlines a few weeks ago when the Starliner capsule returned to earth without a human. The first manned mission to orbit came to an infamous end after NASA decided not to risk putting two astronauts back on the error-prone spacecraft.
Ortberg has not held media interviews since taking office, although he has met with customers, regulators, Pentagon officials and visited Boeing factories. An engineer by training, Ortberg spent most of his career at what is known as Collins Aerospace, the renowned avionics equipment manufacturer that is a key supplier to Boeing.
As CEO, Ortberg has shared camaraderie and destiny with employees. He made a point of relocating from West Palm Beach, Florida to Seattle, leaving behind his predecessors, who largely ran the company on the other side of the continent.
Cash Drain
When the strike began in mid-September, the CEO urged workers to embrace the future and not hold grudges, in a nod to the 2014 contract that cost them their pensions. Senior management took solidarity pay cuts when Ortberg announced furloughs to save money, and the latest job cuts will also include executives and management, he said.
Read more: The Boeing Union refuses to offer workers compensation
But with so-called touch-up work accounting for less than 5% of the total cost of a commercial jet program, some observers wonder why Boeing is not moving urgently to end the work stoppage that is adding to its financial balance.
“Boeing is not a needle mover in terms of profitability,” said RBC Capital Markets analyst Ken Herbert. “What are we waiting for here? Every day that passes, it is more disruptive and money flows in.’
The strike is ripping through Boeing’s supply chain, raising the risk that the planemaker’s own recovery will be slow and stalled even after workers have returned to work. And so far, Boeing has not said where the layoffs will take place, or what it will cost the company in terms of compensation.
‘It can’t be won’
Announcing job cuts in the middle of labor negotiations is also a risky strategy.
On the one hand, Ortberg wants to instill a sense of urgency and shared sacrifice, George said FergusonAnalyst at Bloomberg Intelligence. But on the other hand, the move threatens to further shortchange the workforce Boeing needs to restart plane production at a time when skilled mechanics are in high demand.
The war of words escalated even before Friday’s announcement. Both Boeing and the union filed formal complaints accusing the other of violating labor bargaining protocol.
“He can’t win without a union,” Ferguson said of Ortberg. “It needs their heart and soul when they come back to earth. If there was a honeymoon for the CEO, it seems it’s over.”
