Lots More on the Ongoing Mess That Is Boeing

0:00Your best bottling plant employs 3 ,300 people. How do you get 3 ,300 people working at peak efficiency? Your best store has reduced waste, water, and energy usage. How do you make every store like your best store? Your best property has every guest raving. How do you make every property like your best property? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. When you own your own business, you own every decision. Now own the card that rewards you for it. Chase Sapphire Reserve for Business is a painful card that elevates your travel experience and offers premium benefits that can take your business to the next level.

0:43Sapphire Reserve for Business offers 8x points on all purchases through Chase Travel, 3x points on social media and search engine advertising, airport lounge access, and more. With over$2 ,500 in annual value, it's the card that gives back all you put in. Learn more at chase.com forward slash reserve business. Chase for Business. Make more of what's yours. Accounts subject to credit approval. Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank and a member FDIC.

1:15Bloomberg Audio Studios. Podcasts. Radio. News. Feel like we might have made a mistake recording this episode on Wednesday, October 23rd, which is the day that we're awaiting the strike vote over at Boeing. Oh, yeah. But you know, yes, that's right. That's annoying timing. But on the other hand, what I would say is that Boeing's issues seem so deep, etc., that the strike is only one angle. It's just another trouble. And so even if there were, you know, even if there were all the, you know, by the time people listen to this and there's some resolution, I don't think there's going to be some resolution to the issues at Boeing writ large.

1:57Well, the good news, I guess, in terms of timing is also that we had Boeing earnings just yesterday. So you can kind of see a lot of those issues that you are alluding to directly on the balance sheet. Do you want to know some good news from my personal life? Yeah, please. Okay. The correlation between Boeing and Southwest, their biggest customer, is finally breaking down. So Southwest shares are up. Boeing is still pretty depressed. My dad used to fly for Southwest, so he still has a lot of Southwest stock. So this is a disclaimer. This is a financial disclaimer. That's right. This is important.

2:35Also, this is what constitutes good news for me nowadays. I did a deadlift. One, two, three. Hegemony. Okay, good. Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that, like, in a couple years, the AI will do a really good job of making the Outlaws podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have...

3:13Cha-ching. The perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now. Because even when the odd lots is over, there's always lots more. And we really do have the perfect guest.

3:29We did an episode, I don't know, maybe three or four weeks ago, and the title of that one was The Ongoing Mess That Is Intel. This one I think we're going to title The Ongoing Mess That Is Boeing. But it's interesting. I don't know if you saw earlier this week. I think it might have been Monday, Greg Ip over at the Wall Street Journal wrote this column. Oh, yeah, I saw that. That is basically like the crises at Intel and Boeing are a national emergency. And this is something that I've thought specifically. Sometimes random people who know that I like cover stuff like this for work, they'll say, what are you worried about these days?

4:01And this is usually what I go to first, that we're in an era of we're trying to revitalize U.S. manufacturing, and yet the two defining flagship U.S. manufacturers are deeply struggling. And what does that say about institutional operations and the nature of U.S. capitalism? These are the companies that I think about first when I worry. You know who else thinks about them a lot? Richard Abulafia, who is, of course, a managing director at Aerodynamic Advisory. We've had him on before talking about both Boeing and Embraer. One day we're going to talk, and it'll be good news. We're going to talk about something going really right, but I don't think today is that day yet.

4:42Yeah, jetliner is delivered to happy customers and waiting flying public members. That would be terrific news. Doors staying on planes, things like that. Well, that's asking a lot, but yeah. Okay, yeah. So in terms of what you're watching at Boeing, I just mentioned the strike vote is coming later today. But what is the next catalyst for you in terms of the future of this company? Yeah, I mean, obviously getting the strike settled is just so enormous. But quite frankly, once you get it back, get work going again, getting to the rate they want is really the key to everything. You know, the 737 is their only really big profitability driver.

5:27So if you ever get to that Halcyon place where they're delivering 50-something per month, cash ceases to be a problem. You know, it's just that simple. And they've been stuck in first or second gear for years now at 20-something or zero in the aftermath of the two crashes. That, you know, we're waiting and waiting and waiting. And all of their financial problems are basically as a consequence of this. there are other contributing factors like their rather horrible defense programs and whatever else. But the key to solving the company's problems comes back to getting that ramp going. And of course, the key part of that is getting suppliers healthy and delivering again too, which is an added complication.

6:09On this question, okay, so they need to just objectively to be a profitable company that has a healthy balance sheet, they need to improve that production cadence? Just to be clear, like, okay, if the strike is resolved at some point, which presumably it will either by the time we're talking about this or later on, what does that mean in terms of actually getting back to their production cadence? But that's also, I don't think, the only issue. Yeah. It's just sort of a necessary condition, I guess. This is not a right to work state, which means that when the workers go on strike in Puget Sound, pretty much all deliveries kind of more or less come to a halt except stuff that was about to be delivered.

6:51And that means that the strike simply has to end for things to start again. But then there's finding the necessary resources and in terms of talent, which is an added complication to any terms and benefits they offer the workers. You know, you also want to regard this as an opportunity to attract talent. And I'm not so sure they're doing that. But then the next thing is you've got to look at the supply chain, which has been badly dilapidated by everything from the pandemic to Boeing's terms and conditions over the past decade. Basically, Boeing was kind of using their supply base as an ATM. And they all have to be, well, turned back on.

7:30They have to have the adequate working capital and adequate labor resources of their own. And, of course, at the center of all of this is period air systems. And Boeing had reached the conclusion that the only way to make this good is to bring it back in the company. So that situation has to be cleared up, and that's a big one. That's exactly what I was going to ask you about. Do you get the sense at all that Boeing is going to sort of revamp its relationship with suppliers? Because this was one of the big criticisms of the company and the sort of cultural change that happened. It was this idea that they just decided to outsource a bunch of stuff because it was cheaper.

8:05Well, you know, outsourcing would have been fine at the end of the day. They'd always outsourced a certain degree of the production aspect. It was the decision to also outsource design and integration that made things a little bit worse. But then it got really bad when they sort of learned exactly nothing from General Motors and said, what if we outsource and outsource design and integration and then treat them like a lemon to be squeezed? That'll work out great, right? And they adopted back in the 2010s the same approach to the supply chain as they did to their workforce. These are people we can squeeze and extract cash from.

8:42And they're realizing that, incredible, I mean, no one could have seen this coming, but actions have consequences. And taking all the margins out of your suppliers and giving them 120-day payment terms and whatever else, and even demanding that you own the stuff that's on their factory floor, just any metal that might have fallen to the, I'm not making this up, is buying property, not theirs. I mean, basically squeezing them in all directions. Wait, say that. When you said, I'm not making this up, any metal that falls, what was that? It falls on the floor. They can collect it. You know, it's like, wait a minute.

9:17You know, if there's any scrap metal that falls from the manufacturing process, that's ours, not yours. We get to build that down. Well, that's a real term. That's true micromanaging. Yeah, that's true. Yeah, that's an ATM. And it was a lot of those, right? Wow. Yeah, it is. And there was a rather Orwellian-sounding program called Partnership for Success, a.k.a. Partnering for Poverty. basically, and they did this in two different trenches, basically going in and saying, we're going to cut your margins. And by the way, we're going to have a go at your aftermarket business too, if you're an aftermarket player.

9:47Basically, they went after their supply chain. And for a while, suppliers basically were depending upon if they had Pentagon exposure to make things a little bit healthier during the pandemic. The Pentagon had an accelerated payment program for suppliers, which really helped a lot. And for a while, it was sort of, you know, everyone who loved Boeing regarded the Boeing part of their work portfolios as not so good at all because it was the least profitable. So another thing I wanted to catch up with you on is just the mood at Boeing. Have you been back to Seattle since the last time we talked to you?

10:25Yeah. And what's it like? What are people saying? You know, I mean, people are different, right? The workforce isn't completely homogenous. Having said that, boy, that 96%, I think, vote after the first contract offer, that is pretty telling. There's a real feeling that for the first time in many decades, labor actually has power and they can get back some of the ground they lost over the previous decade or so. Today is going to be incredibly telling whether or not they're willing to say, okay, hey, It's a pretty good offer. Let's get back to work. Or whether they say, no, we gave up our pension 10 years ago and we want it back.

11:07Read our lips. That's going to be the most interesting aspect, effectively a referendum on the pension. So obviously, again, by the time this comes out, people have heard, you know, I think we and now we've talked to a few times. The one line you've said that truly haunts me or that sticks in my head is that Boeing could get to the point where because it's been so long since they've launched a brand new product, start from a clean sheet of paper and launch a new product, that it could get to the point where eventually they have no one inside the company who has ever been part of the process of designing a new product.

11:47And I think there were comments out today from the CEO that there's still no hurry on that aspect of it. No, no, no. He said that Boeing is still focused on building an all-new airplane. But the question, to your point, is like, how do they actually do it? Yeah. And it's like this – to me, like when you said that, there's like no one who knows how to build a new airplane from the beginning. I remember like, oh, that's like a really chilling thought. And so I'm curious like where that stands. Well, we're not at that point just yet. it. There's a risk of it given the demographics of the design workforce.

12:20And you meet a lot of them and they're on the older side. The SPIA engineering union, I think their median age is somewhere in the 50-ish range. Don't hold me to that, but it's older. And the number of people who were around it the last time that a clean sheet design was launched, the 787 around 2004, it's diminishing. You can make an argument 777X has been kind of halfway to a clean sheet as a major derivative, and that's something. But you can see that if something new isn't launched in the next four or five years, they're going to have a really hard time reconstituting that muscle memory, that core knowledge.

13:12Your best restaurant location gets five-star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor.

13:58In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. What do you think is more likely at the moment? And I get that there are a lot of moving parts here, but is it a turnaround of the company, a successful turnaround? Is it a sort of long, slow death or is it a breakup? You know, that depends on leadership. You know, the previous leader, Dave Calhoun, as we discussed, you can see that the future right there.

14:39It was, you know, either a glide slope into the ground or a breakup. And I think they were probably thinking about their breakup options. Kelly Ortberg, that's the big change. Of course, his track record is not absolutely perfect, but there's still a lot of hope. I mean, he's somebody who knows the industry, who cares about the industry. We're kind of hoping that with him at the helm, there is a chance of getting things back on track and for the company to survive and perhaps even be restored to health in something like its current incarnation. I have a question that I don't really want to know the answer to, but you mentioned troubles on the defense side of the business, which probably doesn't get talked about as much because the market is different and the public doesn't know those products.

15:27Defense stocks, say a Lockheed Martin, have actually done extremely well despite the fact that I see a parade of headlines all the time about troubles at Lockheed Martin. And there is a headline out literally yesterday, Lockheed Falls as F-35 delays drag sales. And there's other things like that. Could we do versions of this conversation about many other American defense contractors? The good news is not really the bad news is, yes, we can about Boeing's defense side. Okay. So there actually is like, it's not like what you identify in Boeing and whatever it is, and there are probably many different causes, is not in your view completely endemic to the US defense sector?

16:12Right. It's pretty unique to Boeing and it gets back to the roots of the worst in class management that ran Boeing in the last decade and into this one. basically they made the strategic decision to sign a bunch of incredible money losing contracts and of course the u.s military was fine with that you know you want your investors to pay for our weapons systems great and the strategy was to use the amazing incredible revenue from their unstoppable commercial jetliner cash flow to basically subsidize the defense that was a strategic decision, made worse by a decision to, well, inflict on the defense side exactly the same management mispractice that they did on the commercial side.

16:56You know, under-resourcing things, demanding results without actually showing up and discussing requirements with people. And the consequences, predictably, were just horrible losses on major programs that dwarf anything else in the defense industry. Do you think Ortberg is going to recreate the strategy department that Calhoun dissolved. So they actually know what they're spending all that new capital on and what they're aiming for? Well, again, you're asking for a lot with a strategic direction. I mean, it's like, oh, wow, actually figure out where the super tanker is headed. Good idea. Crazy.

17:33I hope so. Right. I mean, I really sure. I hope so. But there's so many things. And there's also, frankly, a lot he's doing that I don't get, you know, for a guy who About a week or two. Well, he announced a literal decimation of the company. They're going to fire 17 ,000 out of 170 ,000 people. Where the heck would they come from? So, Tracy, getting to your question, you know, to reconstitute a strategy team while cutting overhead, quote unquote, and whatever else, that doesn't seem to make a lot of sense to me. And where would those people come from in any event? Because commercial needs resources to do the ramp.

18:09And the one consistent problem with all those money-losing defense programs is inadequate resources. So where do those workers come from? Yeah, by the way, on CNBC this morning, Ortberg, there is a quote calling Boeing, quote, overstaffed for its business going forward. And then he said, I would rather err on the side of doing less than doing more and not doing well, which, you know, I guess that sounds fine. But yeah, if you're building out things, if you're building out a new product, if you're building out a new strategy team, seems like there are things in tension, to say the least. Yeah, I just don't get it.

18:42I mean, they're trying to ramp, as we discussed earlier, from 20-something to 50-something 737s. That's directly linked to people. Similarly, the one true thing that Dave Calhoun said was some of their key defense programs were suffering from, well, personnel and talent shortages. I don't get the under-resourced or over-resourced argument at all. He's going to have to actually explain where those jobs would come from. One thing I wanted to ask you, and I'm actually a little bit, I don't know if you want to talk about this, but we do have the election coming up. And as Joe said in the intro, you know, boosting America's manufacturing sector has been such a big thing in recent years, a big policy goal.

19:33And both presidential candidates, you know, have talked about this and say they care about it. But do you have any opinion or idea or insight on what the two candidates would mean for a company like Boeing? Yeah, you know, during the Trump years, there were some who believed there was actually a pattern of favoritism towards Boeing in defense contracts. The F-15 came back in the budget. The Super Hornet came back in the budget. And there were rumors that Boeing had even received next generation fighter contract development work. And, you know, it's impossible to say for sure or whether that would continue because, you know, Trump 2.0 would look very, very different from Trump 1.0 in terms of people and policies.

20:20Obviously, Kamala Harris would probably be, you know, pretty much as is. Either way, it's not really clear other than defense what could be done. And even with defense, we're not really sure. I mean, this country doesn't really do industrial policy the way, say, Europe or Japan does. We can provide government resources to stabilize a very bad financial situation with loan guarantees or pension bailouts or something like that. And, of course, there's long-lead advanced technology development, semiconductors, whatever, artificial intelligence, just DARPA sort of stuff. But the stuff in between favoring industries in one way or another, we don't have a lot of experience with.

21:02And policymakers, you know, it's not really clear exactly what they would do to further that goal. Last question for me. You still sort of bearish on COMAC. What's your view on them these days? Yeah, you know, I mean, it's pretty much the same thing. And it's no dig at China itself. You know, I mean, if they were to privatize COMAC and not make it part of the, you know, Central Committee of the Communist Party, I think they'd probably be pretty darn good. And better still, if they could become a global enterprise and say, we're going to buy best technologies all over the world, they'd be really good.

21:34But right now, they're basically the DMV with wings trying to build a... It's a little embarrassing, frankly. Wait, I have one more question, which is, since we spoke to you last, we've had this year's air shows. And I'm just curious, what was the most interesting or surprising thing that you heard from those? Yeah, thanks for asking. Great question. I guess the mood at Farnborough this year outside of London was, excuse me, where's our planes? We've been waiting for a supply chain and production recovery for some time now. And you talked with supply chain managers, and they were apologetic. And they said, well, look, we've got a roadmap to seeing the results from investments we're making at various levels of the supply chain.

22:19This wasn't 100 % completely convincing. But hey, it sounds like they are starting to make those investments. So in a year or so, we might begin to see a slightly faster increase in production. That was sort of the big talked about topic. And it sounds like people were getting serious about sourcing as a strategic function more than ever. So maybe it's getting the priority it deserves. By the way, Tracy, I just wanted to clarify something I said earlier. So Ortberg was on CNBC today and he was asked about the next plane that they're going to design from scratch. Yeah. As I'm reading the Bloomberg article, it says, restoring the balance sheet will be a requirement for Boeing to consider its next commercial aircraft, Ortberg said.

23:00So the basic gist is like, yeah, there's going to be another plane in theory. It's not going to happen until the current financial issues are resolved. And so in the meantime, day after day, the number of people who were there the last time a new plane was launched dwindles. Right. They're in a capital death spiral. So the most pressing concern is gaining altitude by rebuilding that capital cushion before you can figure out where the plane is actually going. There's my, that's my flying analogy for today.

23:35Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Andam and Cale Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts. Please rate, review, and subscribe to OddLots and lots more on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all of our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening.

24:02How many vendors does it take to meet all your organization's food needs? Just one, EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor. In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. This is Shirley Strawberry from the Steve Harvey Morning Show.

24:42Toyota has been building a legacy of excellence for years. From developing hybrid technology to upping the standards of safety and efficiency, Toyota is always innovating, always making progress. And with a superior lineup of in-stock SUVs, including the adventure-ready RAV4 and capable, affordable Corolla Cross, you can experience the legacy of Toyota for yourself. Visit buyatoyota.com, the official website for deals to find out more. Toyota, let's go places.