Troubles at Boeing just keep piling up, along with existential questions about the company's future. Not only is Boeing enormously important to US manufacturing, but it's also a major defense contractor for the US government and a big employer, which means its fortunes are of interest to more than just shareholders. So just how bad are the difficulties facing Boeing at the moment and what is the planemaker planning to do about it? On this episode, we speak to Richard Aboulafia, managing director of AeroDynamic Advisory, about Boeing's history and future. He talks about lesser-known developments at the company, including its recent decision to dissolve its firm-wide strategy unit, and the decisions that go into developing new aircraft. This transcript has been lightly edited for clarity.
Key insights from the pod:
Dismantling of Boeing’s strategy department — 5:09
What’s the mood at Boeing right now? -- 7:32
How has Boeing’s culture changed? — 9:05
Boeing’s decision to develop the 737 MAX - 10:54
The McDonnell Douglas acquisition - 15:25
Developing clean-sheet aircraft - 17:39
Airbus’s dominance of the middle market? - 19:12
How does Boeing catch-up to Airbus — 21:50
What makes a good plane? — 22:49
Worries over Boeing’s defense business — 26:18
Public funding and Airbus and Boeing — 28:59
Why has Embraer been successful? — 31:24
Competition from Comac — 33:34
Culture and resources at the FAA — 37:16
Airline loyalty to planemakers — 41:00
Prices for aircraft right now — 42:20
On Boeing’s future — 43:12
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Tracy Alloway (00:20):
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal (00:24):
And I'm Joe Weisenthal.
Tracy (00:25):
Boeing, have you? Boeing!
Joe (00:28):
Keep that in.
Tracy (00:28):
Don't keep that in.
Joe (00:30):
No, keep that in. Now you got to keep that in.
Tracy (00:32):
I've said before, I have a soft spot for Boeing. So, that's why I'm mixing ‘Boeing’ and ‘Joe’ up. Okay Joe, have you seen Boeing shares recently?
Joe (00:42):
Actually, I haven't looked in a while except, you know, we did an episode on Boeing about three or four weeks ago. So not good. And they have not recovered much, so not good.
Tracy (00:52):
So shares are down 20% since the start of the year, which is never a good sign, when you lose a fifth of your market value in about six weeks. But probably one of the more damning things that has happened recently in terms of the share price is do you remember when the company announced it was pausing 737 production for a day, and the shares went up 6%? That seems bad — when the market is rewarding you for not making your signature product.
Joe (01:21):
Well, there's two funny things to me. And again, ‘funny,’ you know, [with] all the caveats that that entails. It's funny that Boeing has the reputation of being the company that's obsessed with its share price and pleasing shareholders. Airbus doesn't, and of course, Airbus has a much better share performance than Boeing. It's done phenomenally well over the years.
And it's also just kind of crazy, setting aside competition, that Boeing is still nowhere near its peak in 2019. Despite what we know to be a booming global market for aviation. That's one thing we know, like pre-pandemic, post-pandemic, just absolute boom. You always hear about the expansion of new airlines in the Middle East and Asia etc. And so we know that there's this huge general bull market going on, and Boeing doesn't seem to have capitalized on any of it.
Tracy (02:07):
Well, not just a booming market in commercial aircraft, which you're totally correct. As you observe, it has been a busy few years. But also, we've had so much defense spending. And things like the IRA and things that. And even with that happening in the background, America's premier aerospace and defense company just doesn't seem to have benefited from it. The share price has basically been flat for the past three years. Kind of amazing.
Joe (02:38):
And I think it's worrisome, right? Because, you know, setting aside the concerns of Boeing shareholders, they're probably pretty unhappy, if the US wants to be a big manufacturing powerhouse and again, be able to build more complex stuff domestically, it's really a bad sign. The sort of premier domestic manufacturer for global markets, one of only two companies that basically controls the commercial jet industry, is getting worse at building planes.
Tracy (03:09):
Yes, absolutely. So, we have previously recorded an episode on Boeing with our Bloomberg colleague Peter Robison. He's also the author of Flying Blind: The 737 MAX Tragedy and the Fall of Boeing. And we talked about what the Alaska Airlines door blowout actually meant for the company, and also the emphasis that Boeing seemed to place on financial performance, and ironically, its stock price versus a culture of safety and engineering.
But, I feel there is so much more we can say about this topic and so much more to dig into. And I'm really happy that we do in fact have the perfect guest for today's episode. This is the guy, the aerospace guy back when I was covering airlines and aerospace in 2006. He was the expert back then and in 2024, almost two decades later, he is still the guy to talk to on aerospace. So, I am very happy to say that we're going to be speaking with Richard Aboulafia. Again, a longtime aerospace analyst and managing director at Aerodynamic Advisory. So Richard, thank you so much for coming on Odd Lots. It's good to talk to you again.
Richard Aboulafia (04:28):
Same here, Tracy. Thanks so much for having me on. Thrilled to be here.
Tracy (04:32):
You know, I should say, in addition to being the aerospace guy and just an all-around expert on this industry, you also have a reputation for telling it like it is. And I think at this point, a lot of the cultural changes at Boeing are probably well known. But you pointed to a pretty interesting development that I will confess I hadn't even noticed. It happened late last year where the current Boeing CEO David Calhoun basically dissolved the company's strategy department. What was that about?
Richard (05:09):
Yeah, I mean, that's a mystery. But like all good mysteries, it just sort of lends itself to theorizing and indeed conspiracy theorizing. And the most obvious statement was ‘We don't have a future.’ Not only was it the dissolution of the company-wide strategy department, but there was a wholesale gutting of a lot of the business unit strategy department. So it wasn't a devolution story, it was a ‘we don't care’ story’ which was of course as baffling as it gets.
It sort of fits in with this nagging feeling in the back of my mind that the really awful performance is kind of okay to the folks at the top. Because ultimately their playbook is, well, about as deep as the Jack Welch GE playbook, which is, if things go to hell, you simply break up the company.
And in that case, you know, performance doesn't matter, the future and strategy doesn't matter. You simply think — and indeed maybe the bad performance is kind of a plus in a strange way to regulators and everybody involved, customers, whatever. It almost becomes a relief when the company is broken up. That's of course an extreme departure scenario, but I can't think of any other explanations for doing that.
Joe (06:20):
Well, maybe, what is a strategy department and what is it, so they said, I think, I guess it was in November that their strategy boss was leaving. That the strategy teams would be folded into the business units that they support. What do these words actually mean in practice? What are strategy teams? I thought everyone did strategy in business.
Richard (06:41):
Yeah, everyone does, right? It's kind of impossible to imagine a large corporation not having a strategy function. Strategy is about the future. A strategy is about allocating capital for future technology development, for future acquisitions, for allocating people, for developing people and their skills and capabilities. Basically, it coordinates resources across business units and within the business units, of course, it thinks about new products to develop, who their competitors are and are likely to be, and what key enabling technologies are needed to compete in the future.
Tracy (07:16):
One of the reasons we wanted to talk to you is because you are well-connected in this industry, in addition to being an expert on it. But can you describe like the mood at Boeing at the moment? Or how people within aerospace and defense actually feel about this company?
Richard (07:32):
After 35 years, I've never seen anything like it. And it kind of resembles that common trope in horror films, very often the call comes from inside the house. I mean, I spent last week in Seattle and, you know, it's nothing short of horrifying. But it also sort of illustrates one of the strange aspects of this, the so-called crisis, which is that the problem is purely at the top. There are a lot of really good people at Boeing and a lot of really good products and a lot of really good technologies. You just have some people who are really, really bad at their job at the top. So as you can imagine, people within the company, and there are again many good ones, are often mortified by what's happening.
Joe (08:14):
Well, so I understand in the abstract, we could say things like ‘Oh, the bean counters took over and they don't have as much of an engineering culture or safety culture. Or they're just worried about the stock price.’ And I get why that's all bad, and I guess on a sort of theoretical level, it sounds very bad. But why don't we talk concrete? If you're an engineer at Boeing today working on something, how is your life different than it was 20 years ago?
Richard (08:40):
Well, there's no future, right? And the astonishing thing...
Joe (08:44):
What do you, like, day to day, what is it? Some boss three levels up has made decisions and various priorities have changed. So how does it like manifest itself on a sort of day-to-day basis or quarter-to-quarter basis where it's not as compelling of a place to work? What has changed about the nature of the job?
Richard (09:05):
You need something to dream for, you need something that represents the future. And Dave Calhoun, the CEO at the top of the heap, said about, oh, a year and four months ago, ‘don't worry we won't be launching anything new for at least another decade.’ Other than sheer demoralization and encouraging the competition, I mean, the only way to explain it is that he's the best CEO Airbus could ask for.
But from the standpoint of being an engineer, you're getting the heart of your question, Joe. If you're an engineer, you hear that, what are you working for exactly? You're coming up with work packages on the basis of, I don't know, minor tweaks of existing products, stuff that's already in the pipeline.
You know, it's a tight market for technical labor. You're probably going to be pretty interested in going to work for somebody else. So, you might also notice that the demographics are changing because the young and enthusiastic folks who have a future are leaving or not joining. And that too, of course, is a significant change in the fabric of your workplace.
Tracy (10:07):
So you mentioned launching something new, and this kind of goes to the heart of, you know, I guess the current crisis within Boeing, but also the origins of the safety issues. And the idea that instead of doing a clean-sheet aircraft, as it's called, Boeing decided to make amendments to its existing 737 model. And that resulted in the 737 MAX and its stablemates. And then that led to the crashes, which claimed I think almost 350 lives, and the resulting controversy over Boeing and what we're basically discussing now. But just to back up, could you maybe talk about what are the decisions, or the factors, that go into whether or not to design a completely new aircraft?
Richard (10:54):
Well, I'm afraid I must disagree with that narrative. I thought the MAX was the right decision at the time. There were few enabling technologies for a new jet in that class, except turbines. So put a new engine in it. Now, we didn't know then the sheer popularity of the middle market, but even if we did, I'm not so sure that would've changed anything.
What was important is that the MAX go ahead and then the company does what it does every decade — launch a new product. And in that case, that product would've been a notch above the MAX. As for the development of the MAX, there were cultural problems at play that led to the MCAS problems and the tragedies that resulted. But it wasn't economics. I mean, the economic difference between MCAS done right and MCAS done poorly is zero, zilch.
This was purely a cultural driver that led to these tragedies. Now, if you've got the MAX out, okay it was the right thing to do. It should have been done differently, but it was the right thing to do. What should have happened next is they should have said ‘Okay, look back in the past. We had this other aircraft in that middle segment, the 757, it's dead. We need to think about a replacement.’ And they were thinking about a replacement. And that was the first thing Dave Calhoun killed when he came in.
Joe (12:13):
How would you characterize the cultural failings that led to those tragedies?
Richard (12:20):
Very simply a disconnect between the people at the top and the people who are focused on the core business of the company, which is of course designing and building aircraft. You know, the folks at the top, this started under Jim McNerney back in the late 2000s, first decade of the 2000s.
He decided that the supplier base and the workforce were mere disposable commodities that should be crunched. They should be regarded as one giant ATM. You take money out of them, there's no consequences. Though, people will always want to work there and people will always want to be suppliers. Our way or the highway.
This was bound to have consequences, and it just got worse and worse through the 2010s. And as a consequence, you had a badly demoralized workforce. Now as part of his strategy, of course, McNerney back in the 2010s, it became necessary to replace people on the board with people who had no technical degrees. They were one step away from being complete randos who sold accordions. And, you know, the most farcical moment was Nikki Haley was on it, and she left because she didn't think the company should be taking government money. It's a defense contractor.
It was like seriously? So it was a bizarre organization designed to rubber stamp and not much more. It's gotten a little bit better in the aftermath of the MCAS tragedies, but oh boy, that terrible culture of bad governance and that complete disconnect with the people who are charged with actually doing their jobs. A complete lack of redress and inability to push bad information.
You know, I remember very well on 7-8-’07 when the 787 Dreamliner, their last clean-sheet design, was rolled in. And I was talking to McNerney and he told me like ‘This plane's going to fly in September. Well, maybe October. Nope, it's September. I didn't say that.’ And it took someone, it took someone completely outside, way lower down on the organization chart to say ‘Actually Richard, that plane is filled with sand. It's not flying for another year,’ which was correct. And he's not going to be caught in a lie. He simply had no way of knowing, and there was no mechanism with which to transmit bad information up the food chain.
Tracy (14:54):
On the topic of culture, the other thing that tends to come up is the acquisition of McDonnell Douglas and the idea that you brought in these new executives and they had much more of a numbers-based focus. And I'm always kind of curious, is that true, first of all? And then secondly, why did they seem to wield so much influence within Boeing given that they were the company being acquired? Presumably they were, you know, in terms of social hierarchy on a lower rung.
Richard (15:25):
Yeah, it's a complicated one. And of course the bitter joke told at Boeing is that, you know, McDonnell Douglas used Boeing's money to buy Boeing. It's just a bizarre chain of events. There were all sorts of interpersonal reasons, minor scandals and whatever else that resulted in a decapitation of some of the key Boeing executives. And as a consequence, McDonnell Douglas folks were there to fill the void because they were kind of squeaky clean — until they too were toppled, a couple of them were toppled by scandals too. It was a bizarre chain of events.
Now, is it true? Well, there's no question McDonnell Douglas was far more financially focused. It had been on a 30-year glide path towards irrelevance because of this focus on finance and nothing more between, you know, the creation of McDonnell Douglas in 1967 and its absorption into Boeing, it was pretty clear the way things were going all those years.
Having said that, it was still an aerospace company, right? What happened in the mid-2000s with Jim McNerney and now Dave Calhoun is that Jack Welch GE culture, which has nothing to do whatsoever with aerospace. They might as well be hedge fund managers or somebody who's merely concerned with numbers and has no knowledge of the industry whatsoever, came to rule.
So yes, you can put some of the blame on McDonnell Douglas people, but really it's more the Jack Welch influence, or I suppose heritage of Jack Welch influence. about seven or eight years later.
Joe (16:57):
Jumping back towards the present, so you mentioned the comment from the CEO last year where they're like ‘We're not in any rush to introduce a new clean-sheet plane.’ I assume that's kind of the thing shareholders like to hear, because it means, you know, you're not going to have a big upfront budget that you have a lot of, no pun intended, runways still left with the existing product set. What are the costs of launching a brand new product? And how do companies think about the cost benefits of when to launch one versus when to just try to get more out of the existing product?
Richard (17:39):
Yeah, that's, you know, a contentious issue, an important area of discussion. I'm kind of an outlier. I don't think it would've mattered at all to investors and indeed there would've been more positives than negatives. You know, if you look at it, this is a company now with 40 billion in net debt, down from $45 [billion] or so a couple years ago. So, to start a new program would be maybe $2 billion incremental per year in independent research and development funding for probably about six years, seven years. With overruns, it could go higher.
Now, that's obviously a drag on shareholder returns. But put it another way, we're now in a situation where Airbus’ competing jets are getting hundreds, thousands of orders. They're losing market share at Boeing. Wouldn’t some investors have been galvanized by the sight of Boeing getting those orders with its new jet and said ‘What a great place to park my cash because this is a long-term growth story. I'm not concerned with dividends and buybacks. I just really like the idea, in a land where there's plenty of capital available, not a lot of good ideas out there, this is a safe bet.’
Joe (18:49):
Well, is there some part of the market, so theoretically, is there some part of the market that right now Boeing would be competing better in if it had a different product? Or I mean, I don't know what the end buyer is, but if you're sort of dreaming or imagining what that next plane would look like, what is the end buyer that they're not tapping into that may be going to Airbus?
Richard (19:12):
This has been apparent for at least a decade. Basically, there's this middle market of about 200 to 230 seats, about 5,000 nautical miles. It's a fragmentation machine. It allows people to bypass crowded hubs and fly point-to-point where they want to go. Now, right now, Airbus has a license to mint money with the A321neo.
It's not very good at that, frankly, that mid-market, but it's the one product you can buy if you're an airline. So guess what? Everyone is buying it. The order book for the A321neo is now about the same as the order book for all variants of the 737 MAX family. And last year after Dave Calhoun said ‘Don't worry, we won't compete in that class,’ they sold a record 1,300 of those jets.
And what's frustrating is it's not a very good jet. You could defeat it the way Boeing has always defeated. They, Boeing has had a second mover philosophy. 767, 777, 787, 777-300ER, all of them were responses and they all did somewhere between 5% and 10% better than the jets they went against. They won. That's how the company conquered the universe.
Tracy (20:20):
This just reminds me, it's kind of ancient history, but wasn't there an argument that when Airbus actually started developing the A320s, I guess it would've been in the 1980s, that Boeing could have and probably should have in retrospect, just like immediately killed it and gone head to head by developing a new aircraft?
Richard (20:40):
Nah, I don't believe that because the A320 is a good plane. But, you know, the response to it was right in the middle of the 737-300/400/500 series, which continued to do pretty well. And they replaced it with the [737] NG, it did amazing. So the MAX is clearly the last stop on the 737 line, no question of that. And they're having a hard time scaling it up to be that middle market machine. Matter of fact, it's impossible. So there are limits, but the 737 in of itself, I think is actually a pretty good product. It's how it was executed, that's the problem.
Tracy (21:17):
So this was actually going to be my next question. But Calhoun says they're not going to develop anything for 10 years, which could mean that they don't have a clean-sheet aircraft flying until 2040 or something like that. And at the same time, Airbus is taking massive amounts of market share. The two — Boeing and Airbus — used to be fairly evenly matched. That is definitely no longer the case. But A) What does Boeing do in this situation to catch up? And then I guess B) is there actually a desire to catch up?
Richard (21:50):
This looks like a glide slope towards oblivion because remember it's not just the loss of market share, it's also the demographics. You know, engineering workforces have that muscle memory that needs to be maintained. And it's been since 2004, since they've launched a clean-sheet design. They've done some good work since. But again, you're talking about an aging engineering workforce that's not attracting new people. Will they have the kind of core skills needed to create a new jet in the 2030s? I have no idea.
Joe (22:20):
That is such a fascinating point. I mean we talk about it in some context, this idea of internal knowhow. But I hadn't thought about this idea if you have nobody, or if it's been decades since you've started a plane from scratch, do you still have anyone there?
What makes a good plane? I have no idea. I fly, I don't really pay much attention. I never know what kind of aircraft I'm on. If it gets me there, that's fine. When you say ‘it's a good plane’ or ‘it's not a very good plane’ when you're talking about the newest Airbus one, what makes a good plane?
Richard (22:49):
Well, obviously safety is table stakes. Let's get that out of the way. But the most important thing is to acknowledge that your customers — and you need to talk with at least 15 or 20 of them before launching a jet — have incredibly narrow profit margins, which means if you can do specific routes for them that's five or 10% better, you win. That's what happens...
Joe (23:13):
So we’re talking about fuel efficiency? The cost of mechanics, how much repairs they need?
Richard (23:18):
Your total operating costs, you know, it's a function of fuel efficiency. And of course maintainability, but really fuel efficiency. Now, revenue too is important. So things like belly cargo, the ability to put revenue producing cargo under the hold of the jet. Obviously getting passenger configuration right, that's absolutely key. And then there's the extraneous stuff like, you know, little frills, passenger comfort, blue lights, whatever, that matters a whole heck of a lot less than the important stuff.
The A321neo is the latest development of that 1980s era A320 family. It should have bigger wings to do longer routes and more powerful engines. It should have, you know, basically it should be more of a proper mid-market jet rather than a scaled up 150-seater that's trying to do the job. Is it catastrophic? No. That's why everyone wants it. It's good enough.
But the point is that in an industry where everyone has 2% profit margins, if they're super lucky and super good, yes, you could beat that by 5% or 10% in efficiency, probably more like 15% or 20%, I'm thinking, at this stage. So there's no reason not to build it. And when Dave Calhoun said ‘We're not going to do anything new,’ he said ‘We need at least a 30% improvement,’ which is complete nonsense in the context of how this business actually operates.
Tracy (24:37):
I suddenly had a sort of blast from the past where I remembered, wasn't there a moment in, I guess it would've been 2007 or 2008, when EasyJet designed its own aircraft, or said it was going to design its own aircraft? And it had like little propellers on the wings, but weird propellers. It was a jet, but also [had] propellers. Am I completely misremembering that?
Richard (25:00):
No. And just for comic relief, there's always that moment when a discount carrier pretends to actually have engineers, which is always adorable.
Joe (25:10):
Just real quickly. When you say the 737 MAX family can't really be a great middle-market jet, what is the constraint there?
Richard (25:19):
You know, this is arcane, but the clearance under a 737 wing allows for about 69 inches of fan...
Joe (25:27):
We like arcane! So, these details about clearance under the wing, this is catnip for us. Sorry, go on. These are the details we live for, so explain that.
Richard (25:36):
Ultimately, you know, an engine's fuel efficiency is a function of its bypass ratio; the amount of air that goes around the core rather than through the core. You want a nice big fan and the A320 can accommodate 81 inches of fan. 737 maxes out, if you will — hahaha — at 69 and change.
Tracy (25:55):
So I'm conscious we've been talking a lot about the commercial aircraft side of Boeing, but obviously defense and military applications are a huge part of the business. Are we hearing anything from, I guess the government and specifically the Department of Defense, about recent travails at Boeing and what they could actually mean for US security?
Richard (26:18):
We should be. God, we should be. Are we? No, it's the strangest thing. You know, obviously the Air Force in particular has had serious issues with the cost overruns and delays on the next generation tanker, the next generation trainer, Air Force One, whatever else. But in terms of a holistic look at what this means for the US defense industrial base and national security, there's been a shocking absence of interest.
Joe (26:47):
Speaking of defense and speaking of military purposes, maybe this is like a little tangent, but I think it relates to some other things. I've been reading through some of your notes in preparation for this conversation. One of the things that I did not realize previously is how many countries have at some point tried to establish a domestic fighter jet operation. And quite a few, I don't know how many succeeded. Why has there been like so much of a proliferation of homegrown attempts to build a fighter jet? And then like why do we still see so few companies around the world making inroads at all in the commercial space?
Richard (27:28):
Yeah, great question. Probably because the definition of ‘good enough’ in defense is very different from the definition of ‘good enough’ in commercial.
Joe (27:36):
I was wondering if that had to do with it.
Richard (27:37):
I mean, if you build a good enough jet that's for your own, we have to provide some kind of fallback plan in the event we're cut off, you know, or there's an embargo or what have you. Or we just want jobs and we're willing to take a few higher casualties as a consequence. Yes, there could be a problem with higher casualties in the event of an actual war. That's why, you know, we look at these new emerging players and often say basically it's the folks in the lab coats battling with the folks in the flight jackets. And the folks in the flight jackets want best value for money and the folks in the lab coats want to do something cool in-country.
The commercial world is different, it's a global business. In the end, if people have 2% margins, they're doing pretty good. So if they buy something that's 6% or 7% worse than the other guy, they might as well go and make children's confectionery or something. It's just totally pointless.
Tracy (28:33):
So obviously, Boeing gets money from the government in terms of defense contracts and things like that — although sometimes Boeing executives, as you pointed out earlier, don't seem to want to recognize that fact. But how would you characterize, I guess, the differences in public funding between — I have to be careful how I phrase this question — between Boeing and Airbus?
Richard (28:59):
Historically, Airbus got a lot more launch aid, which enabled it to do some mightily stupid things, the A380 being perhaps the worst product launch in the history of the business. And theoretically repayable launch, it wasn't what it sounded like. Yes, if you succeed, you repay it. But if you fail, well, sucks to be you taxpayer. End of story.
Boeing didn't really get that. You know, there was some NASA technology development funding but that's kind of ecumenical throughout the industry and just doesn't move the needle. Airbus would counter that Boeing, of course, had significant defense revenue. And Boeing, of course, would counter that Airbus was not without its defense side, which is also true. So it became kind of, he said, he said.
You know, I don't think you can draw any conclusions. It is pretty clear that Boeing, to a certain extent, did best when it ignored the issue altogether. Airbus got enormous subsidies to build a plane called the A340, which was also a piece of junk. Boeing said ‘Yeah, we're just going to do the 777 and we're not going to get government subsidies.’ And they clobbered Airbus on that. So I think it is, if you look at purely the numbers, an issue. But in the real world of actually building and launching new products, it's a bit of a non-issue.
Joe (30:28):
So as long as we're talking about government support or state champion manufacturing companies, I have a very general question, which is, how does Embraer Air exist? And I mean that in the sense that there aren't a lot of advanced manufacturing companies in Latin America. There really aren't very many commercial planemakers anywhere in the entire world. We know China's been working on it for a long time. How is there, alk yo us, could you tell me — just out of my own curiosity — at some point I want to do an episode on this, about how Brazil managed to produce a reasonably successful jet making company?
Richard (31:05):
Oh, we need another episode. I mean, I love this topic. I’m fascinated…
Joe (31:09):
I would love to just do one for real.
Tracy (31:11):
We’ve been talking about doing an episode on this, yeah.
Joe (31:13):
We’ve been talking about wanting to do an Embraer story. But what is the sort of tweet-length version?
Richard (31:19):
The tweet length, oh God. 140 characters.
Joe (31:21):
You can go a little longer.
Tracy (31:23):
If you pay, you can go longer.
Richard (31:24):
Oh, okay. That's right, certified X or whatever. You know, first of all, remember they did a bunch of incredibly smart things in the 1990s. But for 30 years before that, they were a ridiculous playground for some fascist junta. I mean, nothing more. They got a couple of right products and then they privatized. It became their own company, and they became just absolutely the best aircraft, I think, company on the planet by some metrics.
I always like to joke to if this was a restaurant, this would be the restaurant where chefs from all the other restaurants would go and eat after. It just has enormous respect and they tend to get products right. The other thing they did, so there was that aspect of luck after many decades of trying and not doing so good, but then also they did the exact opposite of what China's doing now.
What China's doing is saying ‘You've got to transfer technology and we're giving you no intellectual property protection. So show up with your latest and best from, I don't know, 1979?’ And as a result, they're producing perfectly crap airplanes. Embraer said ‘Actually, we don't want you to transfer technology. We want to integrate what you've got,’ kind of a Dell computer model. And you've got IP protection and we're just out to build the best computer stroke airplane we can. And it's worked brilliantly.
Tracy (32:58):
I just remembered the first time I ever went to Paris was to attend an Embraer event. And it's funny you say it's well-regarded because I remember going there and it was in a fancy building and just sort of being blown away by the optics around this particular company.
But maybe talk to us about Comac, because I'm conscious we're sort of hitting all these different nationalities, but we haven't yet spoken about China. China, of course, making a big push into this particular area, in part for strategic and, you know, security considerations as well.
Richard (33:34):
Yeah, I mean, in a lot of ways, Comac is sort of an insurance policy against autarky in the event of total decoupling between China and the West, at least they may be able to produce their own aircraft. The problem of course, is that nobody had the conversation with President Xi that these aren't really Chinese aircraft. They're Western systems and engines and avionics all assembled with Chinese aluminum over them.
So, you know, if there is decoupling , these things die quickly. Maybe they'll rectify that by building their entire aerospace industry out. That'll take many decades and hundreds of billions of dollars. Good luck with that. The other problem with that, with Comac of course, is it reflects President Xi's desire to basically turn the economy away from the private sector and towards state-owned enterprises, the exact opposite of what Embraer did. So there are so many, and it's all very frustrating because you look at China, great market, great talent, and great resources. The only thing they could be doing to screw that up on the aircraft front is what they're doing.
Joe (34:38):
Wait, so they're bad planes?
Richard (34:41):
Oh, they're...
Joe (34:42):
What's wrong with them? Because I only, I mean, I know they're selling a lot more, but of course they're selling to domestic Chinese airlines, so it doesn't say very much necessarily. They have put in applications, I think they do want to theoretically sell into the European market at some point. They're trying to get approval. But what is your assessment of where these plans fall short, or why?
Richard (35:02):
Well, first of all, selling is one thing. Building is another. I mean, they've been selling for about 15, 20 years now.
Joe (35:09):
Okay. They do have some in the air now, so what is wrong [with them]?
Richard (35:11):
Yeah, they've, they've delivered three C919s and about a hundred or so ARJ21 regional jets. The ARJ21 was the first mass produced aircraft in China, jetliner aircraft produced in China. And it's massively heavier than where it should be. And has systems that were introduced in Western jets back in, well, the seventies. You know, again, a reflection of of people's skittishness about transferring intellectual property with no intellectual property protection.
So they're bringing their latest invest from decades ago. Now, the 919 looks a little better. We'll see if they bill it in significant numbers, they have yet to establish the kind of massive global support apparatus, which costs an awful lot of money. The 919-2 same design parameters, bring us your latest best and know we won't protect your I{. So I'm having a hard time believing that it will be a whole lot better, but again, they could change it all tomorrow. They could say ‘We're privatizing, we're giving you IP protection. All we want to do is be Embraer,’ I'd be terrified they'd conquer the world.
Tracy (36:16):
This is kind of an unfair question, but would you rather fly on a 737 MAX or a C919?
Richard (36:22):
Hmm, you know, at the end of the day, the safety of the MAX is in the hands of the regulators. And yes, the regulators can be under-resourced, but they do their job. And I think we simply have the safest system in the world that speaks to that reality. Our regulators do their job. You know, for comic relief in all of this, you've got these politicians like J.D. Vance who've spent a lifetime trying to quote ‘kill big government,’ and now saying, ‘Whaaa, what's government doing for me? Why isn't it keeping me safe here? Whaaa.’ That's a problem, right? They need more resources, pure and simple.
Tracy (36:56):
Actually, this is exactly what I wanted to ask you because we did speak about the FAAA little bit with our colleague Pete, but would more resources for the regulator help in this instance? Because there were also accusations that, you know, maybe it wasn't understaffing, but maybe it was just a too cozy relationship with Boeing.
Richard (37:16):
It could easily be, but more resources give you more relative power, you know, to explain ‘Look, we're going to be making your life very difficult and gumming up the works unless you play a ball.’ Now, is there that coziness? If so, that needs to be understood and rooted out. Maybe it's not a resource [issue], maybe it's a cultural thing there too. I don't see how more resources couldn't help.
Joe (37:40):
Real quickly on Embraer, because I realize I don't know this, it's still, it's a really tiny company. Who is their market?
Richard (37:47):
Well, they produce what you might call somewhere in between regional jets and mainline jets. So you've got regional airlines like, you know, SkyWest or whoever, and then you've got a few mainline carriers here and there that also use [them], it's kind of a no man's land of a market, but a really good jet. They also have a significant military side, and then they've got a really superb and successful business jet side. They decided years ago to get into that market and they've been doing really well there
Joe (38:15):
On the C919, do we have, I mean, we must, but from a sort of spec standpoint, when it comes to fuel efficiency, maintenance needs per mile, whatever metric you to use, do we have good data on that? And do you have just like a sense on paper how it stacks up?
Richard (38:36):
Not really, no. I mean, it has LEAP-1C engines from General Electric working with Safram under CFM which shouldn’t be too radically different from the LEAP-1As on Airbus and LEAP-1Bs on Boeings, but we don't know. There's just not enough data maintainability, no idea whatsoever. And the fact that it's only in service in extremely small numbers, two or three aircraft, means we just can't for some time. And again, it doesn't reflect the establishment of a giant support apparatus that they still need to do. So no, no data whatsoever.
Joe (39:10):
So expanding throughput must be difficult even for Airbus, even with a huge order book, because there’s probably only, even if everyone wanted to buy Airbus tomorrow and sort of depart Boeing, there's always so much you can build at a given factory. How much of a constraint is that on sort of short-term market share gains? And does that put a sort of floor under Boeing's market cap, the fact that people need planes and it's not trivial to just sort of build new facilities to expand from an Airbus perspective?
Richard (39:41):
Absolutely. Because remember, it's not just the Airbus facilities, it's all their suppliers. And they've had a rough time between, you know, all the challenges in the industry and the COVID-19 pandemic and everything else that. So they're having a hard time gearing up. 70% plus [of] the value of a plane comes from the suppliers.
Now, the cynic in me yet again thinks that Boeing top management says ‘Industry with high barriers to entry, high switching costs, real challenge in ramping up at Airbus. We've only got a three year time horizon from our own standpoint here, so who cares? Customers have nowhere else to go but to stay with us as we figure out how to ramp up. And when we get that, you know, operating cash flow resumed, we’ll give it to investors, they'll reward us. We can then exit and worry about someone else cleaning up after us.’
Tracy (40:33):
Wait, how sticky is airline brand loyalty? Because of course you do have famous examples — Southwest obviously springs to mind and it's entire fleet of 737s — but how difficult would it actually be for someone a Southwest to just say ‘You know what, we're going to move to a mixed fleet and we're going to have some A320s plus 737s,’ or even ‘We're going to transition our entire fleet eventually away from Boeing’ ?
Richard (41:00):
There's no loyalty at all. It used to be that there were, you know, sort of homogeneity virtues, if you will, in fleet planning in terms of uh...
Tracy (41:10):
Efficiency, right?
Richard (41:11):
Efficiency, training, logistics. That's all out the window because airlines have realized that frankly, the ability to play off two suppliers against each other gives you advantages when it comes to negotiating price. And that and the fact that very often airlines are virtual anyway, a lot of their maintenance provided by a third party player and, you know, for their training, means that frankly it's just not that big a challenge to operate a heterogeneous fleet. And if you're an airline like, say, Delta, that has an in-house maintenance department, you're even using that as a virtue. You're basically establishing yourself as a kind of sustainment center of excellence for a whole variety of customers in the business.
Tracy (41:52):
You mentioned price, and of course the actual prices paid for aircraft by airlines tends to be a closely guarded secret. So you'll see headlines that say like ‘So and so orders X billion worth of aircraft,’ but that's at the list prices. And almost always those prices are adjusted or discounted. What are you hearing about discounts on Boeing planes right now? Is that something that's happening or could happen in the future?
Richard (42:20):
We're kind of a poster child for deflation in this business. You know, you look at the price paid for an A320 or 737, it's stayed shockingly consistent over the past couple decades. A few ups and downs, but pretty flat, which means, of course, every year we're losing a couple percent in inflation.
That's not good. Now, lately Airbus has gotten a bit more pricing power because of Boeing's problems, and Boeing has had to incentivize people for the massive delays, for the problems, the groundings, whatever. So yes, it's very clear that there's a divergence in pricing power, but it's in the context of an industry that's kind of gotten a bit deflationary over the years.
Tracy (42:59):
So just to sum it all up, I realize we've covered a lot of ground in this conversation, but if you were to bet, what would you say Boeing's future is? How do you see this playing out?
Richard (43:12):
You know, to quote Joe Strummer ‘the future is unwritten.’ At the end of the day, the biggest mystery here is why the board hasn't acted and done the right thing, or government or activist investors or somebody, and said ‘Okay, people at the top. There are so many people counting on you, they're all really good and frankly, you're just not very good at your job. Please leave.’
Why hasn't that happened? If it happens tomorrow, they'll be on the long road back. We could be having a very different conversation by the end of the decade. They could even return to market leadership. If it doesn't happen, they'll lurch from crisis to crisis, disaster to disaster, hopefully not fatal ones. And it won't be a pretty story in terms of revenue and market share.
Tracy (43:52):
Alright, Richard Aboulafia, it was so good to to talk to you after so many years. It was great to catch up. Thank you for coming on Odd Lots.
Richard (44:00):
Oh really, my pleasure. Good speaking with you too. Thanks.
Joe (44:02):
Thank you, Richard. That was great. And we really, at some point let's do, the Embaer episode. because I'm fascinated by that story. And so if you think there's a full episode, and you want to talk about it, we can make it happen.
Richard (44:12):
Oh God. You should go there too. It's a fascinating place.
Tracy (44:15):
Yes, let's go, Joe, I want to say that was a fun conversation. It was in some respects, but it was also kind of depressing.
Joe (44:37):
Definitely depressing. But there was a lot in there that I found very interesting. Perhaps the most important thing that I hadn't really thought about is the idea of getting out of practice of launching a new product, right? Because the idea that, okay, internal knowhow, we talk about that all the time in terms of just the day-to-day building. But then there's the separate thing of every once in a while, maybe once in a decade or something, you launch a new product, which is a different skill upfront, cost, R&D, all that. But if you go too long without doing that, then you have no one on the team who's done it before.
Tracy (45:07):
No. And also just the sheer length of the development cycle for aircraft. So the last time Boeing launched something was literally decades ago. And now the idea that, well, if they don't launch anything in the next 10 years, then it could actually be, you know, you could have a whole generation of engineers that basically retire and are gone by 2040 when this thing is actually in the air and flying. It's just kind of amazing the lead times, and I guess how much the plane makers actually have to think on these super long timescales.
The other thing I found interesting, obviously the public funding debate has always been a hot topic issue and continues to be so, but the idea of, well, even if there were cultural issues at the FAA, if you gave them more resources, at a minimum it might end up with more power for that organization, I think was the word Rich used? I thought that was kind of interesting.
Joe (46:04):
Interesting he was so negative on Comac, that was sort of interesting. because you just think all these Chinese manufacturing companies are just going to eat everyone's lunch. Maybe they're not.
Tracy (46:13):
I think that's been a sort of long-running question with planes for obvious reasons and the safety concerns there. But okay. Well we definitely need to do an embryo episode and I'm down to, to go to Brazil if you want to.
Joe (46:27):
Let's do it.
Tracy (46:28):
The other thing I thought was interesting was he pushed back slightly on the clean-sheet idea for the MAX and the notion that Boeing should have designed an entirely new aircraft, which I also thought was kind of interesting and you don't hear that often. But in the meantime, shall we leave it there?
Joe (46:46):
Let's leave it there.