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Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway.
And I'm Joe Wisenthal Boeing.
Have you Boeing?
Keep that in?
Don't keep that in?
No, keep that in? Now, you gotta keep it in.
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?
Actually, I haven't looked at a while, except, you know, like we did an episode on Boeing about three or four weeks ago, so not good. Yeah, and they have not recovered much, so not good.
So shares are down twenty percent 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 seven thirty seven production for a day and the shares went up like six percent. That seems bad when the market is rewarding you for not making your signature product.
There's two funny things to me again. Funny you know all the caveats that that tells. 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 air Bus is a much better share performance than Boeing.
It's done phenomenally well over the years. And it's also just kind of crazy, sitting aside competition, that Boeing is still nowhere near its peak in twenty nineteen, despite what we know to be like a booming global market for aviation, Like that's one thing we know, like pre pandemic, post pandemic, just absolute boom. You always hear about this expansion of new airlines in the Middle East and Asia and et cetera.
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.
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, that's right, and things like the IRA and things like 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 last three years.
Kind of amazing, and I think it's worrisome, right because you know, setting aside, you know the concerns of Boeing shareholders, and they're probably pretty unhappy, Like if US wants to be a big manufacturing powerhouse and again or be able to build more complex stuff domestically, it's really a bad sign that the sort of premier you domestic manufacturer for global markets, one of only two companies that basically controls the commercial jet industry, is getting worse at building plans.
Yes, absolutely so. We have previously recorded an episode on Boeing with our Bloomberg colleague Peter Robinson. He's also the author of Flying Blind, The seven thirty seven 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 like 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 like two thousand and six, he was the expert back then, and in twenty twenty four, almost two decades, he is still
the guy to talk to on aerospace. So I'm 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 all thoughts, It's good to talk to you again.
Yeah, same here, Tracy, thanks so much for having me on. Thrilled to be here.
You know, I should say, in addition to being the aerospace guy and just an all round 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 point into 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.
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 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 jackwelch 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 you know. And indeed, maybe maybe the bad performance is kind of a plaus in as strange
way to regulators in every body, involved, customers, whatever. It almost becomes a relief when the company has broken up. That's, of course an extreme departure scenario, but I can't think of any other explanations for doing that.
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? Is what are strategy teams? I thought everyone did strategy.
Business, Yeah, everyone does, right, It's kind of impossible to imagine a large corporation not having a strategy function. What is the 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. Their competitors are and are likely to be, and what key enabling technology is You're needed to compete in the future.
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.
After thirty five years. I've never seen anything like it, and it kind of resembles that common trope and horror films. Very often the call comes from inside the house, you know. 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 and many good ones are often mortified by what's happening.
Well, so I understand in the abstract we could say things like, oh, the bean counters took over and they don't have a as much of an engineering culture or safety culture, or they just worry about the stock price, and I get all like, why that's all bad, and I guess on a sort of theoretical level, it sounds very bad. But why do we talk concrete? If you're an engineer at Boeing today working on something, how is your life different than it was, say, twenty years ago?
Well, there's no future, right, And you know the astonishing thing like what do you.
Like day to day? Like? Like what what?
Like?
What is some some boss, some boss three levels up has made decisions and various properties have changed. So how does like how does it like manifest itself on a sort of day to day basis or quarter to quarter basis, where it's not as a compelling of a place to work, like what has changed about the nature of the job.
You need something to dream for, you need something that represents the future. And you know, Dave Calhoun, the CEO at the top of the heap, said about oh, a year and four months ago that 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 engine 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.
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 seven thirty seven model, and that resulted in the seven thirty seven Max and its stablemates, and then that led to the crashes which claimed I
think almost three hundred and fifty 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.
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 turbine, so put a new engine in it. We didn't know then the sheer popularity of the middle market. Even if we did, I'm not so sure that would
have changed anything. What was important is that the Max go ahead and then the company do what it does every decade, launch a new product, and in that case, that product would have been a notch above the Max. You know. As for the development of the Max, there were cultural problems at play that led to the mcast problems and the tragedies that resulted. But it wasn't economics. I mean, the economic difference between mcast done right and mcast done poorly is zero zilch. This was purely a
cultural driver that led to these tragedies. Now, if you've got the Max out of the you know, okay, it was the right thing to do. It should have been done different, 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 seven to five seven. 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.
How would you characterize the cultural failings that led to those tragedies?
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. And this started under Jim mcnernee back in the late two thousand, you know, first decade of the two thousands. 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. 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 twenty tens, and as a consequence,
you had a badly demoralized workforce. Now as part of his strategy, of course, McNerney back in the twenty tens, 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 Nicki Haley was on it and she left because she didn't think the company should be taking government money. It's a defense contractor, She's like, seriously,
So it was. 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 Mcast tragedies, but oh boy, that terrible culture of bad governance and that complete disconnect with the people who were charged with actually doing their jobs, a complete lack of redress and inability
to push bad information. You know, I remember very well on seven eight h seven when the seven eighty seven Dreamliner, their last clean sheet designed, was rolled in and I was talking to McNerney and he told me, like, this plan's going to fly in September, well maybe October. No, I didn't say that, and it took someone, It took someone completely outside, a 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 channel.
On the topic of culture, the other thing that tends to come up is the acquisition of McDonald douglas and the idea that well, 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, like presumably they were, you know, in terms of social hierarchy on a lower rung.
Yeah, it's a complicated one. And of course the bitter joke told it Boeing is that, you know, McDonald douglas used Boeing's money to buy Boeing. You know, 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, McDonald 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, you know, there's no question McDonald douglas was far more financially focused. It had been on a thirty year glide path towards irrelevant because of this focus on you know, finance and nothing more between, you know, the creation of McDonald douglas in nineteen sixty seven and it's 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 two thousands 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 in McDonald douglas people, but really it's more that Jack Welch influence or that exposed heritage of Jack Welch influence about seven or eight years later.
Jumping back towards the present, So you mentioned the comment from the CEO last year where they're like, we're not we're not in any rush to introduce a new clean sheet plane. I assume that 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 how do they what are the costs of launching a brand new product?
And how do companies think about the cost benefits of like when to launch one versus when to just try to, you know, get more out of the existing product.
Yeah, that's that's, you know, a contentcious issue, an important area of discussion. I'm kind of an outlier. I don't think it would have mattered at all to investors, and indeed, there would have been more positives than negatives. And you know, if you look at it, this is a company now with forty billion a net debt, down from forty five
or so a couple of years ago. So to start a new program would be maybe two billion incremental per year in independent research and development funding for you know, probably about six years seven years with over could go higher. Now that's obviously a drag on shareholder returns, but put it in another way. We're now in a situation where Airbus is competing, jets are getting hundreds thousands of orders.
They're losing market share at Boeing, wouldn't Some investors have been galvanized by the site 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 bed.
Well, is there some part of the market, so like, theoretically, is there some part of the market that right now Boeing would be competing better in if it had a different product, or like I mean, I don't know. I don't know what the end buyer is. But if you're sort of dreaming what they or imagining what that next plane would look like, what is the end buyer that they're not tapping into that maybe going to Airbus.
This has been apparent for at least a decade. Basically, there's this middle market of about two hundred to two hundred and thirty seats, about five thousand 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 A three twenty one Neo. 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 three twenty one Neo is now about the same as the order book for all variants of the seven thirty seven Max family. And last year, after Dave Calhoun said don't worry, we won't compete in that class, they sold a record thirteen hundred 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 the Boeing
has had a second mover philosophy. Seven sixty seven, Triple seven, seven eighty seven, Triple seven, three hundred R all of them were responses, and they all did somewhere between five and ten percent better than the jets they went against. They won. That's how the company conquered the universe.
This just reminds me it's kind of ancient history. But wasn't there an argument that when Airbus actually started developing the eight three twenties, I guess it would have been in the nineteen eighties 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.
Yeah. I don't believe that, because the three twenty is a good plane, but you know, the response to it basically well, it was right in the middle of the seven thirty seven, three four, five hundred series, which continued to do pretty well, and they replaced it with the NG it did amazing. So I'm just you know, this is clearly the Max is clearly the last stop on the seven thirty seven line, no question of that, and it really is 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 seven thirty seven intes of itself, I think is actually a pretty good product. It's how it was executed that's the problem.
So this was actually going to be my next question, but Calhoun says they're not going to develop anything for ten years, which could mean that they don't have a clean sheet aircraft flying like until twenty forty or something like that. And at the same time, Airbus is taking massive amounts of market share. The two used to be Boeing and Airbus used to be fairly evenly match. 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?
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 two thousand and four that they've launched, since they've last 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. Well, they have the kind of core skills needed to create a new jet in the twenty thirties. I have no idea.
That is such a fascinating point that. I mean, we talk about it in some context, this idea of like internal no how, but I hadn't thought about this idea. If you have nobody, or if it's been decades since you've done 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 amounta. You know,
if it gets me there, that's fine. When you say it's a good plan or it's not a very good plane. When you're talking about the newest airbust one, what makes a good plane?
Well, you know, obviously safety is table stakes 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 fifteen or twenty of them before launching a jet, have incredibly narrow profit margins, which means if you can do specific routes for them, that's you know, five or ten percent better, you win. That's what happens.
This is it's about fuel efficiency, the cost of like a McCant, like how much repair they need, like.
Your total operating costs. You know, it's a function of fuel efficiency and of course maintainability, but really fuel efficiency. Now, revenue two 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, you know, blue lights, whatever. That matters a
whole heck of a lot less than the importance. The three twenty one neo is, you know, the latest development of that nineteen eighties era a three twenty 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 one hundred and fifty seater that's trying to do the job. Is it catastrophic? No, That's why
everyone wants it. You know, it's it's good enough. But the point is that in an industry where everyone has two percent profit margins, if they're super lucky and super good, yes, you can beat that by five or ten percent in efficiency, probably more like fifteen or twenty I'm thinking at the 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, well, we need at least a thirty percent improvement, which is complete nonsense in the context of how this business actually operates.
I just I suddenly had a sort of blast from the past where I remembered wasn't there a moment in I guess it would have been like two thousand and seven or two thousand and eight when easy Jet designed its own aircraft or said it was going to design its own aircraft and it had like little propellers on the wings, but like weird propellers. It was the jet but also propellers. Am I like completely misremembering that? No?
And you know, just for comic relief, there's always that moment when a discount carrier pretends to actually have engineers, which is always adorable.
Just real quickly when you say the seven thirty seven Max family can't really be a great middle market jet. What is the constraint there?
You know it gets this is arcane. But you know the clearance under a seven thirty seven wing allows for about sixty nine inches of fin.
We like ourcane. So these details about clearance under the wing, this is catnip for us. So good, Oh, go on, go okay, these are the details we live for, So explain that.
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 A three twenty you can accommodate eighty one inches of fan. Seven thirty seven Max is out if you will hahaha at sixty nine and change.
So I'm conscious. We've been talking a lot about the commercial aircraft sign up 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 depart of Defense about recent travis at Boeing and what they could actually mean for US security?
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 in national security, there's been a shocking absence of interest.
Speaking of defense and speaking of the military purposes this. 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 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?
Yeah, great question, Probably because the definition of good enough in defense is very different from the definition of good wondering, you know, I mean, if you build a good enough jet that's for your own you know, well, we can't.
We have to provide some kind of fallback plan and the event we're cut off you know, where there's an embargo or what have you, or we just want jobs and we're you know, willing to take a few higher casualties as a consequence, Yes, the casual you know, 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 jack gets want best value for money and the folks in the lab codes want to do something cool in country. The commercial world is different. It's a global business, and if people have two percent margins, they're doing pretty good. So if they buy something that's six or seven percent worse than the other guy, they they might as well go and make children's confectionery or something. It's just totally pointless.
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.
Historically, air Bus got a lot more launchade, which enabled it to do some mightily stupid things, the A three eighty being perhaps the worst product launch in the history of the business and theoretically replayable launch. It wasn't what it sounded like. You know, yes, if you succeed, you repay it, but if you fail, you know, well, sucks to be U tax payer. End of story. Boeing didn't
really get that. You know, there was some NASA technology development of funding, but that's pretty 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, it's
just 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. Air Bus got enormous subsidies to build a plane called the A three forty, which was also a piece of junk. Boeing said, yeah, we're just going to do the t and we're not going to get government subsidies, and they covered air Bus on that. So I think it is if you look
at purely the numbers, an issue. But in the you know, the real world of actually building and launching new products, it's a It's a bit of a known issue.
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 Embra 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 plane makers anywhere in the entire world. We know China has been working on it for a long time. How is there talk to Can 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 as a reasonably successful jet making company.
Oh, we need another episode. I mean I love this topic.
I would be I would love to just you want to We've been talking about.
A number story. But what is this sort of like you know, the short the tweet length version, the tweet.
Length thro oh god, one and forty characters.
If you pay, you can go longer.
Okay, yes, right, certified X or whatever. You know. First of all, remember they did a bunch of incredibly smart things in the nineteen nineties, but for thirty years before that, they were a ridiculous playground for some fascist hunt I mean nothing more. They got a couple of right products, and then they privatized it became their own company, and they they they became just absolutely the best aircraft I think company on the on the planet, and by some metrics.
You know. I always like to joke if this was a restaurant, this would be the restaurant where chefs from all the other restaurants would go and eat after there. You know, it's just has enormous respect and they tend to get products right. The other thing they did so that they're with that aspect of lock 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 is 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, nineteen seventy nine. 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 computers for
a airplane we can. And it's worked brilliantly.
I just remember the first time I ever went to Paris was to attend an embryor event. And it's funny you say it's well regarded, because I remember going there and they had like it was in a fancy building, 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.
Yeah, I mean, in a lot of ways, COMAC is sort of an insurance policy against autarchy 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 she 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 millions of dollars. Good luck with that. The other problem with that comeback, of course, is it reflects President Cheese desired to basically turn the economy away from the private sector and towards data owned enterprises, the exact opposite of what Embre Air did. So there are so many and it's all right 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.
Wait, so they're bad plans, Oh, they're what's wrong with them? Because I will lead like 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?
First of all, selling is one thing, building is another. I mean they've been selling for about fifteen twenty years now.
Okay, they do have some in the air now, so what is wrong?
Yeah, they've they have delivered three see nine one nines and about a one hundred or so ARJ twenty one regional jets. The ARJ twenty one was the first produced mass produced aircraft in China. Jet liner 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 the seventies. You know, again a reflection 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 nine one nine looks a little better. We'll see if they build it in significant numbers. They have yet to establish the kind of massive global support apparatus which costs an awful lot of money. The nine one nine two is you know, same design parameters. Bring us your latest invest and know we won't protect your IP. 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 up protection. All we want to do is be like embra or I'd be terrified they'd conquer the world.
This is kind of an unfair question, but would you rather fly in a seven thirty seven Max or a C nine to one nine.
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 resource, but they do their job. And that I think we simply have the safety 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 JD. Vans who've spent a lifetime trying to quote kill the government and now saying, what's government doing for me? Why
isn't it keeping me safe here? When that's a problem. Right? They need more resources, pure and simple.
Actually, this is exactly what I wanted to ask you, because we did speak about the FAA a little bit with our colleague Pete, but would more resources for the regulator help in this instance because there were also accusation that like maybe it wasn't understaffing, but maybe it was just a too cozy relationship with Boeing.
You know, it could 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 coming up the works that 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, Maybe it's a cultural thing there too. I don't see how more resources couldn't help real.
Quickly on MBRER because I realized I didn't. I don't know this. It's still it's a really tiny company. Who is their market?
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 used. 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 jets side. They decided years ago to get into that market and they've been doing really well there.
On the C nine one nine 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, whatever metric you like to use, do we have good data on that and do you have just like a sense on like on paper, how it stacks up?
Not really, no, I mean it has Leap one C engines from General Electric working with Saffron under CFM, which should be too radically different from the Leap one a's on Airbus and Leap one b's 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 an 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.
So expanding through put must be difficult even for Airbus, even with a huge order book, because they're probably needs to. You know, even if everyone wanted to buy Airbus tomorrow and sort of depart Boeing. You know, there's always so much you can build it 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, absolutely, because remember it's not just the airbus facilities, is all their suppliers. Oh yeah, And they've had a rough time between you know, all the challenges in the industry in the COVID nineteen pandemic and everything else like that,
so they're having a hard time gearing up. Seventy percent plus at the value of a plane comes from the suppliers, So it's it's now the cyndy can be yet again thinks that Boeing top management says, industry with high barriers to entry, high switching cost, real challenge and 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.
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 seven thirty sevens. But how difficult would it actually be for someone like a Southwest to just say, you know what, we're going to move to a mixed fleet and we're going to have some a three twenties plus seven thirty sevens, or even we're going to transition our entire fleet eventually away from Boeing.
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 efficiency, right, 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. So and that and the fact that very often airlines are virtual anyway, a lot of their maintenance provided by a third party player, and ditto for their training, means that, frankly, is just not that big a challenge to operate a heterogeneous fleet. And if you're like 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 you mentioned price, and of course the actual price is paid for aircrafts 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 all 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.
We're kind of a poster child for deflation in this business. You know, you look at the price paid for an A three twenty or seven thirty seven. It's stayed shockingly consistent over the past couple decades. A few ups and downs, but pretty 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.
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?
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 an 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 can 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.
All right, Richard abou Lafia, it was so good to talk to you after so many years. It was great to catch up. Thank you for coming on all thoughts.
Oh really, my pleasure. Good speaking with you too. Thanks, thank you, Richard.
That was great, and we really at some point let's do Yeah, let's do the MBRA air episode because I'm like fascinated by that story. And so if you think there's a full episode you want to talk about, Okay, we'll make it happen.
You should go there too.
Yeah, let's go, Joe. I want to say that was a fun conversation, but actually it was in some respects, but it was also kind of depressing.
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. Yeah, because the idea that like, okay, internal know how 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, costs, r and D, all that. But if you go too long without doing that, then you have no one on the team moved on it.
No.
And also just the sheer length of the development cycle for aircraft, so you know, 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 ten years, then it could actually be you know, you could have a whole generation of engineers that basically retire and are gone by twenty forty when this thing is actually in
the air and flying. It's just it's kind of amazing the lead times and I guess how much the planemakers actually have to think on these super long time scales. 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 like more power for that organization, I think was
the word Rich used. I thought that was kind of interesting.
Interesting. You was so negative on the on Comac. That was sort of interesting because you just think like all these like Chinese manufacturer companies are just gonna eat everyone's lunch. Maybe they're not.
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 Emberer episode and I'm down to go to Brazil if you want to, Uh, let's do it. 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?
Let's leave it there.
This has been another episode of the Odd Blots podcast. I'm Tracy Alloway. You can follow me at Tracy alloway and.
I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our producers Kerman Rodriguez at Kerman Arman, dash Ol Bennett at Dashbot, Kilbrooks at cal Brooks. Thank you to our producer Moses onm. For more Odd Lots content, go to Bloomberg dot com slash odd Lot for your transcript blog in the newsletter and check out a discord Discord dot ggshlines.
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