Boeing CEO David Calhoun Puts Credibility on the Line With Writedown

The credibility of David Calhoun, the chief executive officer of Boeing Co., is on the line after the planemaker took $2.8 billion of charges for defense programs in the third quarter.

Boeing had been taking writedowns consistently on a variety of these programs, including a new Air Force One and a midair refueling tanker, at least every year since 2018, including a stretch of six consecutive quarters from the end of 2019 to the beginning of last year. That’s why the size of the latest writedown shocked investors, who pushed the stock down nearly 9%, adding to the 27% drop this year through Tuesday.

The cause is well known. Boeing entered into fixed-price contracts for these aircraft — which also include a pilot-training plane and an aerial refueling drone — and hasn’t been able to hold expenses in line. Lately, those costs have been amplified by the recent bout of inflation, supplier struggles, a labor shortage and poor performance. Calhoun decided to rip off the band-aid and pile all those charges into one lump sum, getting the sticker shock behind him ahead of a Nov. 2 investor meeting at which he will map out Boeing’s huge cash-generation opportunity for its commercial aircraft.

This strategy works only if this is the last time that Boeing will slip in a charge on these four defense projects and one program for NASA, a new spacecraft capable of carrying astronauts to the International Space Station. Calhoun now has little room for error after he took over as CEO in January 2020 and promised a transformation after Boeing horribly stumbled on the 737 Max airliner, which resulted in two crashes that killed 346 people. Calhoun argues that a transformation takes time. But investors are losing patience.

The opportunity is there for Boeing to turn the corner on its troubled 737 Max and 787 Dreamliner aircraft, but that requires Boeing to execute — something that the company hasn’t done well for a while. Demand for commercial aircraft is strong, and the challenge is to ramp up production even as the supply chain struggles to keep up (Calhoun specifically called out engines from General Electric Co.). Boeing didn’t help itself by paring its annual forecast for delivery of the airliners.

Some critics see Boeing’s challenges as a manifestation of long-festering issues of the company pivoting away from its engineering-first roots and toward an investor-first priority. The shift in focus toward lifting profits and increasing shareholder returns dates back to when Jim McNerney took over as CEO in 2005. McNerney, like Calhoun, is an alumni of GE from the Jack Welch era. In fact, both McNerney and Calhoun were on the short list to succeed Welch, and both left GE after Welch picked Jeffrey Immelt. McNerney first went to 3M Co. and then took over Boeing, bringing with him the shareholder-friendly culture of GE.

Critics say the crowding out of the engineering voices by the financial ones culminated in the 737 Max disaster, which involved software that was added to the new plane’s flight controls without notifying regulators and without training pilots on the new system. The two accidents that occurred in less than five months beginning in late October 2018 led to the grounding of the 737 Max and sent Boeing spiraling into its deepest crisis since the company was founded in 1916. Losses and debt piled up and resulted in the Federal Aviation Administration reexamining its cozy relationship with Boeing, making aircraft certifications much harder.

“Boeing needs to return to an engineering-driven culture to ensure better execution, because even without these fixed-price risky contracts, poor execution would have resulted in losses,” said Richard Aboulafia, a managing director at AeroDynamic Advisory, a Washington-based aerospace consultancy.

Calhoun didn’t make a strong case that Boeing has changed course to put emphasis on repairing its engineering reputation. Cash is still king at the company, and Calhoun pointed out that Boeing was able to turn the corner on its tattered finances by generating $2.9 billion of free cash flow in the third quarter as aircraft deliveries ramp up.

“I feel good about our turnaround. I do think the cash-flow numbers in the quarter are in fact a marker for us,” Calhoun said on a conference call with analysts on Wednesday after the company announced its third-quarter results. “We’ve been focused on it. We will continue to manage the company on the basis of the cash economics that we support our investors with.”

When asked by an analyst whether the emphasis on cash was the right move given that this strategy is what got the company into trouble, Calhoun, who has been on Boeing’s board since 2009, replied that he wasn’t going to speak about the past. The reality is that Boeing must focus on cash profits because of the debt that piled up over the last three years while planes were grounded and Covid-19 raged, Calhoun said. Boeing’s long-term debt has shot up to $51.7 billion at the end of the third quarter from less than $11 billion at the end of 2008.

“Our need to focus on free cash flow is a result of having taken a significant amount of debt on in light of the crisis that we had, some self-inflicted, some definitely Covid-related as it relates to the marketplace and all the things that we’ve had to contend with,” he said.

Calhoun said that cash flow is a “great metric” to measure employees’ performance and the work they’re doing. That focus doesn’t mean the company isn’t investing in new capabilities that will return Boeing to being a leader in the market, he said.

Boeing needs to be profitable so it can crank out current plane models and invest in the complex process of designing and building new aircraft. At the same time, the company must recover its prowess as a leader in aircraft engineering. In other words, Boeing must execute at a high level without further missteps. The US aerospace industry and Calhoun’s credibility depend on it.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico's industry, economy and government.