Boeing's endless doom loop gives new CEO Ortberg no respite

(Bloomberg) — As Boeing Co. lurches from one crisis to another, there is one constant for the beleaguered planemaker: Its plight seems to be getting worse.

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A freak accident that blew a door-sized hole in the fuselage of an airborne 737 Max and revelations of sloppy workmanship and now a crippling strike entering its second month — the US manufacturing icon hasn't been able to catch a break since 1971. First day of January. Cash is dwindling, aircraft production is anemic and the stock is heading for its worst annual performance since the 2008 financial crisis.

Together, the episodes exposed quality flaws at Boeing and its supply chain, along with a quarter-century of corrosive culture in the making, where cost and schedule pressures seeped into decision-making. Earlier this year, customers finally revolted and the board shook up leadership, hiring Kelly Ortberg out of retirement in August to fix the beleaguered manufacturer.

In his two months on the job, Ortberg has made several blunt moves. He removed the head of the Defense and Space Department and tried to short-circuit the strike by making a higher offer directly to workers – a move that backfired and only hardened the union's resolve.

core area

His latest strategy came late Friday, when Ortberg said Boeing would cut 10% of its workforce, which equates to about 17,000 people. And he hinted that the company may need to take more dramatic steps to bounce back.

“We must keep a clear view of the task we face and be realistic about the time it will take to achieve key milestones on the road to recovery,” Boeing wrote in an Oct. 11 memo to key staff. “We need to focus our resources on the areas of performance and innovation that are at the core of who we are.”

The comments suggest that under Ortberg, Boeing may double down on the field for which it is best known: commercial aviation. Ted Colbert's unannounced departure as head of the defense and aerospace business threw that subsidiary's shortcomings into sharp relief — made more apparent Friday when Boeing said the unit would have a charge of about $2 billion in the third quarter.

It all adds up to the perception of a company that will take longer to regain its footing — the top official at the Federal Aviation Administration says it's a matter of years, not months, before Boeing stabilizes. When Ortberg, 64, hosts his first earnings call as CEO on Oct. 23, investors will want more details on how he intends to lead one of corporate America's most difficult revivals in a big way, rather than simply putting out fires.

“It's all getting a little hand to mouth,” said Nick Cunningham, an analyst at Agency Partners LLP in London. “This is not a coherent plan, it is just another quarter of the big charges, the previous management had to do anyway, because they reflect existing and developing problems and are not part of this kind of restructuring. “

Ratings agencies have put Boeing on notice with a warning that it could be downgraded below investment grade, a move that would make the plane maker the biggest so-called fallen angel in corporate US history. The company has only a small buffer above the $10 billion in cash and short-term securities it needs to avoid a slippage in its position. The toll of the strike increases the urge to tap markets sooner rather than later for fresh financing

continuous loop

“For every problem that comes to a head, then falls apart, more problems arise,” Bank of America analyst Ron Epstein wrote in a note to clients. “All the problems feed into each other, creating a continuous doom loop while compounding the negative effects.”

All told, Boeing will record $5 billion in combined charges for its two largest businesses when it officially reports third-quarter earnings, the company said in a surprise announcement Friday evening. In addition to defense and aerospace charges, Boeing will book additional costs to push back its 777X model once more, leaving its largest widebody plane with a delay of nearly six years.

Much is unclear about Boeing's turnaround efforts. A ramp-up in manufacturing that was supposed to help cash flow has been dampened by recent strikes, and defense and aerospace businesses continue to bleed cash.

The company is still known as Spirit Aerosystem Holdings Inc. Who should buy back, which it hid in an ill-fated move nearly two decades ago, only to see its original supplier's production quality suffer as a result.

In the long run, Boeing may have to make some tough calls in unprofitable areas like its space efforts. The department made global headlines a few weeks ago when its Starliner capsule returned to Earth without a human on board. It was an inglorious end to its first crewed mission to orbit after NASA decided not to risk returning two astronauts to the error-prone spacecraft.

Ortberg has not given any media interviews since taking over, although he has communicated with customers, regulators, Pentagon officials and toured Boeing factories. An engineer by training, Ortberg spent most of his career at what is now Collins Aerospace, a well-known avionics equipment manufacturer that is a key supplier to Boeing.

As CEO, Ortberg appeals to a sense of camaraderie and shared fortune with the workforce. He made a point of relocating to Seattle from West Palm Beach, Florida, a departure from his predecessor, who had originally run the company from 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, agreeing to a 2014 contract that cost them pensions. Senior management took a pay cut in solidarity when Ortberg announced furloughs to conserve cash, and the latest job cuts will also include executives and management, he said.

But so-called touch labor accounts for less than 5% of the total cost of a commercial airplane program, leaving some observers to wonder why Boeing isn't moving with more urgency to end its financial woes.

“This is not a needle mover in terms of Boeing profits,” said Ken Herbert, an analyst at RBC Capital Markets. “What are we waiting for here? Every day that goes by, it's more disruptive and more of a cash drain.”

The strike is rippling through Boeing's supply chain, raising the risk that recovery at the planemaker's own factories will be slow and stalled even as workers return to work. And so far, Boeing has not said where the layoffs will take place, or what the severance might cost the company.

'can't win'

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, said Bloomberg Intelligence analyst George Ferguson. But on the other hand, the move threatens so much worker opposition that Boeing will have to restart jetliner production, at a time when skilled mechanics are in high demand.

The war of words intensified before Friday's announcement. Both Boeing and the union have filed formal complaints accusing the other of violating protocol for labor negotiations.

“He can't win without the union,” Ferguson said of Ortberg. “He needs their heart and soul when they get back on the floor. If there was a honeymoon for CEOs, it appears to be over.”

–Assisted by Siddharth Philip and Danny Lee.

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