The Boeing Company (NYSE:BA) Bernstein Strategic Decisions Conference June 2, 2023 8:00 AM ET
Company Participants
David Calhoun – CEO
Conference Call Participants
Douglas Harned – Bernstein
Douglas Harned
Let’s get started. So welcome this morning. I’m Doug Harned, Bernstein’s Senior Aerospace and Defense analyst, and I’m really happy again to have with us Dave Calhoun, the CEO of Boeing. I think you have a forward-looking statement.
David Calhoun
A critical slide that you should all read in depth with respect to forward-looking statements that I may make as you all know, I’ll let you read it. There you go. Thank you.
Question-and-Answer Session
Q – Douglas Harned
All right. Great. So just to get started here. David, we were here a year ago, I think almost in the exact spot. And since then, a lot has happened. So maybe just to start out with, you could take us through the last year and the challenges you faced and kind of where you are now?
David Calhoun
Yeah. Last year, I would have been — I was beginning to be optimistic about the recovery and mostly just the robust nature of it. Since that time, on the market side, I think we’ve announced four of the biggest orders we’ve ever had. And that is the beginning of a lot of competitions that are going on around the world. So the optimism I had with respect to market returning is significantly better than even then. So now I’m not just optimistic, I’m like, okay, now we got to be smart about how we manage supply against that demand spike, and it is reasonably big.
On the flip side, on the supply chain, it’s just frustratingly slow going to open up the constraints, some of which we know and structural and those — I’m actually feeling quite good about, but then it’s the ones you don’t know. It’s the supplier who lost some experience, talent somewhere along the way, didn’t replace them in kind. They’re still going through learning curves and you get a notice of escape or a defect or I can’t make next month’s delivery. And because we’re all operating at the margin now, we need every next part, we need every next assembly, it’s been frustratingly slow.
So my appreciation for the depth of that issue how we ultimately get through it is significantly better now than it was then, but it doesn’t mean it gets better tomorrow. We still have a ways to go with respect to supply chain constraints.
Douglas Harned
But if we look at demand right now, the narrow-body traffic is all the way back to 2019 levels, wide-body is not. But when we look at like flight hours on 787s, they are.
David Calhoun
They are. Yeah.
Douglas Harned
And so from the demand side, even if we see a recession, do you see any risks to the kinds of targets you’ve put out there?
David Calhoun
No, I don’t. I — with the targets we’ve put out there, I see us as still supply constrained. I’m not talking about my supply side, but the ability for the two airplane makers to meet the demands, I think will still be constrained five years from now.
Douglas Harned
And when you think about it that way, like, if somebody here wanted to order a MAX today, when can you get a slot?
David Calhoun
Yeah. It would be very hard. We’re all competing out there in ’28, ’29. And as you saw, some of our orders, of course, carry all the way into the early 30s. And so that is the way the pipeline is working. I — it is — there’s two reasons it’s going on. One reason is the return of traffic. It’s been as robust as it can be.
And then, two, there is no doubt and if you look at the size, scale of the orders and like, the time they want to go out, they’re all beginning to understand the supply constraints that will exist. And then, therefore, that in and of itself creates demand. I got to get line. I got to get line sooner rather than later.
Douglas Harned
It sounds like what we heard from Ryanair.
David Calhoun
No, I think with Ryan, and I give a lot of credit to Michael. We were patient with each other. We had some objectives we had to meet. He had some objectives he had to meet. We finally got to where we need to get. I have no doubt that part of the reason we got to an end was because his recognition of what was going on.
Douglas Harned
And when you look at the 787, I mean, clearly, narrowbodies, very high demand. How is it for 787 in terms of when you can get an open slot?
David Calhoun
So we’re sold through ’26. So you’ll start with ’27. And I’ll predict that, that market is going to extend out as far as the MAX and maybe further even, if we can find our way to 10 and then up the rate even more. over the next five years. It’s just a — there’s a robust demand for that airplane, robust.
Douglas Harned
And then I’ll just have to throw the last one in here, 777X.
David Calhoun
Yeah. Well, the 777X everyone sort of looks at that airplane as an old airplane in a sense that it’s been around for as long as it’s been. But you would appreciate the technology that was developed to facilitate the 777 development was developed for the airplane we’re going to introduce in ’25. And it’s all about those two engines replacing four. And what’s happened in the last few years, that airplane now will compete with nothing. In other words, the 380, we know is out of production, the 47, we ended our production.
Douglas Harned
Well, Airbus would argue their A350, 1,000 competes with that.
David Calhoun
Yeah. And will it go up — we’ll just go up against that all day long, all day long. I believe this airplane will be just one of the most successful ever. It’s hard for me to predict rate. I want to get certified first, that is going well. The airplane is performing beautifully. So we’re — we have a lot of confidence in it.
But I also believe that this one could last as long or longer than the Queen of the Skies 747, simply because it really does compete on its own. When you get up into loads that can — that airplane can handle and you can fill it with either the cargo end of it or packs, it has real economic advantages for the airlines. And there’s a big enough market there that, in my view, stimulating a lot of demand.
Douglas Harned
Now when you talked about your goals for ’25, ’26, getting to 50 a month on the MAX, getting to 10 a month on the 787, you’ve said this, and we’ve looked at it, I think you have the same view, but you can do this without any additional orders from China or deliveries to China I should say.
David Calhoun
Yes.
Douglas Harned
Now how does China stand now? What’s the situation?
David Calhoun
Yes. So I always have to explain this to everybody. I’ve taken it out of all of our guidance, so our $10 billion in ’25, ’26 is — has no China. And why did I do that? Because the rhetoric and discussion around all things geopolitical with China was beginning to confuse all of our investors with respect to how important it is and how critical is it?
So I wanted to make sure everyone understood the underwriting case for no China. We never stopped working on China ever. We have great customers there. We have satisfied them every step of the way. My personal view is that the reason things stopped in China for Boeing is COVID-related, that COVID policy they had for all that time, they didn’t need a single airplane, didn’t need one.
And even the other guy, while they got some orders, the deliveries have been at a very slow pace, and some of them have even been parked. So — but now that is over and it’s all coming back. So we saw a major move to get all of the airplanes that they already have and own, the MAXs up in the air, so the — all of their airlines have them back in the year at almost — we’re almost through all of the airplanes period that are there.
And as you know, we have airplanes on our tarmac that are — that have their logos. So we’re working on that. I’m constructive on it. If it didn’t happen, remarketing them would be easy — nothing is easy in our business, but yes, it’s easy. So I do think, and I believe that with ebbs and flows, we will restart our work in China.
Douglas Harned
So when you look at China, so you’ve got — I mean the vast majority of the MAXs like 90-some over there flying, but they also have — I mean they have a big the airlines have big sub fleets at 737 NGs. When you talk with the Chinese about this, the Chinese airlines, is there an assumption that they would keep, stay with those NG sub fleets and bring MAXs in. In other words, is that commonality a big deal for them?
David Calhoun
Yeah. It’s the same for them as it is everybody in the world. You pay a price when you mix up your fleets. And by the way, it’s not just the airplane itself, it’s the pilots. It’s — pilots are in short supply everywhere. And switching from one airframe to the other, that’s not a simple endeavor for an airline to orchestrate with respect to pilot availability. So it’s that same dynamic. And, as is often stated to us in all of our discussions around China is, their objective is to keep it an even split. That is what they would like to do.
So, yeah, geopolitical events happen. They slow things down for periods of time. But I think the need for the airplane itself, given the traffic demands in China, I just think that will ultimately prevail and I’ve always believed that.
Douglas Harned
And I just — I will ask this because I feel like I have to ask this, but how do you look at the Comac entry that just had its first commercial flight?
David Calhoun
Yes. I — again, you have to run the long game. And the long game in — based on what I know and have seen, and as you know, I started with that organization back when we were putting engines on their regional jet. So I’ve watched that development from the very, very beginning. It’s taken longer than anybody would ever predict to get to this moment where they have — they fielded an airplane. It’s a good airplane. It’s a safe airplane. The ramp-up of that airplane in terms of production and then the improvements required to meet the standards that the other two guys have, that is another 10, 15 year run.
The regulatory hurdles that you have to go through everywhere in the world to get that into the global market, you run all of that stuff, all those numbers and even in an optimistic case, maybe in 2050 they get to be a 10% player. In a market of our size and scale, growing at the rate, it’s growing, over that period of time, the idea that we would have three competitors serving the global market should not intimidate us, it just shouldn’t. And our focus has to be to just keep developing a technology road map that keeps us advantaged with respect to every next airplane entry.
And that goes for me, and it goes for the other guy that’s currently in the business. So I don’t predict an end to the western providers like a lot of people would. I view it very differently. A lot of industries get along just fine with three players and two giant players. So I don’t lose a lot of sleep over it. I wish them luck, and I don’t mind the competition.
Douglas Harned
So let’s get to the MAX now, the supply chain has been tough. And when we’ve looked at this, and if I look at the guidance that — you’ve given the guidance that Airbus has given, and I go back for 2023, and I go back to the beginning of 2022, each of you has cut that by about 25% from where you were because of the supply chain issues.
Now you — and you’ve just recently, you’ve had this issue with the fittings coming from SPIRIT. You take, you said I’m keeping the guidance at $400 to $450. As I understand it, you’ve stabilized at $31 a month the goal had been to go to $38. I think it still is. But can you fill us in on where you are now in this, in terms of getting that rate up and how you think about that $400 million to $450 number?
David Calhoun
So you’ll recall during the ’22 discussion, which was the first time we really laid out a sort of a forward look, we said we weren’t going to assume that everything gets better, that the supply chain would remain constrained. We would hit bumps in the road. We would overcome them.
Our belief is, and our experience, more importantly is that these bumps are getting lower, smaller, the resolution of them is getting faster. So in the projections that we laid out, we expected bumps. And the SPIRIT 1, a little bigger bump than some of the ones that we may have expected, but manageable, very manageable, probably costs us 25 airplanes in the air. The rate increase that we have projected in the middle of this year, that’s going to happen, nothing is — it didn’t affect that at all. We’ve not taken it off course. So we’re going full out on that.
Our rate projections, as you go forward, all the way up to 50, are lower than my competitor’s rate projected. But I don’t think our projections are going to be what happens. I think it’s all going to be based on how the supply chain opens up, the extent to which constraints are removed. If it gets better and better and better and better, our rate projections will get better and better and better and better, right? Because as we said, we’re starting with what we believe is overwhelming demand in a supply constrained industry. So if we can figure out a way to open up our constraints faster than the other guy, then so be it.
Douglas Harned
So if I go back to last year, if the constraints that you were facing, or at least you talked about a lot, we’re heavily tied to engines, same thing at Airbus. It appears that the engine situation has gotten a little better. Where are you now? In other words, where are the stress points and the bottlenecks in your supply chain?
David Calhoun
Yeah. So as I said earlier, the structural issues mostly were built around engines and then underneath them, forging, casting suppliers. Those structural impediments have gotten better. They still have a lot of work to do to stay ahead of the rates, but they have made steady progress on doing that. And I’m confident that they can do that. Now I’m — as you know, I’m heavily weighted to one of those suppliers, to one of those suppliers. And I have a lot of confidence in them to be able to get to where we need to get to.
If I wanted to increase my rate projections, I mean 50 to 60 or whatever, that would be — I’d go back to structural, and I’d say, how are we going to do this? So — but we have time to do that. We have time to do that. The other constraints, honestly, it is tasked about maybe 25, 30 parts that we track, far fewer suppliers because some of those suppliers own a lot of those parts. And we have regular meetings and rhythms about what’s required and what’s necessary. Visibility is great. So the people you have visiting this, this conference, I interact with them directly with both of our teams. We all have visibility of what is required.
Confidence is growing every day, but we still run into — we run in a month-to-month issues. And as you know, if we stay disciplined in our factories, I got to — I have to pause production when that happens. I have to pause it. So I don’t travel it because we know how travel piles. So that’s what we do. And anyway, I’m confident it’s steadily getting better and the visibility in the supply chain and the leadership of the supply chain is clear and nobody is second guessing demand anymore, nobody.
Douglas Harned
Yeah. And I’m sure that helps because there was a lot of — you really expect us to take right up help…
David Calhoun
Yeah. And I was one of those guys in the supply chain for a long time, and I second guessed every projection I got.
Douglas Harned
But if you look at a couple of things and over the course of the last couple of days here, there’s been one area that seems to have come up on both defense and commercial side. And that’s electronics that there are some issues there. Has that been — actually, the two things that I wanted to understand from you are electronics and systems issues and seats.
David Calhoun
Well, to the last one first, seats is, that was a perennial issue. As you know, we opened our own seat company and it’s doing incredibly well. And it’s allowed us to, I think, overcome that constraint. So I’m not as concerned about seats as I have been historically. And as you know, it’s our customer who places the order for those seats. But we have opened up the capacity, I think, enough to not — that not be a problem.
Electronics is — to be honest with you, I don’t think we’ve had a snag on — in the supply chain that has caused us to defer any deliveries and/or slow down any rate increases in electronics that has not been our particular issue.
Douglas Harned
Okay.
David Calhoun
It probably has a lot to do with mix of our products. And Defense is one that we — you have to keep an eye on it in every way. As you know, we have a lot of mature programs that where it’s less of an issue. But — so I could see where some of our brethren in the industry might have a little more focus on that than we do. But so far, I have had almost none. In fact, I can’t think of one over the last — over the course of this year.
Douglas Harned
Okay. Then you mentioned that if you can’t go higher, you could go higher — or would go higher. So right now, I mean, you’re — you’ve got three lines in Renton, which should be able to do your 50 a month, and then you’re building out another line for the MAX and Everett, which suggests to me that you are seriously thinking of going well above 50.
David Calhoun
We have to be ready for it. I think we would have started that fourth line. Under normal circumstances in the world we used to know, we would have started that a year or two from now. We wanted to go early, start early, get ready, be prepared. The — one of the advantages we have here is the rework that we have been involved in on the MAX, the MAXs that we inventoried for as long as we did.
We have an awful lot of people working on those. That ends at the end of next year. So I’ve got a workforce ready and able. So my ability to step that up if the supply chain can keep up, I want to be ready. I want to have people in place, and I want to have the physical plant in place. And so that’s why we’re moving as fast as we’re moving and want to be ready for it.
Douglas Harned
Now on the 787, so you’ve said you’re now at four a month, going to be at five a month by the end of this year and then 10 a month out in ’25, ’26. So again, as we talked about, demand is not an issue here. But when you look at — when I go back and look at Charleston before, I mean, the original plan was seven and seven, seven in Charleston, seven in Everett. Now you’re going to 10. I think you all have said you’re able to do that with pretty limited capital investments.
David Calhoun
Yes.
Douglas Harned
So what are the are the bottlenecks there on the 787 in getting that up?
David Calhoun
Well, our biggest issue has been the joint verification work. As you know, we were — again, we have this rework…
Douglas Harned
Is this the non-conformity?
David Calhoun
Non-conformity. We call it joint verification. It is a line in and of itself. And so it occupies a lot of space, it occupies a lot of work. We do as much work on that line as we do to assemble the original airplane, again, that ends next year. So we have this opportunity now to — and what we’ve done is, we’ve migrated that work to the Puget Sound, all the joint verification.
And now we’re in the tool up for the second line that allows us to get to 10, and we’re confident we can do that, like you said, very limited capital — whatever is required, we’ll put in, but it’s not going to change anybody’s projections. And then the issue we will face is, if we want to go over 10, and we believe we can, we will require some capital, we will require some footprint, not new land, but just footprint.
Douglas Harned
Yeah. And — but when you think about the 787 and particularly this joint verification issue, there’s been extra cost in your supplier base to make sure that you can meet the requirements.
David Calhoun
Totally.
Douglas Harned
And if I just think more broadly, and you look at like the material costs have gone up, but a lot of small suppliers putting a lot of pressure on them on their financials, how does that get covered? And in other words, one of the things we struggled with is, you’ve got pricing to the end customer.
And everyone always says, well, we have escalators or we’ve got fixed price contracts. Then you go down to the next tier, they tell you the same thing. You go into the next. Somebody is paying for the inflation, somebody is paying for these added costs. How do you think about that?
David Calhoun
We have — if you look at it over a reasonable amount of time, somewhere between five and 10 years, our inflation recovery mechanism is pretty good. It’s pretty good. The contract escalation clauses don’t cover everything in any one year ever. But they’re a real hedge against it, and they — it accumulates, so it covers.
And then every next contract, which speaks to that, the second five years, your five to 10, we have got to price our way to where we need to be. But if you look at that over a fairly long period of time, you’ll find out that mechanism works pretty well. And it’s working pretty well right now, particularly in light of the demand that we’re seeing.
Douglas Harned
Well — but in terms of costs, I mean, you certainly — this may globally work, but are there — do you have small suppliers down like Tier 3s who are facing structural suppliers that have a more material cost kind of in their cost structure that you have to help out or work with.
David Calhoun
Without a doubt, and that is — I mean, that’s going on as we speak. I believe, and I think the step function moment for our company with respect to all of the forward guidance we give is second half of next year when we shut down these shadow factories. And then we get to a way more stable moment for us, and as importantly, as you point out, all those suppliers that are down there.
A lot of work has been going on with respect to the reasons their material costs or more importantly, probably labor costs have gone up because of rework operations they’ve had to put in, et cetera., so that we don’t have to do the joint verification in our factories, that all of those things are being worked hard both with our engineers and their engineers and there’s real progress being made.
So there will be a much higher level of stability in that supply chain as we get to that ’25 time frame, but we have to end our sort of our big shadow factory so they can end theirs. Incoming, every next airplane that we produce, much better, much better. So we don’t have to — we sort of stopped the entry to join verification, meaning the airplanes we get, the parts we get today are meeting our standards. So I think there’s a lot of productivity embedded in that whole transition to stability. And then, yes, they have had material inflation, which our clauses and our pricing have to recover.
Douglas Harned
And so when you look out to that ’25, ’26 time frame, you said there’s still going to be supply chain issues to work through in terms of volumes and so forth. But do you see yourselves able to get back, say on the MAX to the margins you were able to get pre-grounding?
David Calhoun
I do. I think Dash 10 will also have a play a big role in that one. More seats, more seats is a good move for us. It’s both productive and its price accretive.
Douglas Harned
And to get to the MAX 10, can you give us an update on certification?
David Calhoun
Yes. I mean it’s slow. We just gave — our Program Manager just gave an update to the press. I’m confident we’re going to get to where we need to get to. The slowness is 90% documentation. So the flight — our flight testing is going great and now we have to get our regulator on top of all the flight testing. But I feel very good about the dates we set out there. And we have enough margin between the dates we’ve set and the customer commitments we set and so.
Douglas Harned
And what are those now, the MAX 7 and the MAX 10, what are you kind of thinking about?
David Calhoun
So the 7 — the most important moment for the 7 is going to be the introduction into service at Southwest because that’s the big customer. So we still are targeting the end of this year. It could bleed a month or two into next year, but that’s where we are. And it is almost — I think we’re probably within weeks, if not a month or two into the final documentation submissions. So — and they’ve already been through rounds and rounds. So then this will just become the stamp, if you will.
Douglas Harned
And this…
David Calhoun
And a lot of that then becomes the basis for the 10.
Douglas Harned
And is this — is sort of this timing now mainly due to sort of back up kind of FAA has a lot going on, and is it sort of getting it through their processes at this point?
David Calhoun
Yeah. I wouldn’t fault them in the sense that they got a lot going on. I think the changes to the CERT process and the requirements on design assurance, which is the big documentation exercise, it basically says you’ve got to bring everything perfectly current on every one of these airplanes, whereas in the past, you could bring a lot of your history into that submission, you can’t anymore. It’s — everything now has got to be perfectly current, detailed to the [indiscernible] degree. So it is what it is. And they are wrestling with that just like we are.
Douglas Harned
Yeah. 777X certification. You’re still…
David Calhoun
Still positive, feel good. The big hurdle there, so we go back to a year ago when we were here, the big hanging issue was EASA and the FAA agreement on the certification principles and design principles that were embedded there. They’ve resolved that. It’s documented. So now we are marching down the path. Airplane is doing incredibly well so…
Douglas Harned
Engine is fine now?
David Calhoun
Yeah. Well, they know what it is and their program to fix it is in place. And I trust it. I trust it.
Douglas Harned
Yeah. There’s no new airplane coming anytime soon, I believe, unless you’re going to surprise us.
David Calhoun
Yeah. You know me and surprise. Yes. No.
Douglas Harned
So — but how are you thinking about an eventual new model in terms of the technologies you want to have, manufacturing capabilities? So what’s going to determine the timing and the positioning?
David Calhoun
Yeah. Again, you’ve been around this a long time, and I hope many of you have, but you have to go back in history and look at airframe program development in its simplest form, go all the way back to the 777, in our case, the A380 and the other guy’s case. These decisions are big, they’re monumental. If they don’t improve the performance for our customers a minimum of 20%, a minimum of 20%, hopefully, something closer to 30%, and that performance now is both efficiency and emission.
If you don’t do that, it’s really hard to justify a program for new airplane. So you have to mature the technologies that allow you to get to that kind of incremental improvement so that when you make that big investment, you can get a return on your investment, and that investment will have to last a minimum of 50 years. It has to. And all the great airplane programs have. And the ones that weren’t so great, didn’t, and the losses were massive.
And so our job is to mature the technology road map enough so that we can call out that airplane and put it in place. We have said — I have said not before 35. Why? Because we know enough about our technology road map to know that they’re not going to be mature enough to then take to the marketplace when we need to take them to the marketplace.
Douglas Harned
And this includes engine technology?
David Calhoun
This includes engine technology, yeah. The only way they’re going to get to the kinds of numbers we need is a bigger bypass, so bigger fan — anyway, it is — and there are things we have to do the airplane to accommodate that. So that will be a piece of it. It won’t be the biggest piece. There are aerodynamics associated with some of our programs. There’s one that’s highly publicized, our transonic trust price (ph) wing. That is a very viable design. We have done a lot of test work. We’re on Step 2 of the maturity program.
Step 2 is a joint program with NASA to put it on a real airplane, put it to work and find out if it performs as well on a real airplane as they did in the wind tunnels and all of our experiments, et cetera. So that program is designed to prove its course by ’28. We’ll learn a lot every single year in the process. So — but that combination, what that does, that wing, which sits on top of the airplane does what? It allows for the bigger bypass, it allows for the bigger bypass.
So — and if we can get to that moment, then we will say to ourselves, what is the product of airplanes spec, what spec will fill the biggest part of the market and generate the kind of demand over time that we need? And that’s got to be meaningful. It can’t be a niche. It can’t be a niche. For me to design an airplane that sits on top of one of the other guy’s airplanes, it makes no sense at all. It’s — there is no return. There is no return.
Douglas Harned
What — so hydrogens way out there, hybrid electric doesn’t really work very well at this scale. But there is the open rotor, which your predecessor to predecessor, Jim McNerney once said to me, he goes, yeah, every time people run out of ideas, it’s the open rotor.
David Calhoun
It’s the open rotor.
Douglas Harned
So what do you think? They have the RISE concept now at CFM?
David Calhoun
It is — it will be a regulatory challenge, the regulatory challenge because today, there’s containment mechanism for these fan blades. In that scenario, there’s not. On the other hand, there are an awful lot of airplanes, awful lot of airplanes flying around with open rotor. I am getting more and more confident they can do it, but it’s not a short put. One of the biggest technology introductions was the fan blade on the 777, which operates at very high speeds.
It’s a composite blade, and the performance on that now will get you to a safety standard that can meet that requirement. So now it’s a very different configuration. It’s very different. But the material itself, I think is the key to the whole thing. And I think the — at least one of these players has taken a big step forward on that front. So I’m more confident than I would have ever been. You can’t deny the — both the emission and efficiency gains you get from it, you just do. And our job now is to figure out how to accommodate it with a different wing concept.
Douglas Harned
Yeah. Well, let’s switch over to Defense. So we’re in a period of strong Defense budget growth. I mean growth at Boeing Defense has been pretty modest at best. And now when you look at the new budget, the 2024 Biden budget, and we’ve gone through kind of a crazy process in Congress to see we’re going to get out of that. How does — first, how does Boeing fare in that budget?
David Calhoun
I don’t think the budget and the deal that was cut and the caps are going to impact us much at all in the next several years. For us, let’s just acknowledge right upfront the underperformance of the portfolio. We fully understand that. I think we have a good approach on how we improve this over the next five or six years.
We have a collection of programs, probably 60% of our revenue that meet all of the return characteristics that all of the other players have, in some case, exceed, we have a couple of fixed price development programs we have to just finish and never do them again. Never do them again. That fixed price development world has to stop. It just doesn’t work. It doesn’t work for us, and it doesn’t work for our customers in my not so humble opinion.
Douglas Harned
And I will just say that we heard from several other large defense primes the same message this week here.
David Calhoun
Yeah. It just doesn’t work. I think everybody has learnt the lesson. I’m not preaching anybody. I think our customer also sees the limitations associated with it. So we have to complete those. When we do that, then a lot changes in the business, the improvements get significantly better. And then we’ve got fighters and satellites, which are about between 20%, 25% of our portfolio, where they’re underperforming for the same reasons that commercial aviation is, which is supply chain, and working our way through all those caveats.
And I think that will be on the same kind of improvement time frame as our civil business is. So we have means by which we get to a great answer. And by the way, we don’t put our services business in our representation of defense. We put it in a services bucket. It performs really well. And if you put it in defense, it at least improves the picture, still underperformed, but it proves the picture quite a bit. So I like where we are. The most important part of all of this is, with respect to the threat that the Defense Department is focused on, the intensity with which they are focused on it, the pace at which they will accelerate programs that meet that threat, I think we’re in an incredibly good spot, incredibly good spot.
As you know, most of that is in a classified world, but we have steadily invested in that. We didn’t take our foot off the pedal once during these existential moments. And as you saw, some of these have been advanced already. And I just — I like our chances. And we’re going to give these our best shot and with contract terms that are acceptable.
Douglas Harned
Now, I mean I understand the contract term issue, but also in this have been execution issues. And you’ve taken — you took very large charges last year. We saw another charge on the tanker this last quarter, a smaller one. And then there was an issue that came up on the Starliner that was just reported. So how can we get confident that you can pull out of this — putting the fixed price contract structure assigned, but the execution issues, how are you going to get out of?
David Calhoun
Yeah. I would suggest, relative to the industry, the execution issues are not anywhere near what they feel like because our execution issues, in the context of the contracts we have, they’re immediately visible and you take hits. When you have a zero margin contract, and you have an execution bump, and it’s fixed, you have no choice. You have to do what you do. If I compare myself to other programs in the industry, in defense, you read about cost growth every day, significant cost growth. But you’re protected by contracts in every case.
Douglas Harned
You’re right. They’re not forward loss.
David Calhoun
They are no forward losses. I have to do forward losses, the minute something happens. And I can’t just put some giant reserve in place that covers all forward losses so we can get on the life. You can’t do that. There’re rules and you do it. So until we complete some of these contracts, until we complete them, this is just going to be the way it works. So we have to finish them. We have to finish them well.
And with respect to execution, nobody, including me, are happy with any moment where you have an error or you find out something late in the game that you don’t have to go back and make adjustments, including the commercial crew moment that we just had. And I don’t think this will be significant in any big way, but you hate hearing about things at the last second. When you hear them, you got to do something about it, you got to do it fast. But defense programs, especially development side, things don’t go perfectly. They just don’t.
You are taking risks every step of the way. They’re calculated risks. You get through them. If they take too much time, it hurts, so forth and so on. So I’m not quite as pessimistic on execution as what I think that the world perceives.
Douglas Harned
But you have — so when you look at the profile here, this year, it’s going to be — defense is going to be a user of cash.
David Calhoun
Yes.
Douglas Harned
And I think back several years ago, it was always just a great source of cash in that 2025, ’26 time frames. You’ve also done I believe, a pretty significant reorganization inside BDS. Can you talk about that and that path to get to the positive $2 billion?
David Calhoun
Yeah. The reorganization was mostly build around what I saw and my new leadership team sees is just opportunities to eliminate bureaucracy and things that just — my biggest — people ask me all the time, culture. Tell me about the Boeing culture because it’s — so much was written for so long.
Douglas Harned
Yeah, we’ve talked about it.
David Calhoun
But the one thing I emphasize with everybody that is so important is transparency. We got caught at a moment in time where our culture wasn’t as transparent as it needed to be, yeah, with the outside world. But even more importantly, inside the company. No one thinks instantly, no one thinks quickly, being able to act quickly so that you can get ahead of things as opposed to wait for things to sort of spread. That has been probably my number one endeavor since the first day.
And I think we’ve made enormous progress, and I have a leadership team now that embraces that in every way. It’s uncomfortable, but it’s necessary. So I feel like our team is making enormous progress on that front. Transparency is helpful to us in every way we get ahead of things. We will get to that $2 billion cash flow, we will. A lot of it is completing these fixed price programs. Those are cash drains. That is our money going out. Every hit we take within 12 months, the money goes out the door. So it’s — I’m confident, we’re going to get to that moment. And most of the reward is focused on that transparency thing?
Douglas Harned
So Boeing Global Services, this has been a pretty impressively performing unit. And you mentioned the defense side, defense services side. Can — if I go back aways, there were some, I would call them, extreme projections for growth in services at Boeing. How do you think about — what’s your target for this? I mean how large do you think this business will be in that ’25, ’26 time frame or longer?
David Calhoun
I’ll refrain from setting that giant target, and you’re right, that target was way out of reach in many ways. And the out of reach cost us because capital was getting deployed for the sole purpose of achieving that number and without enough regard for the return on the capital we deployed. We have a team now that is really good at capital deployment. They know where we have IP. They know where we have product knowledge advantage. They know where we can capture more than our fair share of the returns and where we enjoy competitive advantages, and they’re doing a great job at it. And it’s growing at a healthy rate. I believe this is a business that can grow somewhere between 10% and 15% over the medium and long term.
And I also believe it can get the kinds of returns. Today, we operate at over 15% margins, and I believe we can retain that, and the digital component of this. The things that make operators more efficient in their world doesn’t relate necessarily the airplane, usually has some connection to the airplane, but where it’s working on the efficiency of the airplane, the efficiency of the ATC systems, et cetera., that business has been growing at a very healthy rate. We have migrated most of the technology now to modern architectures so that we can integrate them.
And so I’m quite bullish on that one, and I hope there’s a day in our life where we can sort of call out that segment separately and talk about the growth and the returns because I do think it’s going to be really meaningful to our industry.
Douglas Harned
And that would be the high — what you see is the highest growth potential in BGS?
David Calhoun
Yes. And many of you know, we have — we enjoy a business Jefferson (ph). We’ve retained the brand, we will always promote the brand that has a really important position in the industry.
Douglas Harned
So if we bring this all together, you’ve talked about free cash flow of $10 billion in that 2025, ’26 time frame. What things could take that higher or lower? Where is the sensitivity around that number?
David Calhoun
Supply chain stability takes it higher. Every step forward will take it higher because it will allow us to get a little more aggressive with rate, and more importantly, the productivity inherent is huge. So what I like about that is it’s mostly controllable, stuff I can work on every day. It’s not market dependent, and I think most of the levers that we get to pull are within our control. Whereas normally, you’re — now you’re thinking about market stuff that’s got to occur. So I feel pretty good about that. What could take it worse? Instability, supply chain and/or some world event. And…
Douglas Harned
The World event other than just, say, a normal recession or something like that.
David Calhoun
Yeah. World event, you can imagine.
Douglas Harned
Yeah. So you’ve still got $40 billion in net debt. As cash generation comes back, how are you looking at deploying that cash?
David Calhoun
Well, we’re going to run down the debt. So that will speak to most of the cash flow in those early years. We’ll run it to a level that we feel is conservative enough to do all the things that we want to do. Ahead of that is investing in the business, except we already do that. So there’s not — it’s not — we’re not like cutting back in any significant way during this period. As I said to you, we’ve been steadily investing in our big projects for defense, steadily investing in the technology capabilities that need to mature.
So I’m pretty confident in our ability to sort of do all the work we need to do in today’s — at today’s kinds of run rates. So we’ll pay down the debt as fast as we can, and we’ll get back to how do we return it, and we’ll get lots of advice. I don’t think we’re going to want to move the balance sheet to a more conservative position than it was, say, in ’17, ’18, but we’ll want to get close.
Douglas Harned
Yeah. Okay. Well, look, just to wrap up, I just want to finish. When you look at the next 12 months, where you’re going to focus your time?
David Calhoun
Just running the supply chain as hard as we can. There are two big things going on right now. Supply chain, we’re all doing it. Everybody is racing. Like I said, visibility is good. We’re getting more moving down that path. So that’s priority number one. But priority number two is, the industry demand is getting fed by an enormous amount of activity in the Middle East and in India.
So the sovereign demands and requirements. You have the Kingdom of Saudi Arabia investing $1 trillion in a destination. It’s a big country, and the destinations are pretty amazing. And they’ve got a lot of work to do to build traffic lanes to get people in, and they’ve got big targets. That is, as we’ve already seen, begun a big spree on demand. We’ve been beneficiaries of that.
India, for the first time, has a real player for the international market, first time. We’ve all been around Air India for a long time. But the new owner, and the deal that the government constructed for that new owner, they are good, gives them lots of room, lots of money, and they are good operators. So I am confident India can become 1 of those massive markets just like China, and that’s happening as we speak.
And then the folks in the Middle East who are already big and enjoy so much of that international traffic in both directions, they’re not going to want to fall behind. So what we have are a lot of enormous demand…
Douglas Harned
In big long haul.
David Calhoun
Yeah. And this is all the feed the long-haul markets, et cetera. And we love our product positioning, and we anyway. So that’s all happening as we speak. Each one wanting to beat the other one to the table, right?
And then we haven’t talked about it, but there’s also this sustainability override. The easiest way for any airline to move down the course on sustainability is to replace the old airplanes. Simple as that, 30% the day you do it. So there are just some demand things that are all happening and these are the kinds of things we’re working on.
Douglas Harned
Okay. Well, great. Well, Dave, thank you very much, I really enjoyed it.
David Calhoun
Awesome. Appreciate it, Doug. Yeah. Thank you.
Credit: Source link
