PARIS --- On 5 May, US aerospace giant Boeing announced its global HQ would settle in Arlington, Virginia, a mile away from the Pentagon and across the Potomac River from Washington DC. A decision that looks like déjà-vu all over again, two decades after the 2001 move from Seattle, where Boeing was born and raised, to Chicago (Illinois).
The move and its timing are puzzling. The House of Representatives Transportation Committee Chair Peter DeFazio voiced concern, saying it was “another step in the wrong direction” for Boeing. Following the announcement, the harshest statements perhaps came from big customers such as Avolon CEO Dohmnal Slattery: “I think it’s fair to say that Boeing has lost its way.” Air Lease Corp CEO, an authoritative figure in the aviation industry, Steven Udvar-Hazy was equally critical.
Boeing CEO Dave Calhoun, however, claimed moving to the region “makes strategic sense given its proximity to the company’s customers and stakeholders.” Though, to many observers — often long-time Boeing-admirers themselves — it is difficult not to see the move as another sign of Boeing leaning towards political influence to the expense of innovation and excellence in engineering.
Longtime Boeing customer Ryanair CEO Michael O’Leary put it bluntly as usual: “Boeing need a management reboot in Seattle and either the existing management needs to up its game or they need to change the existing management,” he told analysts. ‘Boeing management is running around like headless chickens,’ he bluntly added.
Surely, the Aerospace giant finds itself in an alarming position after a decade of crisis, while facing its now dominant competitor Airbus, who is consistently gaining market shares. Yet, the move calls for more than sighs of despair; Boeing’s stakeholders may have been guilty of greediness in the past, they cannot afford to bury their head in the sand in the current situation. This decision could, to a certain extent, shed a light on potential paths for the future of the group.
Crises are piling up for Boeing.
The 2021 full year results were a clear warning signal, with Airbus boasting 611 aircraft deliveries against 340 for Boeing. These figures, well below both manufacturers’ record highs, were prolonged by the recently issued results of the first quarter, with 95 deliveries for Boeing versus 142 for the European competitor.
But, more importantly, the document revealed several worrying developments:
-- production of the 777X has paused, with its first delivery pushed two years back to 2025;
-- the KC-46 tanker program is now recording jaw-dropping total charges of $5.7bn, with a $165mn loss in the first quarter;
-- Air Force One presents the biggest cost overruns across all military programs with a $660mn loss, while two other defense projects have recorded their first charges, namely the T-7A Red Hawk ($367mn) and the MQ-25 Stingray ($78mn).
Besides delays and charges in the civil and military branches alike, Boeing is facing regulatory hassles with the 787 Dreamliner, which has been grounded for a year following quality issues and production flaws, adding $2bn in “abnormal costs” for the company.
The MAX 10 is yet to recover its certification from the FAA, which could ask Boeing to undertake costly cockpit modification works, while all MAX jets are still waiting for their new certification to resume flights in China, a major market for Boeing Commercial Aircraft.
Meanwhile, Airbus’ A320-family jets and their “neo” variants are doing just great, and making it increasingly more unlikely for Boeing to manage catching up in the future, without a clear innovation breakthrough.
The European manufacturer is planning to produce 65 jets of the type per month in 2023 and 75 by 2025, while Boeing only plans to produce 47 737s per month by 2023... In addition, Boeing missed the turn towards long-haul narrowbodies: Airbus’ A321XLR faces no competition in its segment and is likely to feed the Toulouse-based company’s cashflow in the near future.
Boeing’s New Midsize Aircraft (NMA) project was aborted in 2020, and no major news has come since then on that front. The more 321s are sold, the less attractive Boeing NMA’s Business case becomes… Some observers even wonders if Boeing is able to launch a clean sheet design without additional capital input…
Is Boeing playing all-in on defense?
Now neighboring the White House and the FAA, Boeing will certainly strengthen its efforts to influence regulators and legislators. The group, however, is already the fifth most active in lobbying in the US, according to the Center for Responsive Politics. Influencing decision-makers certainly did not require Boeing to move its HQ closer to DC. Rather, this move could indicate a stronger focus on defense in the years to come. In Arlington, Boeing will border the Pentagon, which remains its largest customer.
As Boeing Commercial Aviation (BCA) keeps stalling, Boeing Defense Space & Security (BDSS) becomes increasingly important to the group: though the latter’s backlog lies far behind the former’s ($60bn vs. $300bn), military contracts have represented around 42% of the company’s revenue in 2021, amounting to $26.5bn.
This has led some observers like former BBC business journalist Dominic O’Connell to suggest that Boeing might be considering splitting branches… The company refutes such hypothesis. It is worth noting, however, that Chicago had notably been chosen to locate the HQ away from Boeing’s three branches. Arlington, however, was already home to BDS. It is beyond debate that the group is betting on future major contracts with the DoD to offset its losses.
Does Boeing still have the resources to undertake strategy change?
In Arlington, Boeing has also pledged to create an R&T hub, Dave Calhoun praising the region for “its access to world-class engineering and technical talent.” The new HQ could serve as a homebase for developments in cybersecurity, autonomous technologies, or quantum sciences.
But Boeing suffers from at least two handicaps hindering the pursuit of a more innovation-oriented agenda. First, investments in major programs, and in research in particular, are not the top priority, considering the financial situation of the group.
Boeing has a massive $30bn debt in its books, and a negative free cash flow. Long Time aerospace analyst Richard Aboulafia -consultant at AeroDynamic Advisory – told the Financial Times that Boeing “has significantly underspent on commercial R&D over the past five years compared to its rival Airbus”.
Second, Boeing may be facing a real human resources problem. In the 2000s already, many external observers as well as insiders were warning against the brain drain that the company was facing. With engineers leaving the company as R&D activities were increasingly being outsourced to subcontractors. Twenty years later, the pandemic led Boeing leaders to cut thousands of qualified jobs, leaving the company in a similar position.
In September 2020, aerospace analyst from consultancy AIR Michel Merluzeau warned: “We are witnessing the departure of a critically talented, experienced segment of the Boeing executive workforce. And that you cannot replace easily.” As noticed by Bloomberg reporters Julie Johnson and Brett Haensel, analysis of LinkedIn data shows that more than 1,000 Boeing alumni now work for Amazon, also located in Seattle, and at least 200 at SpaceX. Besides, last November, FAA Administrator Steve Dickson blamed brain drain for the lack of skill of Boeing’s safety engineers…
Will Boeing miss its rendezvous with next-gen, more environment-friendly jets?
A strategy for recovery will take years, and Airbus is set to dominate the commercial aircraft market for this decade. Experts like Michel Merluzeau have expressed confidence in the fact that Boeing would launch a new program by 2023 or 2024, but the resulting jet would be highly unlikely to enter service before 2030. By this time, important advances will certainly have been made in the field of sustainable aviation. And, in this field, Airbus and Boeing seem to have taken different paths.
The European player has committed to becoming the leading manufacturer of hydrogen-powered aircraft by 2035, and unveiled three concepts in September 2020 (a conventional turbojet airliner, a regional turboprop, and a “blended-wing body jet”) as part of an initiative called ZEROe. Airbus also aims to test powering an A380 jet with hydrogen engines in 2026.
Boeing, for its part, has long been reluctant to invest in hydrogen, rather betting on sustainable aviation fuels. Reacting to the publication of Airbus’ concepts, Boeing Commercial Aircraft’s VP of Product Development Mike Sinnett warned: “I do believe we see promise in a transition to more hydrogen-based fuels over time. However, I would caution that it’s not something I believe is right around the corner.”
In January 2021, Dave Calhoun claimed that SAFs “were the only answer between now and 2050.” Boeing targets to fly on 100% SAFs by 2030. Surely, the late positioning of the US government on hydrogen did not help: while the French government issued a national strategy for the development of decarbonized hydrogen in September 2020, Joe Biden only signed its Bipartisan Infrastructure Bill a year later, allocating $9.5bn to the hydrogen industry.
At this point, Boeing shifted its position, claiming in an October 2021 statement that the company enjoyed great expertise in the field of hydrogen propulsion, through its space activities but also with its Phantom Eye high altitude UAV demonstrator, and was committed to translate it into commercial aviation.
However, this parameter might create yet another problem for Boeing: with hydrogen and electric propulsion being seen as key to the future of sustainable aviation, the company is faced with a dilemma. Should it prioritize the launch of a new aircraft program to keep up with Airbus as early as possible, or invest in future concepts, so as to avoid missing on the next big revolution in commercial aviation?
Boeing surely will not be able to afford both at the same time, given its financial situation and the massive associated costs. After a peak in 2009 in the $5bn range (15% of BCA sales at the time) Boeing commercial Internal R&D fell dramatically in the $2bn/year range and is expected by analysts to gradually reach $3bn annually in the next 3 to 5 years. As the 777X initial expenditures are - finally - coming to an end, that may leave some room for new projects…
Nevertheless, while many saw Airbus’ claims as a bluff, and tended to downplay the potential of clean hydrogen for aviation, the context is different now. Hydrogen has gained momentum in the US: in a recent report from the Aerospace Industries Association, soberly entitled “Horizon 2050”, it is depicted as demanding major investments in infrastructure, but presenting an unequalled decarbonization potential, covering 38% to 53% of global aviation CO2 emissions.
This perspective spanning over the long term, Boeing will anyway have to take other initiatives by the time this next generation of aircraft comes about, in order to remain afloat in the next 15 to 20 years. Several leads exist, but strong, clear decisions will have to be made. Moving the HQ closer to DC and the Pentagon surely seems like a bold decision… but whether it will prove significant for the future of Boeing remains more than uncertain.
Boeing’s turn around needs much more than a HQ location change. It needs a deep cultural transformation, a resolute investment strategy and - most probably - a sweeping management reshuffle…