Boeing CEO says the company must fundamentally change as losses surge
By Chris Isidore, CNN
New York (CNN) — Boeing reported huge quarterly losses Wednesday, as new CEO Kelly Ortberg conceded “it will take time to return Boeing to its former legacy.”
“Going forward, we will be focused on fundamentally changing the culture, stabilizing the business, and improving program execution,” Ortberg said in the company’s quarterly statement. He took over control of the embattled aircraft maker in August, a month before the start of a strike by 33,000 members of the International Association of Machinists.
“There’s no silver bullet,” he said in a later interview with CNBC. “This isn’t going to be fixed in one fell swoop. There’s a lot of issues here that we’re dealing with… We really need to embark on a culture change that is something more than just a poster on the wall, that’s a guide to how the company behaves day in and day out.”
The company’s net loss surged to $6.2 billion from $1.6 billion a year earlier, with a $4 billion operating loss coming from its commercial airplane unit. That is the Boeing unit that has been the most troubled, but the strike affected only the last two weeks of the three-month period.
Boeing reported a $2.4 billion operating loss in its space and defense business, which is not affected by the strike.
The losses, thus, are not just from the strike. They include a $3 billion pre-tax charges for further delays in its next generation commercial jet, the 777X, which has encountered problems during test flights and has further pushed back plans for its first delivery to customers to 2026 – along with plans to discontinue the 767 freighter jets.
Boeing is also taking a $2 billion pre-tax charge for problems with several defense and space programs, including its Starliner spacecraft, which had its first crewed flight in June. Starliner developed problems and had to return from the International Space Station without crew members, stranding two NASA astronauts on the ISS for months longer than expected. They will instead return to earth on a spacecraft from rival SpaceX. The charge for the Starliner program was not broken out by Boeing but it appears to be hundreds of millions of dollars.
Boeing had already warned investors of much of the bad news it would be reporting Wednesday. So shares of Boeing (BA), which were already down 39% so far this year, were little changed at the start of trading Wednesday following the report.
Although the problems in the company did not start with the strike that began on September 13, it brought virtually all of Boeing’s commercial airplane production to a halt. Standard & Poor’s, which is on the verge of downgrading Boeing’s credit rating to junk bond status for the first time in the company’s history, estimates that the strike is costing Boeing an additional $1 billion a month, on top of its existing rate of losses.
Union vote could end strike soon
The good news for Boeing is that it is possible an end of the strike could be at hand. Rank-and-file members of the IAM are set to vote on whether to accept the latest offer from the company. If they accept it, they could return to work Friday.
If the offer is accepted, it could raise Boeing’s labor costs by more than $1 billion, according to analysis from Seth Seifman, aerospace analyst at JPMorgan Chase. Boeing has already announced plans to cut its global workforce of 171,000 employees by about 10%, or 17,000 jobs. The cost savings from those cuts could more than offset the increased cost of the wage package, Seifman said.
The offer would increase wages by 35 percentage points over the four-year life of the contract, with an immediate 12% raise, along with increased contributions to union members’ retirement accounts.
But Boeing did not restore the traditional pension plan that the company insisted members give up 10 years ago, a move that sparked widespread anger at company management among union members, and ratification is far from certain. A previous tentative agreement that was recommended by union leadership was almost unanimously rejected by rank-and-file members, sparking the start of the strike.
“We’ve worked really hard to find that overlap to find a deal that the employees can feel good about and the company can be successful going forward,” Ortberg said in his CNBC interview. “I’m very hopeful for the vote.”
Still this was one of the worst quarters for Boeing during a period of nearly five years of massive financial and operational problems. It’s the largest loss since the end of 2020, when the company was dealing with the effect of the pandemic on it airline customers and taking a huge charge for delays in the plans for its next generation jet, the 777X.
Five years of losses, climbing debt
Ortberg has said he wants to “reset” relations with the IAM and has relocated the CEO’s office from its corporate headquarters near the Pentagon outside of Washington, DC, back to Washington state where most of its commercial jets are built – and where the union members are on strike. But he comes into a company which has been accused by whistleblowers and other critics of putting a desire for profitability ahead of the quality and the safety of its aircraft, leading to a string of problems and federal investigations.
The latest loss brings Boeing’s total core operating losses to $39.3 billion since early 2019, when the second fatal crash of its key passenger jet, the 737 Max, led to a 20-month grounding of the plane. Boeing has reported losses in virtually every quarter since then.
The company has covered those losses by taking on massive amounts of debt. Boeing’s long-term debt has climbed to $53 billion at the end of September, up from $47 billion at the start of this year and far above the $10.7 billion it had on its books at the end of March 2019. It has announced plans to raise another $25 billion through borrowing from major banks and the sale of stock and debt on Wall Street.
The company was also hurt financially by the pandemic, which brought demand for flying to a near halt and caused massive losses across the global airline industry, Boeing’s customer base.
Airlines are generally reluctant to cancel orders for jets that they already placed, even in a downturn, because there are financial penalties for doing so. But the delays in deliveries caused by the grounding opened the door for airlines to cancel 737 Max orders without penalty, and that resulted in hundreds of orders being canceled.
Then, in January, a door plug blew off an Alaska Airlines’ 737 Max jet shortly after takeoff. Although no one was seriously injured, the incident sparked numerous federal investigations and questions about the quality and safety of Boeing jets. One federal probe found that the plane had left a Boeing factory without the four bolts needed to hold it in place.
The Federal Aviation Administration ramped up its oversight of the company, a step that will slow Boeing’s ability to increase production of the Max to the levels that it would need to return to profitability.
Despite recent issues Boeing remains a key component to the US economy. It is America’s largest exporter and has an estimated annual contribution of $79 billion to the economy, supporting 1.6 million jobs directly and indirectly at 10,000 suppliers spread among all 50 states. Some of those suppliers have already been laying off workers due to the strike.
Fortunately for Boeing, it is not likely it will be forced out of business by its current financial crisis. Boeing’s place as part of a duopoly, along with European rival Airbus, essentially ensures its survival. Boeing and Airbus are the only companies that make the full-size jets that the global airline industry needs, and both companies have massive backlogs in orders. Any airline that canceled its Boeing orders and shifted to Airbus would need to wait at least four or five years to receive any aircraft from the European giant.
This story has been updated with additional context and developments.
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