The Boeing Company (BA) Earnings Call Transcript & Summary

Okay. I think we are ready to go here. So I'm Doug Harned, Bernstein's aerospace and defense analyst. I'm very pleased to have with us Dave Calhoun, Chairman and CEO of Boeing -- I mean, I'm sorry about that, CEO of Boeing.

And -- but along that line, to start out with, you have now been given by the Board the opportunity to stay for 5 more years essentially. With that, what do you want to accomplish? How do you view that time frame? And what you want to do with it?

Yes, yes. So it's good to be with you, Doug. Yes. I had always anticipated, when I accepted this role with my eyes wide open and knowing the industry is one of the longest-cycle industries that there is, that you don't do anything in a year or 2. Maybe an airplane gets certified, but that's far from having accomplished anything meaningful. So yes, I think about it this way, and I want that sort of future duration to be as long as the Board wants it to be. I have no specific contract term or anything of the sort. They'll tell me what it is. Stability is the most important. We have really 3 mountains to climb, right? The first one was recertify the MAX. January 13 of last year, when I started, there were a lot of questions about that. And most importantly, beyond the product, which I have always had immense confidence, was the relationship with our regulator, them feeling pressured, us trying to call a date, nobody happy, customers not knowing when to expect an airplane, et cetera, et cetera, et cetera. So in that first year, we got the airplane recertified not just here but with Europeans, which was very important to us. We can't just certify in one place. We fly them everywhere, as you well know. And I feel good about having done that. On the other hand, I feel even better about, I think, reestablishing some trust between the FAA and ourselves, giving ourselves the time to do our respective work. We know we have different things that we're accountable for. But I think we did build a rapport there, and that's important and it's important to continue that. You don't just recover that in a year and then everything is okay. You have to sustain it. And so that's one. Number two, of course, was the one I didn't foresee, which was COVID. That came in March of that first year. I want to see this through to recovery. I have always believed in a certain recovery, not as in a guesswork but that it was certain. We would get back to '19 and we'd get back on growth track because of the important missions that we serve. We connect people around the world. We supply people around the world. Our equipment's in demand, and it is and will be, again, supply constrained. That's an industry most people would like to get into and get into in a big way. So I am confident in that outcome, and I want to get us to where that outcome is at least on us and that we begin to realize some of the growth investments that we've sustained during this difficult time. And then the final hurdle for me now is another new one in a sense, and that is we've got to repair or restore, is probably a better word, our deliveries in China. We have to have a framework where our governments want to get back together, restore trade in selected areas. And I think in the case of the United States, Boeing and commercial aerospace has to be a high priority in light of the number of U.S. jobs that are attached to it and the global leadership position that we've enjoyed as an industry for so long. That's predicated on doing business in China and continuing to do business in China. So those 3 mountains, we're still at different stages of recovering from.

Well, talking about the recovery. I'd like to get a sense of how you see that now. It obviously varies a lot by region of the world. We just saw Airbus come out and say they want suppliers to be ready for a 64 a month rate by -- in the end of 2023 and maybe going to 75 a month in late 2025. What's your view the pace of the recovery? And what do you make of that Airbus announcement?

Well, let me start with just customers and maybe stating the obvious in light of the number of customers that have been involved in this conference of yours. It's pretty robust recovery. It's more robust than I ever imagined when we started the evaluation of COVID and what it might mean. It is completely wrapped around the distribution and penetration of vaccines across the world. And I think as has been said, large developed domestic markets are the first to recover, and they are recovering very quickly. China is back at their former traffic levels and will continue to grow from there. The United States -- and you're hearing from everybody. Our U.S. carriers are back in it. They are going to be supply constrained, in my opinion, starting in the summer, bringing back schedules, getting back to that -- those former levels in '19 and then get back on the growth track. Between the rehiring and the rebuilding of their own networks and then also the supply chains that support them and all the services and other things, it's just going to feel supply constrained for a while. I think that will mean it's a healthy recovery and that they'll get back to former pricing levels sooner rather than later. That's important to all the folks who care about return on capital and forward momentum. So I believe strongly in that. The next big part of it, of course, is the long-haul stuff that involves borders all around the world and the border protocols that are currently in place. I'm getting more and more optimistic that those will begin to resolve themselves, again, tied to vaccine penetration in a variety of these bigger markets. But the corridors between big developed markets, and let's just talk about the North Atlantic first maybe, those corridors are going to sort of define the recovery in my view. They will be largely based on bilateral negotiations that no longer require quarantines but are likely to require some verification and/or password that both sides of the ocean agree on. And then around the world, these bilaterals will continue to expand. What I'm encouraged by are all the regulatory authorities that are beginning to weigh in on facts and science as opposed to anecdote and "let's just keep the border closed as long as we can" that comes with politics. So I'm beginning to see a real push now for facts and science. And I do think the North Atlantic reopening, when it comes, will help define that. And then that's likely to come quickly. So by the -- well, I think when we exit '22 and head into '23, we might already be talking about '19 levels of growth from there. So -- and then last dimension that some people -- there's a lot of supposition around is the leisure market is going gangbusters. Everyone can't wait to get out and visit all the places that they haven't been able to. I am so confident that the business market -- business travel is going to be the same. I think it thrives on competition, and there's plenty of it out there. And people are going to go on and see each other, and I think that parade will start quickly when it really opens up. So that's how I feel. On the rates -- so now this is your relationship with the supply chain. That's really what rates speak to. And my own view of forecasted rates -- and now I'm only 1 player so I'm not going to comment on my competitors' rate announcements. But in my opinion, the idea that we should signal to our supply chain what the rate is going to be in 2 or 3 years from now when we still do have time to respond and do have time to put things in place. The idea that we're going to compete on those forecasted rates, I think, creates trouble for our supply chain. Supply chains make their own judgments. They don't just take exactly what we say. I was in that supply chain. I was an important supplier into both sides. We make our judgments about how optimistic or aggressive our airplane manufacturers are going to do it. And then we apply that judgment. If we get it wrong, we pay a price for that. We don't satisfy demand that would otherwise be there. And/or we're getting crushed by too many inventory, and all of a sudden, we got to lay people off because we're ahead of ourselves, right? So we're trying to manage that process. I don't want that process to go on like that forever. So my approach to rates are we'll announce rates when we need to announce rates with respect to supplier capacity management. I simply want to give them every ounce of information I have, the transparency as to exactly what the backlog looks like and what the production lines are delivering and then allow them to weigh in on that judgment with me. And those that require physical capacity, meaning investments that are longer cycle than the cycles involved in the order or the simple rate adjustment, then we'll try to get as far ahead of that as we can. But I am going to steer clear from blanket rate announcements that go out too far. I will always announce rate adjustments when I need to for the benefit of the supply chain, not in terms of signaling market shares.

Well, when you were talking about the recovery, you talked about the leisure travel in the U.S., which is very strong. We've heard that this morning from Delta, from American. Now Europe recovering, that looks good. But the single largest market out there is Asia Pacific. And so when you think about that part of the recovery, it's hard for Asia Pacific to really recover without seeing China recover, not just domestically but internationally. So can you give us a sense -- you mentioned it at the beginning, but can you give us a sense of where things stand? Because China has always tended to split their market between Airbus and Boeing. Things have been kind of frozen there in the last 4 years. Where do we stand now and what needs to happen?

Well, we need our -- the 2 governments to want to restore some of the trade lines that have been in place for 50 years and served both markets, both economies incredibly well. And I'm quite constructive that, that is a step both want to take, and it's not ill informed. I have reached out to our new administration and members of the administration. They understand the issue and the opportunity. I think they want to be constructive. They also have a much larger construct to put that within. And they have real debates on issues between the countries that also have to get built. My hope is that the restoration of trade is a step toward building that bigger construct, which will have significant issues and debates on both sides. And I think it's in both parties' interest to want to do that. And I've had enough signals or I believe that they understand it well enough that I have confidence that will happen. I can definitely not pick the month. I don't know when that moment of thawing on trade restoration begins with respect to the United States and China. I do know that if it goes on for too long, I pay a price. I pay a price because they're the biggest part of the growth of the industry in the world. Roughly 25% over the next 10 years of the growth will come from China. And then secondly, if I'm not allowed to serve, I see global leadership in an industry our country and our company has enjoyed for quite a long time. So -- and I have -- I'll never give up on that. But it's going to create real issues for us in the next couple of years if we can't thaw out some of that trade structure.

Now switching gears a little bit. You've -- as a company, you now have over $40 billion in net debt. You've talked about the fact that you don't see any kind of liquidity risks here anymore. And how do you then view your debt situation? And does it change the way you think about managing the company, including from an investment standpoint?

Well, the implication of that question, and everyone asks it for all the right reasons, is are you constraining thing -- are you not spending on some things you really would like to spend on? And the answer to that question is no. We have sustained what we think are all the important investments necessary to maintain leadership in our respective markets. That always has to be the answer. We have always had a high level of confidence in the recovery of the industry and then, therefore, the return of cash flows to The Boeing Company, similar to the kinds of cash flows that we enjoyed before COVID, before the MAX issue, and that we can get there in relatively short order in aerospace and aviation terms. So it's our confidence in that, that has allowed us to continue to invest. Fortunately, we've made some great, I think, transformation decisions to lower the overall enterprise cost structure in ways that will benefit us forever. You always take a hard look at your kind of stuff that gets in the way. I think we've taken a good sharp lens to that. We've saved ourselves, I think, money that will be saved forever. And then we made a few big factory decisions like the consolidation of our 87 production into Charleston and now the ability to scale around 1 big line in Charleston and a terrific workforce in Charleston. We don't have to move parts of that airplane across the country, which is an inefficient move historically. COVID, this sharp reduction in rates allowed us to take that moment and consolidate production. We'll get back to the rates we used to be, but we'll do it in one footprint. And there's a lot of leverage in doing that over the long term. So there are productivity -- there are accretive things that are happening for productivity and margin enhancement going forward that without COVID we might not have been able to do. So we've been doing all that kind of stuff. We've taken advantage of consolidation plays where we can. We know we're getting more efficient, and we think we sustain all the important investments that I think investors are counting on from The Boeing Company.

Well, I just wanted to follow on that with respect to the 787. A couple of things. One is you said that operating on that single footprint in Charleston, you could get back to the rates you were once at before, and you're 5 a month now. It used to be -- that's been a capacity limit of about 7 a month in Charleston. Does that mean you can get all the way back in Charleston up to a 14 a month rate? I mean that would be double where you were.

Yes. The answer to that is yes. That footprint, that design was a big footprint when it got -- when it was started. You don't go from 5 to that number overnight. You get there in increments. And we have plenty of cycle time to stage those increments appropriately and reconfigure the flow of airplanes through the factories such that we can accommodate those kinds of rates. We wouldn't have done this if we didn't think we could. We believe in that airplane, the most utilized of the widebody fleet during the COVID time. And what do you do during those moments? You fly your most efficient, your best airplanes. That's what you do. That is the 87 fleet. It's performing beautifully in that front. We will settle through the consolidation issues in simply moving equipment from one place to the other. We've pretty much got worked our way through that already in the first quarter. And we will work our way and get to a stable delivery rate, which is, right now, our biggest challenge, and working with the FAA as we alter some of our production control systems and other things in ways that are designed to make us more productive long term that feel really unproductive in the short term. But we think we're doing this the right way, and we're doing it alongside the FAA. We've got to give them time to breathe on that as well. So our objective over the course of this year is to really settle that down.

Well, can you describe what happened here? Because you had started -- you had these issues, which we've talked about these nonconformity issues you've dealt with them and the rework process. You got the restart. You were delegated the authority, and you delivered 9 airplanes in April. That looked good. I mean what's happened here? And do you still see the opportunity, which you all have talked about before, of delivering 100 airplanes this year? Is that still...

Yes. I -- yes. But let me give you the one caveat. Nothing's changed with respect to the determinations that were made, deliveries of the airplanes before this next pause, and they're performing beautifully. So our issue is that the FAA rightfully wants to know more about the analytics and process controls that we put in place, which are different than the ones we had previously, so that we could be more perfect. That's a word I would use. But anything that's different requires a vote and requires a deep look by the FAA. And they just have -- they have questions about the approach that we took; not objections, just questions. And I don't want to ever repeat the mistake of us trying to pressure them to do things faster than they would otherwise do them and as diligently as they would otherwise do. I'm still in that frame of mind. I will stay in that frame of mind. And it's going to create some instability. Probably -- I hope that's measured in months and not longer than the calendar year. But again, I'm just going to let that play out. I will say this. I don't think we're going to introduce as many changes as we did in this last 5-month pause. We took on a lot, and we did it because we thought it was in the best interest. We still believe it's the best interest of the long-term stability of that plant and the productivity at that plant. So we don't regret any of that, but it's -- it would be unfair of us to shove it down the FAA's throat. That wouldn't be right.

And so the 5 a month production rate, you're sort of continuing with that independently from whatever this delivery restart timing is?

Yes, yes. We'll stay on that clip. And I -- and we're still going to deliver the lion's share of the 100. I hope it's all of it. I hope it's -- you measure the difference in tiny little numbers, but I'm not -- I don't want to get too predictive about that. The most important thing about all those airplanes is they have homes. I have no doubt we'll be delivering them and that they'll be productive the day they get put into use. And so whether that's -- whether the tail of that's measured in a month here or month there, I'm not going to get too caught up on that one.

If we flip over to the MAX. You -- fortunately, you've restarted deliveries of the MAX. You're still, I assume, planning to be in a production rate of 31 a month in early 2022. Is that correct?

Yes.

But then we're now -- but we're now getting a little closer to that. You said earlier you didn't really want to get into long-term rates. But to think about where you would be at the end of 2022, I mean, the supply chain needs to know that now from an operational standpoint. Can you give us any better sense on what that trajectory might look like?

Well, I don't want to get past the 31 number until I have a real clarity around China. It's a real factor. It does affect the recovery trajectory. And if I try to run that number on the basis of an absolute win across the board in China at a certain moment and get it wrong, it's a big wrong. So I don't want to do that. I'm -- we have tried to push out China deliveries in our inventory and in -- with respect to the commitments on our line rates. We've tried to push them out to the -- as far as we can risk-reduce, do all those kinds of things. But we're going to get within cycle pretty soon, right? And as you get within cycle, if we can't restore those trade routes, then we're going to have to delay going from 31 to anything until we're confident that, that is restored. And so that's why I'm not getting ahead of myself on that.

Yes. So other big airplane, 777X. So can you tell us what's the status of this? I mean it's been pushed back a couple of times. Can you talk about how you see the market for that airplane now? We've had some people switch out orders. I mean what does the 777X look like to you in terms of schedule and attractiveness of that airplane?

Yes. Sometimes, the way I like to characterize it is if I had a clean slate of paper today and knowing -- and it wasn't a 777X loaded in my development pipeline, would you want to do it again? The answer is absolutely yes. I've seen that end of the market for quite a long time. That airplane, we are still confident, will be certified in the fourth quarter of 2023. We've incorporated all the time line learning that we could possibly incorporate from the MAX recert and the architectural preferences that both the FAA and the EASA has embedded in their regulations. So those are important things with respect to how we do this, and we've incorporated that. And we've given ourselves time to learn as we go through this. On the other hand, that airplane has been flying quite a bit. We know a lot about the airplane. It performs really well. We don't have like a load of technical glitches, and we don't have a battery issue. We don't have that kind of stuff because we've actually been flying it and doing the things that we've been doing. So I like the status. I like the progress we're making against the cert. Again, we will be subject to FAA's time line, and we will not question it. Now what do I think about the airplane? This airplane is going to have, in its category, an enormous cost advantage per seat, per -- volumetric numbers for freight. And there will always be routes that want an airplane of this size and scale. The difference with this one relative to the historic competition is that it sits by itself. It sits by itself. We don't have a 47 competing with it in our own backyard, and we don't have an A380 competing with it. It is -- it's on its own. So we keep refining it. We keep pushing it. We bring it to the freight market, all of which I'm confident we will do -- it will have a 40- or 50-year run, and I think it will be one of the great runs of all time. So I just -- I have lots of confidence in it. It's often forgotten. "Oh, it got delayed. Do they really want to do it?" It's quite the opposite. We love it. We want to do it. We think it fills an important part of the marketplace. It's an incredibly efficient airplane, and we think it flies on its own.

Well, it's -- you mentioned the freight market. So I take it from that, that you're very confident this will have a freighter version. And I ask in part because I think there will be challenges from a carbon standpoint for freighters -- existing freighters around in 2028. And so -- but you're pretty committed. It sounds like that this will be a freighter as well as...

Well, I'd say it's another reason why -- when you've led as much -- as long as we've led in the freight market with our portfolio of airplanes, it's another very important reason to do it because it will meet the standards. And so that's just another arrow in the quiver of wanting to do it. So it hadn't been announced, hasn't been approved by our Board. But I am confident that this one will move down that path.

Yes. Because I know -- I mean you've -- Boeing has really just dominated the freight market. On the last Airbus earnings call, I asked Guillaume Faury about that question. He said that -- he acknowledged they're not well positioned there, but it's important for them to get there. My understanding is they're looking at a potential A350 freighter. I mean how do you see Airbus right now as a competitor in that market, in the freight...

I see them as a direct competitor, right? They are going to go after the market. I have no worries about that. And they're going to work with the airframe they know, and so -- and then we have to compete against that. And we like our chances, we really do. And it's not just based on the knowledge and history and all the things that we've learned in our -- with our experiences in the freight world. It's just the raw performance of the airplane at that size and scale. It's an incredibly efficient, smart choice for the really great operators out there. So will it win them all? No. Will it win a lot of them? Yes, and we're confident in that. So -- and I have no doubt that our competitor will want that market and will come after it.