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[Text/Observer Network columnist Zhang Zhonglin]

On July 31, Boeing finally announced its new CEO, former Collins CEO Robert K. "Kelly" Ortberg.

Boeing's current CEO Calhoun announced in March this year that he would step down within the year. Now that the new candidate has finally been confirmed, Boeing will have a new helmsman.

For Calhoun, this moment is a mixture of emotions. In 2019, due to a series of 737MAX air crashes, Boeing's then CEO Dennis Muilenburg announced his resignation, and Calhoun became Boeing's CEO as a firefighter. And with the Alaska Airlines 737MAX9 "mid-flight gate" incident once again detonating the 737MAX crisis, "firefighter" Calhoun also "brought himself into trouble" and resigned like his predecessor.

New CEO Ortberg will take office on August 8th. The reason for this date is that the U.S. Congress will hold a hearing on August 6th and 7th regarding the Boeing "Air Gate" incident in January this year. If the new CEO attends the congressional hearing right after taking office and is questioned by various congressmen in public, it will obviously be very detrimental to his public image and future work. Therefore, Calhoun, who is about to step down, has to stand his last shift and take all the blame in Congress.

What everyone wants to know most is whether the incoming Ortberg can lead Boeing out of its current predicament?

Screenshot of USA Today report

What is the new CEO like?

It must be said that Ortberg's appointment as Boeing's new CEO was somewhat unexpected. After Calhoun announced his resignation, Ortberg had not been on the list of CEO candidates, and the most popular candidate on the list was Shanahan, the current CEO of Spirit.

Shanahan is no stranger to those who know Boeing, as he has spent most of his career at Boeing and climbed up step by step from the grassroots to become the vice president of Boeing Group.

If we look at his resume, we will find that he is arguably the most suitable person to be Boeing's CEO: he joined Boeing in 1986; he participated in the Boeing 757 project; he was responsible for the research and development of the Boeing 777; as a firefighter, he was responsible for cleaning up the mess of the Boeing 787 project halfway through; he served as vice president of Boeing Commercial Airplanes Group, and later became vice president of Boeing Group in charge of supply chain.

Although he is the current CEO of Spirit, which caused Boeing's difficulties, he just took office in October 2023. When he took office, the Boeing 737MAX9 fuselage that caused the "flygate incident" had already been delivered to Boeing, so he does not need to be responsible for it. His identity as the CEO of Spirit is also of great benefit to the integration of Boeing and Spirit.

Such a brilliant career resume is enough to prove that he is a senior manager who is very familiar with Boeing's civil aircraft business and has rich experience, and is qualified for the position of Boeing CEO. But why did Shanahan still lose to Ortberg in the end?

Because Boeing's board of directors has a lot to consider.

There are CEOs who have worked their way up from the bottom of Boeing. Dennis Muilenburg, who served as CEO from 2015 to 2019, is a "pure-blood Boeing man" who has worked at Boeing since graduation. His resume is very similar to Shanahan's, but it was during his tenure that the 737MAX crisis broke out and Boeing fell into a dilemma. Therefore, in the eyes of the Boeing board of directors, such candidates seem suitable, but there is already a bad precedent, so they have to weigh it more carefully. Moreover, Shanahan has been immersed in the Boeing sauce jar for too long, and his appearance has long been full of Boeing's colors. As CEO, he cannot give the outside world an impression of "newcomers with new atmosphere", and people feel that "the soup has not changed."

Patrick Michael Shanahan profile picture

As a professional with a background in science and engineering, Ortberg started working at Collins in 1987. He was responsible for the development of multiple projects as a project manager, and finally became CEO in 2013, leading Collins for five years. Judging from his resume, he can be said to be a technical executive with rich grassroots experience and a good reputation in the industry.

Collins is one of the giants in the aviation industry, and its avionics systems and overall solutions are at the world's leading level. Airbus and Boeing aircraft both use a large number of Collins' avionics systems and various subsystems. Even the communication and navigation system and integrated surveillance system of the C919 are provided by the joint venture established by Collins and its domestic partners.

Collins is an extremely important part of Boeing's supply chain, and Ortberg is no stranger to supply chain management and integration. Moreover, Collins is responsible for the production of various high-precision equipment for aircraft, and its equipment reliability and quality are well-known in the industry, which is undoubtedly the most needed for Boeing, which is in urgent need of improving production quality.

But for Boeing, is it professional and technical personnel that they lack? They are not short of executives who understand technology and manage production, and the CEO level will not be in charge of specific matters. What Boeing needs is: 1. To give the outside world the impression that Boeing is a "new man with a new look"; 2. To let Ortberg change Boeing's corporate culture and reverse its image in the public eye. Ortberg's career experience has nothing to do with Boeing, and he has excellent performance and a solid professional background, and has an excellent reputation in the industry. Therefore, from the perspective of reversing Boeing's image and reshaping its corporate culture, he is a very suitable candidate.

After Ortberg was appointed Boeing CEO, he began to prepare for the job. As a new firefighter, he naturally had to do three things when he took office, and the first thing he did was to announce that he would choose Seattle as his permanent residence.

Anyone familiar with Boeing's history knows that Boeing's relocation of its headquarters from Seattle to Chicago in 2001 was a landmark event, which represented that Boeing's management at the time shifted its focus from R&D and production to finance and profits, stepping on the accelerator of Boeing's decline. Although it has not announced that the headquarters will be moved back to Seattle - after all, moving the headquarters is a big deal - the new CEO's choice to reside in Seattle undoubtedly shows that the Boeing Group will refocus on R&D and production and "set things right" for Boeing's corporate culture and business policies over the past 20 years. This is exactly the change that investors and users want to see.

It will take a long time to see whether Ortberg's "three major actions" can effectively help Boeing out of its predicament. But right now, he has two pressing issues to deal with: Boeing's financial situation and the acquisition of Spirit.

Worsening financial situation

Just on August 1, Boeing released its second quarter 2024 financial report on time, and the situation presented in the report was shocking.

In the first quarter of 2024, due to the "Flying Gate incident", Boeing's passenger aircraft deliveries in the first quarter were only 83, resulting in a sharp decline in Boeing's commercial aircraft revenue and a net loss of US$355 million in the first quarter.

In the second quarter, the situation did not improve but worsened. Boeing delivered only 92 aircraft in the second quarter, far lower than its old rival Airbus, which delivered 323 aircraft in the first half of the year. In addition, Boeing's losses in the second quarter further expanded to a staggering $1.439 billion.

Boeing's commercial aircraft division is the main reason for Boeing's losses

If you look at the detailed financial data, you will find that among Boeing's four major business modules (civil aircraft, defense, global services, and capital), the revenue of civil aircraft has fallen the most year-on-year, and the reason is well known - because of the 737MAX. It is precisely because Boeing has been unable to solve the production quality problems, and the important supplier Spirit is currently undergoing rectification, which has affected the delivery of fuselages, that Boeing's aircraft deliveries have dropped sharply, and the sharp drop in revenue has caused a loss of US$715 million.

However, it was not the civil aircraft division that caused Boeing's serious losses, but the defense division. Although the defense division's revenue only fell slightly, the recorded loss was as high as US$913 million, and the reason was also quite "American": Boeing's government contracts were all fixed-price contracts, but over time, due to problems such as unsuccessful project progress, production quality problems, and supply chain disruptions, these projects continued to incur huge losses.

Take the new Air Force One (VC-25B presidential aircraft) as an example. The two presidential aircraft had previously recorded a loss of $480 million due to rising costs, and in the second quarter, additional costs were incurred due to changes in the wiring and structural design of the aircraft, which led to a loss of another $250 million. And this is not the end, there is the possibility of more losses in the future.

The VC-25B presidential plane is just one example of Boeing's government contracts. Similar problems have occurred on the KC46 tanker, MQ-25 Stingray unmanned tanker, and T-7 Red Hawk trainer, resulting in huge losses. Not to mention the Starliner spacecraft project, which is still in the sky and has no idea when it will return to Earth due to endless failures.

As for Boeing's cash flow, it is an even more interesting story.

When Boeing released its first quarter financial report, its CFO warned that Boeing would run out of cash flow within the year. At the end of the first quarter, Boeing had only $6.914 billion in cash and equivalents, but at the end of the second quarter, it had $10.08 billion in cash and equivalents. Huh? Didn't they say that cash flow was about to run out? With such losses, how could cash flow increase? A closer look at the financial report will reveal that Boeing added $10 billion in debt in the second quarter, which is basically the same as the cash and equivalents balance at the end of the period.

Oh, the case is solved! It turns out that he borrowed another 10 billion US dollars.

It must be said that being able to borrow money is also a skill, called "financing ability"

At this point, we have to sigh at the strong financing ability of Boeing, the "first son of American northern industry". The $10 billion was borrowed at any time. However, under the current high-interest monetary policy of the United States, the borrowing cost is incredible... Boeing's debt has also soared from $52.3 billion to $57.9 billion. I wonder if Ortberg would faint when he saw this financial situation?

Bloody takeover

The civil aircraft division has always been Boeing's cash cow and the main source of profit. However, the civil aircraft division was severely hit by the two 737MAX crashes, resulting in huge losses. For Ortberg, to solve Boeing's complicated dilemma, he must first start with the civil aircraft problem; to solve the civil aircraft problem, he must first resume delivery; to resume delivery, he needs to improve quality; to improve quality, he needs to reorganize the supply chain; to reorganize the supply chain, he needs to acquire S-Brain. Therefore, after a round of development, he still fell into the acquisition of S-Brain.

The relationship between Spirax and Boeing can be said to be "long-standing".

As the predecessor of the Spirit Factory, the history of Boeing's Wichita Factory is almost as long as the history of the name Boeing. Before Boeing sold it, the Wichita Factory produced parts or fuselages for almost all Boeing models, with a workforce of 12,600 people, and the size of the factory was close to Boeing's legendary Everett Factory. The fuselage production of the Wichita Factory is a labor-intensive "traditional manufacturing industry". Although it is important to Boeing's supply chain, it has reduced the return on net assets in Boeing's financial statements. Therefore, in 2005, Boeing CEO Stonecipher (also the last CEO of McDonnell Douglas) chose to sell the Wichita Factory in a package for US$1.2 billion (including US$300 million in debt), which became the Spirit Factory today.

On July 1 this year, in order to solve the production quality problem, Boeing announced a plan to acquire Spirit for a total of $8.3 billion (including $3.6 billion in debt). Since the acquisition requires $4.7 billion in cash, and Boeing's cash flow is now on the verge of exhaustion, it is naturally unable to pay such a large sum of money, so the acquisition method is "stock for stock", that is, Spirit's share price is locked at $37 per share (the US stock market share price was $32 at the time), and the stock is exchanged with Boeing's stock price when the transaction is completed - for Boeing, which has been obsessed with using cash for stock repurchases for many years, there is no cash for acquisition, but the stock for exchange is definitely enough.

It was sold for $1.2 billion 19 years ago and now bought back for $8.3 billion. Neoliberal economics is truly amazing.

However, since Spirit's customers include not only Boeing but also Airbus, the Airbus part of Spirit had to be separated, otherwise it would be a joke that "Boeing produces fuselages for Airbus". Therefore, in order to successfully sell to Boeing, Spirit formed a complex three-party agreement with Airbus.

In the agreement, Spirit will sell four factories related to Airbus business to Airbus for operation by Airbus at a price of $1 - you read that right, four factories for $1. Of course, Airbus not only gets four factories for $1, it will also receive $559 million in compensation from Spirit as the price of taking over these four factories. The reason for this inversion is that these four factories are operating at a loss, and Spirit is considered to be spending money to get rid of the burden, and this money will eventually become part of the acquisition cost, paid by Boeing. You see, isn't Hayek's big hand amazing?

Therefore, Boeing's acquisition of Spirit is seen as a bloody acquisition. Spirit's shareholders and Airbus made a lot of money, while Boeing spent a huge amount of money to get a factory with serious losses, low morale, and a lot of problems. It will take a lot of time, energy, and money to solve the problems and reorganize the supply chain. But for Boeing, what it lacks most now is time and money.

Even though Ortberg is a genius, the Boeing board of directors fully supports him, and Boeing is working together to make a comeback, the objective difficulties are there, and it is not so easy to solve the problems and get Boeing back on track. Boeing's problems cannot be solved by an acquisition, nor can they be solved by changing the CEO. The problems Boeing faces are a microcosm of the decline of the US manufacturing industry, which has affected the company's production line from a social perspective, and this is not something that Boeing alone can solve.

The sunset is beautiful, but it is near dusk.

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