(Bloomberg) — Boeing Co. (BA) As it lurches from one crisis to the next, the beleaguered planemaker has one constant: Its predicament just keeps getting worse.
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From an accident that blew a door-sized hole in the fuselage of the airline’s 737 Max, to revelations of sloppy workmanship and a crippling strike now entering its second month — the icon of American manufacturing has been beset by problems since the first days of January. Cash is running low, aircraft manufacturing is anemic and the stock is headed for its worst annual performance since the financial crisis in 2008.
Now the planemaker is making another dramatic move by cutting 10% of its workforce, the equivalent of about 17,000 people. But it’s a risky maneuver because Boeing is in the middle of testy labor negotiations and unions show no sign of letting up. Details about where the cuts will occur, how much the divestment will cost — and if the move will be enough to stem the financial hemorrhaging are also left unanswered.
said Nick Cunningham, an analyst at Agency Partners LLP in London. “It’s not a coherent plan, it’s just another leg of the big charges that the previous administration would have had to make anyway, because they reflect existing and developing problems and are not part of an overhaul like this.”
In her announcement of the job cuts, new CEO Kelly Ortberg gave a hint that more dramatic action is needed to get the company back on track.
“We must be clear about the work we face and realistic about the time it will take to achieve key milestones on the road to recovery,” Boeing chiefs wrote in an Oct. 11 memo to workers. “We need to focus our resources on operating and innovating in areas that are fundamental to who we are.”
Under Artberg, Boeing is expected to double down on a field it is best known for: commercial aviation. The unexpected departure of Ted Colbert as head of the defense and aerospace business put the subsidiary’s shortcomings in sharp relief — even sharper on Friday when Boeing said the unit would have a charge of about $2 billion in the third quarter.
The frightening episodes for Boeing exposed the quality deficiencies of Boeing and its supply chain, along with a corrosive culture over a quarter century in which pressures on costs and schedule permeated decision-making. Earlier this year, customers finally rebelled and the team shook up leadership, hiring Ortberg in August.
There is broad agreement among observers that it will take a long time for the company to regain its footing — a top official at the Federal Aviation Administration has said it will take years, not months, for Boeing to stabilize. Ortberg, 64, Oct. When he holds his first earnings call as CEO on the 23rd, investors will need more detail on how he intends to fully lead one of corporate America’s toughest revivals, rather than putting out fires.
Ratings agencies have warned that Boeing could slip below investment grade, making the planemaker the biggest fallen angel in corporate American history. The company has only a small buffer of over $10 billion in cash and short-term bonds. The number of strikes increases the urgency to quickly tap the markets for fresh funding.
Boeing has lost 42% this year, making it the second-worst performer in the Dow Jones industrial average behind Intel Corp. ( INTC ).
continuous cycle
“Every problem comes to a head, then disconnects, and problems sprout,” Ron Epstein, an analyst at Bank of America (PAC), wrote in a note to clients. “The problems all feed into each other, creating a continuous doom loop when the negative impacts compound.”
After all, Boeing will post $5 billion in combined charges for its two biggest businesses when it formally reports its third-quarter earnings, the company said in a surprise announcement Friday evening. In addition to security and space charges, Boeing will book additional costs to once again push back its 777X model, leaving its largest widebody aircraft about six years behind schedule.
Much is unclear about Boeing’s turnaround efforts. A surge in production that was supposed to help liquidity was dampened by the latest strike, and the defense and aerospace business continues to bleed cash.
The company is still known as Spirit Aerosystems Holdings Inc. (SPR) to buy back, it saw the production quality of its key suppliers suffer due to a bad move nearly two decades ago.
In the long run, Boeing may have to make some tough calls in unprofitable areas like its space ventures. The unit made global headlines a few weeks ago when its Starliner capsule returned to Earth unmanned. It was an ignominious end to its first crewed mission to orbit after NASA decided it didn’t want to risk sending two astronauts back into orbit.
Ortberg has not done any media interviews since taking over, although he has visited customers, regulators, Pentagon officials and Boeing factories. An engineer by training, Ortberg spent most of his career at what is now called Collins Aerospace, a major supplier to Boeing, a well-known avionics equipment manufacturer.
As CEO, Ortberg shares a sense of camaraderie and destiny with employees. He departed from his predecessor about relocating from West Palm Beach, Florida to Seattle and ran the company from the other side of the continent.
Cash drain
When the strike began in mid-September, the CEO urged workers to embrace the future and not hold grudges. Senior management took solidarity pay cuts when Ortberg announced furloughs to conserve cash, and recent job cuts include executives and management, he said.
But with so-called touch labor accounting for less than 5% of the total cost of the commercial airline program, some observers wonder why Boeing hasn’t moved with more urgency to end the strike, which is adding to its financial woes.
“It’s not a needle mover in terms of Boeing profitability,” said Ken Herbert, analyst at RBC Capital Markets. “What are we waiting for here? With each passing day, it becomes more disruptive and more of a cash drain.
Along with the job cuts, Ortberg wants to share a sense of urgency and sacrifice, said George Ferguson, an analyst at Bloomberg Intelligence. But the move further threatens workers who need to restart Boeing jetliner production at a time when demand for skilled mechanics is high.
Even before Friday’s announcement, the war of words intensified. Both Boeing and the union filed formal complaints alleging violations of the code of conduct for labor negotiations.
“He couldn’t win without the union,” Ferguson said of Ortberg. “He needs their heart and soul when they come back upstairs. If the CEO had a honeymoon, it looks like it’s over.”
– With assistance from Siddharth Philip and Danny Lee.
(Updates with stock performance)
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