Podcast: Is Kelly Ortberg Turning Boeing Around?

Boeing’s new CEO has been on the job for a year. Analyst Scott Mikus joins Aviation Week editors to discuss how he’s doing so far.

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Joe Anselmo (00:29): Welcome to Aviation Week's Check 6 podcast. I'm Joe Anselmo, editorial director and editor in chief of Aviation Week and Space Technology magazine. Has Boeing turned the corner? If that question has a ring of deja vu, it should. It was the title of a Check 6 podcast in December of 2023 and it proved to be premature. A few weeks after that podcast in January of 2024, the company was thrown into disarray when a door plug on an Alaska Airlines 737 Max blew out in flight. In August, CEO Dave Calhoun stepped aside and was replaced by Kelly Ortberg. Barely a month later, the company's machinists went on strike, shutting down commercial aircraft production and exacerbating the company's financial bleeding. But that turnaround we asked about 19 months ago finally seems to be underway. While Boeing is still losing money, the second quarter earnings announced by the company on July 29 show that its finances are stabilizing. Production of 737 Maxes has risen to the highest level since 2019. 

(01:34): The company's defense business, a perennial problem child, received a huge boost when it won the contract to build the U.S. Air Force's next generation fighter, the F-47, and the June 12 crash of an Air India 787, which ruined Boeing's Paris Airshow, does not appear to have been caused by a mechanical or design problem. Joining me to break this all down are Michael Bruno, Aviation Week executive editor for business; Sean Broderick, our chief safety and regulatory editor; and from the finance community we have a special guest, Scott Mikus, director of Aerospace and Defense Research at Melius Research is back for another Check 6. Scott, thanks for joining us. Let's start with you. Did I get that right about the second quarter earnings?

Scott Mikus (02:21): Yeah, Joe, thanks. It's great to be back. The second quarter results for Boeing are pretty good. Sales were up 35%, which we'll rank as the highest in our coverage list this quarter. It also came in 3% better than consensus expectations. Boeing Commercial sales were up 81%, but you also had high single-digit growth at Boeing Defense and Global Services. The core loss per share of $1.24 was significantly improved compared to the $2.90 loss per share in the prior year quarter. The production ramp on 737 and 787 seems to be going well, but the real standout and the focus for investors, the cashflow performance consensus was looking for about a $1.6 billion cash burn. It came in at only $200 million, so significantly better than we were expecting in consensus. Now there were some timing items related to the liquidation of 777 freighters. 

(03:16): We also had a 777X cash burn, about $900 million. If you adjust for those two items, actually Boeing was essentially cashflow break even, so it was a pretty good quarter. They also improved their cashflow outlook for this year. Prior expectations were for a $4 to $5 billion cash burn for this year. They're now targeting about $3 billion. Investors may have been expecting a little bit better commentary on the cashflow outlook, which might've been part of the reason why the stock traded down, but it seems like there's a healthy level of conservatism in that cashflow guide. So I think Boeing is set up pretty well and we're seeing a lot of good progress and stability across all three of their businesses.

Joe Anselmo (04:01): So Boeing's been losing money for years, Scott, I mean, what is the point where they reach breakeven and then start to make money again?

Scott Mikus (04:10): Yeah, so this upcoming third quarter, they're expecting the cash burn to be about $200 million, which is comparable to what they had in the second quarter, but there's about $700 million of one-time items that's related to a DOJ settlement that just needs a sign off from the judge in the court. And then the fourth quarter cash flow should turn positive and then significantly improved as we get into 2026 and beyond. And the key item that a lot of investors have been focused on is when do they get 737 production to a rate of 38 per month? And Boeing on yesterday's call confirmed that they got there in May. Now it will probably take a few months to stabilize. Then they'll discuss with the FAA about going above the cap of 38 per month, so they could be at 42 per month by the end of this year, and at that point they should be generating a healthy amount of cashflow and consensus estimates for next year are looking for north of $5 billion in free cashflow. So that's significantly improved off of the cash burn that they'll have this year. And then on the call there was also discussion about the $10 billion free cashflow target that was originally laid out at the November 2022 investor day. So it seems there might be some focus on that as well.

Joe Anselmo (05:29): We're just about at Kelly Ortberg's first anniversary with the company. Michael Bruno actually filed a story this morning that's in edit right now. Scott, how is Kelly being viewed on Wall Street?

Scott Mikus (05:41): I think very favorably. When he was first hired, I was on the Check 6 podcast and we talked about the hire of Kelly. It's great choice. Boeing outsider engineering background consensus builder knows the issues to focus on and is really driving a cultural change. I think that's very key on Wall Street is seeing that what Boeing did in the 2000s and 2010s while that contributed to Boeing's outsize free cash flow growth and caused the stock to hit a record high, what Boeing was doing in that time period was completely unsustainable. They were squeezing their suppliers employees. Some of their relationships with their key stakeholders had turned arguably adversarial. And when we were at the Paris Air Show, our conversation with suppliers and with Boeing was that the relationship has changed significantly where they're being much more collaborative, proactively working to solve problems together. So there's a lot of positive momentum that you're hearing from customers, regulators, also suppliers as well. So we're seeing a lot of positive changes culturally, operationally, and it's really starting to show up in financial results as well.

Joe Anselmo (06:55): Sean Broderick, you led Aviation Week's coverage of those earnings yesterday along with Michael and Robert Wall. What were some of your key takeaways?

Sean Broderick (07:04): Well, I think Scott hit on a lot of the high notes. I mean clearly what we're seeing is not just examples of what Boeing can do when things begin to go right, but they're starting to string together numbers that show they are turning the corner. It's a big corner, but it's pretty clear that they have entered that corner and are rounding it. Deliveries are at a point now where we can begin to talk about pre-pandemic comparisons. I mean the 2018 numbers, the last 2018 was, as we've talked about often on Check 6, that was the last normal year and normal is doing a lot of work in that sentence when you're talking about an airplane manufacturer in particularly Boeing. But there was the last one that the 737 Max output deliveries and production weren't constrained by issues they were having, whether it was the two fatal accidents or the Alaska Airlines accident that has kicked off the safety and quality revamp that started last year, 787s. 

(08:11): Also soon after that, they peaked in 20, I think in 2019 they were still at 14 a month. Then they had their production quality issues that halted deliveries for the better part of a year. So they are solving the issues that underpin those problems. And the numbers show that the most important one. I think we count deliveries every month because that's what Boeing reports, but the most important ones, of course, the production rates, those are moving up on the two key programs. 787 is up to seven a month and they're looking to transition to 10 and then beyond. And the beyond comes into play because they're expanding their footprint in North Charleston because they can only produce about 10 in the dual final assembly lines they have there. 737 Max at 38. But important to note. And then Scott touched on this too, that they are not stable at that rate yet, not just because they haven't been there for enough months to give Kelly and the team confidence, but the six key metrics, the key KPIs that were established in the plan that Boeing put together to satisfy the FAA following the January 2024 Alaska Airlines accident. 

(09:28): One of those key metrics is not in the green or is satisfactory as Boeing would say. They have a simple dashboard with green, yellow, and red, and the traveled work on the final assembly line is not where it needs to be now. Or Kelly has said that Boeing will not increase rates on any of their commercial production lines until those KPIs have been in the green for a few months. That's what he defines as stability. So on the rate increase on the Max, Brian West and Kelly both said they're getting close to be able to go to the FAA and talk about the next step. But from past comments, I would not expect that before September or October early fall, the actual switch to take place because they still need a couple three months to iron out the issues on that one metric on the travel work on the final assembly line, but they are moving in the right direction and that's translating into better financial performance. 

(10:37): And most importantly, you're seeing a consistent pattern month after month and quarter after quarter that assuming it's sustainable, which Kelly has made that one of his key priorities is to ensure that we don't just increase, but we can increase in a sustainable and safe way. And customers are happy with the airplanes they're getting from a defect standpoint. In addition to all the other things, assuming they can sustain that, they seem to be moving in a trajectory where we can once again begin to talk about the last guidance that they gave, which was back in November 2022, as Scott also referenced.

Joe Anselmo (11:13): Michael, as I noted, you just filed a story about Kelly's first year. It's still in edit, but why don't you tell our listeners your takeaway.

Michael Bruno (11:22): I'll give you a little preview of what we're going to say in print in the coming days and weeks, which is essentially that Kelly Ortberg is turning around Boeing, it's widespread, it is across the company as Scott and Sean were talking about. It's cross industry as Scott mentioned. You hear it from suppliers and customers elsewhere. And the government officials continue to say they think there's progress being made, but clearly Boeing's not out of the woods is sort of the usual line that's given. But where we see most interestingly, some of the progress being made is the fact that it's not just rate 38 on the 737s. It's also getting the defense programs in BDS, Boeing Defense Space and Security kind of under control and meanwhile not messing up the aftermarket division which continues to make money. So again, widespread, clearly things are pivoting, but it's early days. Of course, we're only one year into this and I think Scott and many other learned people have said that this is going to take many, many years to truly turn around Boeing. So nobody is saying that they've arrived, they've recovered, but they sure do seem to be pointing in the right direction. I do want to caveat with one thing because I'm a journalist of course, and I can't help but see the cloud behind the silver lining. 

(13:00): There were some criticisms that Mr. Ortberg had in the first year and there worth mentioning because it was not a linear year where it was just progress after progress and success after success. Mr. Ortberg walked in and immediately faced that 53-day strike by the union workers around Seattle, and there was immediately criticism about why wasn't he working to end it sooner? How did it go 53 days? For whatever reason, it went that long. It was very injurious, it was impactful on the entire industry, not just Boeing itself. And some would say that the company is still trying to get back in place to where it got set back from that strike. There were also some events made about management changes or lack thereof. A lot of people, I think kind of expected Mr. Ortberg to walk in and slash some heads at the top of management kind of hold people responsible, hold their feet to the fire. 

(13:58): And that really didn't happen at first. And then the very first person who seemed to have been ousted, if you will allow me to use that term, was Ted Colbert at Boeing Defense. And that kind of caught some people off guard because while clearly that division has had a lot of challenges and was in a very deep structural hard place, Ted Colbert had been seen as a very affable and was making some degree of progress people thought. So it was kind of strange to some observers that he was the first to be ousted. Meanwhile, over at Boeing Commercial Airplanes, there really wasn't any management change taking effect at the top at least. So there were criticisms that had been lodged over the past year, but say what you want. Here we are a year later and we've had the second quarter report and the finances look good, the customer reports and the supplier reports sound good. And Boeing is looking at raising rate on the 737, which is the most important thing at the end of the day for that company financially. And these are all good places to be in. So you've got to say congratulations to Mr. Ortberg and Boeing for getting to this point, even with a tremendous amount of work left to do.

Joe Anselmo (15:21): Scott, in your research note after the earnings, you noted about Kelly Ortberg's efforts to change Boeing's culture, and you had referenced that a little bit here today, but tell us about that. How is that going? Do you see marked changes in Boeing's culture?

Scott Mikus (15:37): I think you do in that they're starting to actually deliver and produce aircraft ahead of schedule. We're hearing customers talking about how they've never had more confidence in Boeing's delivery skyline than they have in recent years. So it's about holding people accountable, meeting those commitments. Now there was a slip in the Max 7 and 10 certification. There might be some design changes, but still it seems based on the airlines reports that had been previously communicated to them and before in years past, we would hear comments from airlines that they didn't know when their planes were going to arrive. So I think the lines of communication within Boeing's organization also with its external stakeholders, whether it be the suppliers customers or regulators, has improved significantly and they're just really starting to rebuild that trust. There's also this strike that's going on in St. Louis, which there was a question about that on the call. 

(16:37): You hope that that doesn't drag out very long and that they can get that issue resolved. But it seems like Boeing is really putting its best foot forward and trying to communicate and hold accountable everyone within their four walls to make sure all those KPIs are in the green, everyone's executing, speaking up when something's wrong, and really just taking a collaborative approach to problem solving. And I think that's a welcome sign for a lot of investors on Wall Street where maybe there wasn't that accountability. In the past, and particularly when we talked about the defense business, we now have two consecutive quarters where Boeing had not taken any sort of meaningful charge on this fixed price development programs and over the past five, six years and for the KC-46 tanker, it went on even longer. We would see significant charges almost every single quarter. And when investors see that, that's kind of a sign that bad news is not traveling up the food chain as fast as it should, and now we're not seeing those charges happening, which means that if there is bad news, it's flowing to the top and they're getting some sort of solution in place. So I think there's a lot of positive signs here.

Michael Bruno (17:53): Scott, I want to follow up. One thing that really interested me in the call, the second quarter conference call July 29 was Mr. Ortberg was asked about that $10 billion free cash flow bogey right hanging out there and about whether Boeing could still hit that. And I thought it was a very interesting nuanced answer if you can explain that maybe a little bit better. But sounded to me like he essentially said, yeah, we're still going there, and that's exactly what Wall Street wants to hear.

Scott Mikus (18:24): Yeah, he said that he sees nothing structural that would prevent them to getting there. They've talked about getting Boeing defense back to the mid to high single-digit margins, and then if you're going to get to that $10 billion free cashflow number, you'll have steady growth in the services business. Granted, you will be selling Jeppesen. That deal will close probably before the end of this year. And then the other key is Boeing needs to get the 737 production rates to 50-52 roughly, and then 787 production around 10 per month. And then you got to get 777X obviously certified and hopefully get that to at least cash break even or cashflow positive. They decided not to put a timing on that. Consensus estimates are looking for about $10 billion of free cashflow in 2027. It'll be interesting to see if they can hit that timeframe. Right now, things are looking up and up, but Boeing also has a lot of buffer inventory that they're able to burn down right now. And once that buffer inventory starts to normalize, those production rate increases will become more of a challenge. So the execution will just become that much more difficult when you don't have that buffer inventory. So that's something that we're going to keep a watch on and that'll become more apparent once Boeing probably steps up the 737 rate from 42 to 47, and then 47 to 50 probably late next year. That's when we'll start to see can they execute on this ramp without significant levels of buffer inventory and can the supply chain handle that ramp too.

Joe Anselmo (20:08): And when you talk about production rates, you're obviously talking about per month,

Scott Mikus (20:11): Correct. Yes. Monthly production rates, yes.

Joe Anselmo (20:15): Michael, did you have a question?

Michael Bruno (20:17): Well, I just wanted to follow, but all of that got me thinking about all this money starting to get generated, which hadn't been the case the past couple of years. It's going to bring us right back to the question of what to do with that money, right? Do they pay down the debt, this mountain of debt, they have $53 billion in gross debt, or can they go launch a new commercial aircraft? That's something that those of us in the aviation industry have been debating and waiting to see what they do.

Scott Mikus (20:45): Yeah, on that point, I think that Boeing will probably try and get back to what we consider a net cash position or pretty close to that before they consider launching an aircraft. So right now, the net debt, which is Boeing's gross debt minus its cash and marketable securities is hovering around $30 billion. So they'll end up absorbing some of the debt that Spirit AeroSystems has as well as part of that acquisition. I think a lot of the cashflow in the upcoming years will probably be used to pay down that debt shore up the balance sheet because Boeing wants to have its operations, right? It's balance sheet strong before it enters into a development program, because a development program is a high risk game. You're talking about potentially a seven to 10-year development cycle and spending a couple billion dollars per year researching certifying and also building out the production system as well. So it's important that Boeing makes sure its balance sheet is in rock solid shape before it engages on that path.

Joe Anselmo (21:48): Sean, a final question. I had mentioned the 787 crash in India. At the beginning of this, it was just the week before the Paris Air Show, Boeing had toned down all of its plans for the show. Kelly Ortberg ended up not going to Paris. But where are we now on the investigation? And that crash is looking like it is not the fault of the hardware or design, correct?

Sean Broderick (22:15): There's no indication that there is anything linked to the airplane or its systems or its engines right now. That is for sure. The preliminary report that came out was certainly no analysis, which is common for a preliminary report in the first 30 days after an accident. But there were enough holes in it to keep everything on the table. But the reactions from the FAA and from the NTSB that say, right now we have no recommendations to any 787 operators, that speaks volumes about their evaluation of the evidence. That points to nothing that suggests that there's a technical problem. Kelly Ortberg opened his second quarter remarks with condolences on that accident. So Boeing, Boeing has handled it in the best way possible, but fortunately for them and for shareholders and really for the rest of the industry does not appear as though this is going to be yet another issue that drags Boeing down because of a technical or a quality problem.

Joe Anselmo (23:34): Okay. Well, on that note, we are just about out of time, so we're going to have to wrap up this episode. But I'd like to thank Scott for coming back and joining us to share his insights. And special thanks to our podcast producer in London, Guy Ferneyhough, and of course, thank you to all of our listeners. Head to aviationweek.com for full coverage of Boeing's earnings and look out for Michael's feature on Kelly Ortberg's first year in the next issue of Aviation Week and Space Technology. If you haven't already, be sure to follow Check 6 on Apple Podcasts, Spotify, or wherever you listen, so you'll never miss an episode. If you've found today's discussion helpful, please consider leaving us a star rating or review. Better yet, share this episode with a friend or colleague. Thanks for checking in with Check 6, and bye for now.