Podcast: Is Boeing’s New CEO The Right Pick?

Joe Anselmo:

Welcome to Aviation Week's Check 6 podcast. I'm Joe Anselmo, Aviation Week's editorial director and editor-in-chief of Aviation Week & Space Technology Magazine. Boeing has rolled out its second-quarter earnings, and they are not pretty. CFO Brian West has indicated the airframer will see another full year of red ink in 2024. But the bad news was overshadowed by a momentous announcement. Boeing has selected Kelly Ortberg, a veteran aerospace executive who used to run Rockwell Collins, as its next CEO succeeding Dave Calhoun. So who is Kelly Ortberg? And is he the right choice to lead the turnaround of the embattled company?

Joining us today are two guests, Scott Mikus is Vice President of Aerospace and Defense Research at Melius Research where he helps oversee the firm's coverage of Boeing. And Kevin Michaels is managing director of management consulting firm Aerodynamic Advisory. He has known Kelly Ortberg for many years. He's also a regular Aviation Week columnists. Rounding out our discussion is Aviation Week's chief business editor, Michael Bruno.

So Scott, let's get started with you. You and your colleague, Rob Spingarn, put out a research note calling Kelly Ortberg quote, "A great choice to lead Boeing." Tell us why.

Scott Mikus:

Yeah, we think he's a good pick. I mean, Boeing really needs an operator to come in here and fix the operations. One of the things that's really encouraging is that he plans to be based in Seattle to oversee the operations of Boeing commercial. When you look at the quarter, the financial results were not very good, but the stock still traded up as investors were optimistic about the CEO choice, an excellent track record at Rockwell Collins. He sort of redefined the way avionics or thought of. He had a big work package win on the 787 for Rockwell Collins that helped them get other wins on the A350, the 737 MAX, and A320neo. So it's nice to see an operator in there that has public company experience, a long track record in the commercial aerospace industry, and he has an engineering background, which is something that Boeing desperately needs.

Joe Anselmo:

Kevin, as I noted, you've known Kelly Ortberg, worked with Kelly Ortberg for many years. Do you think he's the right choice to lead a turnaround of Boeing?

Kevin Michaels:

I think he's an outstanding choice, Joe, and I first met Kelly in 1996 at Rockwell Collins government systems. And some of what's been lost in the reporting on this as well is that Kelly really made his mark on the government military side of the business. He ran a data links business unit that made Link 16 and other tactical data links and branched out into ISR data links and other things. Really showed what he could do on that side of the business and government systems. And then transitioned over into commercial where he led the 787 wins that Scott mentioned previously.

But from there went on to after he was named CEO after serving under Clay Jones, really one of the great CEOs in our business over the last 30 years. He acquired ARINC right out of the box where he was redefining Collins away from just being an equipment manufacturer to being a connectivity solutions provider. And then, not too long after that, was B/E Aerospace, which again redefined Collins. So there were some very big moves in his tenure as the CEO of Rockwell Collins.

Joe Anselmo:

Kevin, people also, when they've talked about Boeing problems, they've talked about culture and I mean one of the things Rockwell Collins was famous for was its Midwestern culture. It was an Iowa company with those kinds of roots. Kelly didn't go to an Ivy League school. He's got a mechanical engineering degree, I think from Iowa State.

Michael Bruno:

University of Iowa.

Joe Anselmo:

Thank you. Is that going to be a benefit to Boeing, do you think? Is going to change things.

Kevin Michaels:

Absolutely. I mean, underpinning everything is that Boeing has a cultural problem. It has to redefine the values that define the company that have gone astray. And in my experience, and I'm curious as to Michael's perspective on this too, is I think Rockwell Collins has one of the absolute best cultures in the business, and I call it a balanced capitalism culture. And what do I mean by that? Well, yes, Collins did take care of the shareholders during the tenure, but they balanced this with investing in the future with coming out with innovative products. The 787 win that we talked about earlier was a big upset. They won five of the seven work packages by getting close to Boeing by really understanding Boeing. But at the same time, Collins had what was known as the best customer support and aftermarket organization in the business. They were on top of almost all the customer satisfaction surveys and the supplier scorecard survey, certainly in the top few that Boeing and Airbus did. The employees loved working for them, and they took care of their local community, all while delivering shareholder returns. And they showed that it is possible.

And it seems to me, as I've written about in the past, is our culture, not only at Boeing, but in many aerospace companies has gone, it's skewed to a version of capitalism where it's all about the shareholder. That's like priorities A, B, and C, and everything else is a poor second or third priority, and he brings that culture to Boeing. Now, it's one person in a company with a very state culture. To me, it's almost analogous to Alan Mulally when he went to Ford Motor Company. I'm here in southeast Michigan, and when Mulally came to Ford, which was a company that was in dire straits and had big cultural problems, not many people gave him a chance to succeed and he succeeded. It took him a few years. And while Mulally had to learn the automotive industry and Kelly doesn't need to learn aerospace, he's got a big challenge ahead of him.

But yeah, I think he's absolutely up to the task. And as I've mentioned in some of the interviews, Kelly is a very Midwestern person, which means that he's a workhorse. He's not a showhorse. He's an incredible listener. He doesn't have grand theories about how the business should work. He gets the facts, talks to as many people as possible and makes a decision, but he can be very, very decisive, but only after engaging the right stakeholders. And the fact that he's going to Seattle is not a surprise because that's the way Kelly works.

Michael Bruno:

I just want to underscore what Kevin's talking about in regards to his likability. It's one thing to be personally likable that you meet the person and you want to have a beer with him or her. But with Kelly, there was a likability that transcended into his executive management and could be seen in results. And just a couple of anecdotes I want to share about Kelly that we heard about at Aviation Week when we were covering him in his time leading Rockwell Collins. Way back last decade, a decade ago, he was concerned about the workforce transition from the baby boomer generation to the millennial and younger generations and trying to attract new college graduates and workers, whether it was on a factory floor or in the office with STEM degrees, knowing that the business of aerospace was going to be changing and he was trying to make sure that Rockwell was situated.

And so Rockwell management started reassessing what is it on their own that their own workers were looking for? And there's an anecdote about Kelly Ortberg giving up his prized parking spot in the parking lot at Rockwell Collins so that any one of his random employees, but particularly a newer employee could come park close to the building and they wouldn't have to walk from way back in the parking lot and kind of have a walk of shame from way back on the asphalt. And that's just, it may even sound gimmicky, but it's one of many things that led Rockwell Collins to have this really high employee satisfaction rating on places like Glassdoor and others where they would go survey employees somewhat anonymously online so you got to take these results with a grain of salt. But when you look at a comparison of where Rockwell was compared to other companies, Rockwell was just far exceeding what people thought about the CEO.

It also showed in whether people would recommend working at Rockwell versus some other company. So again, results were showing up not just on the balance sheet for shareholders. They were showing up in employee surveys that were being done by outsiders and not by the company itself. So likability there was transitioning into company results.

Having said all that, and I kind of turn it back to Scott on this because Scott and his colleague Robert Spingarn were some of the people who informed me starting last year about how long it's going to take for Boeing to turn around. You can bring in Kelly Ortberg, but I think a lot of people here are looking at a four to five year turnaround process for Boeing. And Scott, do you think I'm wrong on that? Do you think most of us think that? I certainly do.

Scott Mikus:

I agree that it's going to be a multi-year turnaround. So one of the concerns we heard from investors was about Kelly's age. He's currently 64, but Boeing put out an 8-K with his compensation package and some of his incentives and performance targets, they take four years to vest. So it seems like this isn't going to be a one to two year stop gap. He does have some tests coming up in the near term. He's going to have to negotiate with the IAM. He's got to repair the trust with regulators, customers, the flying public, also have to stem the losses at Boeing Defense.

Once the balance sheet is finally fixed, they're going to have to define a roadmap for what their next clean sheet aircraft is going to be to replace the 737. 737 was a great program, but it's well past its prime and we feel much more comfortable with a CEO being at the helm with an engineering background to help define that technology roadmap for the next aircraft than we would if say it was a finance person. So when you think about Boeing's long-term value, they're a manufacturer of commercial aircraft and they service those planes. They need to refresh their product lineup. They haven't delivered on a clean sheet aircraft since the 787, and that last delivery was in 2011. So there's a little bit of concern of have they lost that muscle memory of taking an aircraft program from the drawing all the way to entry into service. It's going to be an expensive and long arduous task. But hiring Kelly is definitely a step in the right direction.

Joe Anselmo:

Michael, throughout the idea of a five-year turnaround, but I seem to recall when Dave Calhoun took over four years ago, people were saying a five-year turnaround. You can't blame Calhoun for COVID of course, but man, they don't have time to waste, do they, Scott? I mean, Kelly's got to get moving and get this ship righted.

Scott Mikus:

That's correct. I mean, the cash burn, they burned 4.3 billion in this quarter, over 8 billion year to date. And if we just look at the start of 2020 through the first half of 2024, Boeing's cumulative free cash flow burn over that period is over $25 billion. That's basically a clean-sheet aircraft right there. Balance sheet has a lot of debt on it that needs to be paid down. So the good thing is demand is strong. They have inventory that will get liquidated, they can pay down the debt. But yeah, this will be a multi-year turnaround operationally and financially. And then changing the culture also doesn't happen overnight. That's a process as well. And Boeing definitely needs a culture change, as Kevin talked about earlier.

Joe Anselmo:

And Michael, we've been talking a lot about commercial aviation, but Boeing also has some huge challenges on the defense side, doesn't it?

Michael Bruno:

It does. It has a bunch of marquee programs and almost none of them are performing, whether it's in actual delivery or financially, it's a well-known problem. Boeing signed up for a bunch of fixed price contracts with the Pentagon back last decade when it was rolling in cash on the commercial airliner side of its company. And the theory then we think was, well go ahead and take these sort of loss leader contracts and they'll eventually catch up and perform on them. But they all turned out to be a lot harder to deliver on. I'm talking about the KC-46 tanker for the Air Force, Commercial Crew services for NASA, UAVs, the T-7 trainer. There's hardly a program there that seems to be going well that makes a lot of money. Let's not forget that quietly Boeing and Lockheed are still thinking about selling United Launch Alliance, their rocket launch company, because it just hasn't gone well in the face of SpaceX.

So a whole lot of trying to restructure and just restructuring that division alone of everything else was going to go well is turning into a multi-year project. And so it's very daunting across the business. And I would actually, I would turn it over to Kevin. I'm going to put you on the spot because I'm really curious, from your knowledge of both Boeing and the industry, what is it that you think Kelly has to do first on this? Because it's a long list and everybody knows it's a long list, but how do you start chipping away at this?

Kevin Michaels:

I think that's a great question, and I think the first thing he has to do is he has to get the right people on the bus. And what do I mean by that. So there are important decisions that need to be made at the corporate level in terms of is he going to bring his own people in or is he going to work with the current leadership team there?

And then importantly, I would argue with the BCA level. In the press release yesterday, it sounded as if Calhoun was hoping for Stephanie Pope to go on as BCA lead. And that may well be, so Kelly's going to have to decide does he want to keep the BCA leadership team in place, or does he need to tweak that as well? But fundamentally, I think you've got to get the right people on the bus to make these very big decisions about the corporate portfolio, which definitely needs to be reshaped. Do they get out of space? What do they do with defense or certain programs? What do you do with BGS? Does that require some purging? And then as Scott mentioned on the commercial side, where do you go there?

But he can't do it by himself, and he's got to have a group of people that he trusts around him that bring fresh perspective to these really vexing issues. And I think that's really where one has to begin.

Michael Bruno:

I just want to note that Calhoun yesterday in the teleconference, I don't remember the exact words and maybe I should wait to get the exact words, but he said something like, he thought Kelly was going to come in and give Stephanie a hug, and they're all just going to hold hands and go along merrily. And I thought that was a really interesting comment because it almost sounded like setting up the new CEO with an expectation that the current management was going to stay in place.

Kevin Michaels:

I had the same reaction I did as you. There's one other in Kelly's background too. I think this is probably as salient is some people believe that in the long run, Boeing should break up civil and military in the separate companies. I'm not one of those, by the way, who believes that. But if you go back and you look at the history of Rockwell Collins, I mentioned Kelly began on the government system side. And at the time there was a commercial division. It was across the street, it was called C Avenue, it's called C Avenue in Cedar Rapids, Iowa. And the old saying was that C Avenue is 40 feet wide and a mile tall. And part of what Clay Jones and Kelly did is they broke down the barriers between the commercial and military side. Now, albeit it was in one city, but they found a way to get a common core architecture to avionic systems that they could use both in commercial jet liners as well as retrofitting military equipment.

And in fact, Collins retrofitted everything from the KC-135 to many of the rotary wing aircraft with a common architecture, which enabled them to sell it at a commercial price and get a much greater scale and drive their profitability. That was a big breakthrough. And I mentioned that because the siren song of just break it all up and sell it for the best pieces and just focus on commercial, I'm not sure Kelly's the kind of person that's going to go for that argument without a serious examination. And I think his own experience is that there are ways to drive synergy there, and I do think that will be something in his background that will inform, I'm not suggesting that that means nothing will happen, but I think leaders tend to go back on their own backgrounds and their history of what worked and what didn't when they consider decisions like this.

Joe Anselmo:

Guys, we're running short on time, but one final point I wanted to address. Kelly's name has been out there bubbling as a potential Boeing leader for years. You've heard it come up many times, but his name was also bubbling up as a potential successor to Greg Hayes at Raytheon Technologies after Raytheon acquired Rockwell Collins and then suddenly Kelly retired and was gone. I know he is been on the board and all that, but he seems like he disappeared for a few years before he came back.

Michael Bruno:

He did disappear for a few years, and his name was coming up in all kinds of CEO search propositions not necessarily announced by those companies themselves, but he seemed to be an obvious candidate for succeeding Greg Hayes at RTX. Used to be Raytheon Technologies, if that's the way they wanted to go. They went with Chris Calio, who knows what happened. And I won't try not to speculate here because I wasn't involved in those conversations, but his name has certainly come up, including at Boeing before Calhoun. So his name's been out there. My guess is it's been some kind of choice of what he wanted to do. The man is 64 years old and could have probably retired quite happily. So it's very, it's intriguing in one sense that he's up for the challenge of turning around Boeing and coming back into the limelight. And we know for sure one thing will happen, he will be in the spotlight for the next several years because he's taken the weight of that whole company on him.

Kevin Michaels:

I like to say he's probably the highest visibility CEO this side of Elon Musk. But one point to make as well about Kelly, he is 64, but he's very youthful. He looks like he's in his late forties and he takes good care of himself and is energetic. And when you spend time with him, he doesn't come across as someone in his mid-sixties. He is just much younger and hard so I think he has the energy and drive to do this. He's not someone sunsetting. I think he's, he's up for a grand challenge and something that's important to not only our industry, but to our country in taking this on and coming out of that semi-retirement in Florida.

Joe Anselmo:

Scott, any final points you'd like to make? You want to take us to the finish line?

Scott Mikus:

Yeah, one thing I do want to make, just circling back to Boeing Defense, every once in a while we are asked by our clients whether Boeing would consider spinning it off or breaking it up, saw GE broke up. But the thing about Boeing is given the state of its balance sheet and the losses at Boeing Defense, a spinoff or a breakup isn't even really feasible because when GE spun off GE Vernova, it spun it off with no debt, $2 billion of cash, and it had a roadmap to being free cashflow positive versus Boeing's in no position to spin off its defense business that's already losing money and then give it cash and no debt. So Boeing, for better or for worse, it's stuck with its defense business.

Kevin Michaels:

And I would add to that in Boeing Global Services, which is kind of opaque, we don't know all the elements of that, but if we could pull the curtain back on Boeing Global Services, I suspect that you would see a lot of their profitabilities from military CLS contracts on aircraft like the C-17 and AH-64, as well as their parts sales. I think military drives a lot of the success of profitability of Boeing Global Services, and presumably you would have to give up that as well to a potential buyer.

Joe Anselmo:

Guys, thank you for a really enlightening conversation, Michael, Scott, Kevin, appreciate you sharing your insights. Kelly, if you're listening, congratulations and I will extend an open invitation to you to appear on the Check 6 podcast in the future. We'd also like to thank our podcast editor in London, Guy Ferneyhough. And a quick final note to our listeners, if you are interested in aerospace business, join Michael and me on November 12th in Beverly Hills, California for Aviation Week's A&D Mergers and Acquisitions conference taking place just one week after the U.S. presidential election. This one-day event will bring aerospace leaders together to discuss the latest trends in m and a. Go to aviation week.com/events for more details and use the promo code Check 6 to save 20% on registration. That's all the time we have for now. Thank you for your time and join us again next week for another Check 6.