Boeing: CEO Resigns Amidst Crisis, The Transformation Starts Now

Summary:

• David Calhoun, CEO of The Boeing Company, is stepping down by the end of the year, signaling a major shakeup for the company.
• Calhoun’s tenure as CEO was marked by criticism for his handling of Boeing’s crises, including the 737 MAX crashes.
• The next CEO will need to prioritize safety and quality to rebuild trust with stakeholders and drive the company’s recovery.

As I was preparing the monthly order and delivery report for The Boeing Company (NYSE:BA), the news broke that David Calhoun, CEO of The Boeing Company, would be stepping down by the end of the year. This is a major shakeup that I think was long overdue. In this report, I will be discussing the changes, why I believe Calhoun was not the right man at the right place since day one, and what the leadership shuffle means for Boeing.

Calhoun Witnessed Boeing’s Crisis From The Start

Calhoun became Boeing’s CEO in January 2020, and his first months as CEO, to me, were unconvincing. Months after he took Boeing’s leadership role, I already questioned whether Calhoun was the right man to lead Boeing to greener pastures in a report published in March 2020. The main reason for me questioning his leadership was that Calhoun had been on the board of Boeing since 2009. That means that as a board member, he had a first-row seat on everything happening within Boeing, and in my view, a responsibility to safeguard the interests of stakeholders.

In November 2019, Calhoun backed then-CEO Dennis Muilenburg, and a month later, Muilenburg resigned. In an interview with The New York Times, Calhoun mentioned some things that, in my view, were problematic to his functioning as a CEO. Calhoun simply stated that boards are invested in their CEO until they are not, completely ignoring his role as a board member during the crisis and the fact that he was a board member when Boeing launched the 737 MAX, which would be involved in a series of fatal crashes and accidents. Furthermore, Calhoun seemingly continued to blame pilots and refused to answer a question when asked whether he believes American pilots would have been able to handle the MCAS malfunction. He also portrayed Muilenburg as someone who was chasing the profits and during the Boeing Q4 2019 earnings call he said the following regarding his role as a board member:

I get a lot of media attention around the idea that I’m somehow an insider. What if I change that a little bit? What if I told you I simply had a front row seat to everything you saw? And so all the things I read and see and hear, make no mistake, they all have an impact, they have an effect, and I get a front row seat. And ultimately, our board took action as a result of it. And now I’m the one sitting in the operating seat.

In my view, Calhoun was not the right man for Boeing because, as a board member, he was part of Boeing and let everything happen. In my view, Calhoun did not bring the leadership skills required to turn Boeing around since he was not even able to weigh his own role in the crisis as a board member.

A Change In Company Mindset Is Cultivated From The Top-Down

Even if Calhoun seemingly blames Muilenburg and not reflecting realistically on his own role as a board member. There are two more reasons why Calhoun might not have been the right man for Boeing. The first one is that from years of watching the crises at Boeing unfold, to me, it was clear that a new company mindset was required, and in my view, that mindset change can only be achieved by from the top-down and not from the bottom-up. With that in mind, you can wonder whether any executive at Boeing that was part of the old mindset was the right person to cultivate a new company mindset and approach toward safety and quality. The fact that Calhoun continued to question the role of the pilots in the second MAX crash showed that he might not be the right man to do so. None of this is actually completely new in my assessment, I discussed it in my report four years ago and I echoed the same sentiment in a report published in February this year.

Boeing’s public image problem has been that it put financials before safety and quality. Everyone has their opinion about that, but what is clear is that stakeholders would rather have seen someone with an engineering background leading Boeing and Calhoun is not that. He has a background in accounting, and it definitely has not helped him improve Boeing’s tarnished reputation.

Over the years that I have been following Calhoun as the CEO of Boeing, in the same way I followed Muilenburg, to me it continuously seemed that every hick-up in the ramp-up profile of the Boeing 737 MAX production as well as the quality issues on the Boeing 787 were used by Calhoun to show that he was willing to slow down. In my view, Calhoun was doing the minimum in that regard and pointed at those decision points to show he had to make tough decisions while it was the only right decision. More importantly, to me, it seemed that Calhoun did too little to proactively improve the safety and quality culture at Boeing. It was not until earlier this year and after the accident with the Boeing 737 MAX 9 that Boeing implemented a bonus structure for its employees that was more focused on safety and quality rather than meeting financial targets. In my view, it should not have taken four years and another MAX accident to tie safety and quality metrics to bonuses and from what I can see Calhoun, as Boeing’s leader, was always one step behind in the process. He was fixing things after they happened instead of preventing them from happening. Calhoun called himself the backup plan and my conclusion would be that the backup plan did not work.

Why Is David Calhoun Stepping Down: Boeing Leadership Support Was Fading

After the accident with the MAX 9 in January, it became clear that support for Boeing’s leadership was fading rapidly. The FAA halted any increases in the Boeing 737 MAX production rate for the time being, which to me showed how little confidence the FAA had in Boeing’s ability and that of its leadership to improve the safety and quality at higher production rates. While the FAA cannot sack a CEO, I believe it did set something in motion as freezing the production rate means that less value than initially envisioned would be generated. That value would not only be in the form of free cash flow, a metric that Boeing investors love but also the lack of value for airline customers and lessors as new generation airplanes bring significant cost benefits for operators and better lease rates for lessors.

Perhaps the strongest indication that Calhoun’s days as Boeing’s CEO were numbered is the fact that key Boeing customers demanded a meeting with Boeing directors, but Calhoun would not attend the meeting. Following the Alaska Airlines flight accident, the CEO of the carrier already expressed its frustration with Boeing while United Airlines (UAL) put its MAX 10 order under review following continued delays certifying the jet. Most vocal on the shortfall of leadership at Boeing was Ryanair’s (RYAAY) O’Leary. The words spoken by the always outspoken O’Leary are not appropriate to quote here, but clearly showed how frustrated at least one key customer is with Boeing’s leadership. Throughout the industry, the same sentiment echoed and that is that something needed to change at Boeing. Not necessarily, a change in leadership but, in my view, as Boeing’s was losing support in all layers, namely the FAA, lawmakers, shareholders, the flying public, and airline executives Calhoun’s position became untenable.

Did The Boeing CEO Achieve Absolutely Nothing?

In my view, informed by a background in aerospace engineering, Calhoun was not proactive in dealing with issues and had progressed too little on the end of improvement in safety and quality and that sentiment was echoed by the FAA. In four years of leadership or some might say lack thereof, Calhoun achieved too little in my view. During the 2022 Investor Day, I saw several Boeing executives present and I had the impression they were stronger in de-risking programs, but all of that fell through. What actually remained is that the Investor Day was still squarely focused on free cash flow. As I covered the Boeing Investor Day on X, I noted that Calhoun initially did not address leadership and transparency was telling and that executives such as Ted Colbert made a better “CEO-like” impression:

In some way, that tweet pretty much sums up Calhoun in my view. A step too late in every aspect. Did he do everything wrong? No. There are some things he did well and what I think he did particularly well is reducing risk by de-risking China from the production plan and eventually selling some airplanes built for Chinese carriers to Air India. However, in my view, it does not weigh favorably against the reactive nature of his leadership.

Who Will Be The Next Boeing CEO?

The Boeing board put a lot of trust in Calhoun and even increased the mandatory retirement age for him from 65 years to 70 years hoping that Calhoun would be a beacon of stability and recovery. With Calhoun leaving, the big question is who will become Boeing’s next CEO. That question is important given that a company mindset is cultivated from the top-down, and so it will require someone who can solve Boeing’s issues and put safety and quality above everything. I believe that Boeing can still manufacture quality products, but it needs to shift its focus on safety and quality and the cash flow growth will come as a desired byproduct.

One possible candidate to become Boeing’s next CEO is Stephanie Pope. She has three decades of experience at Boeing. According to the executive biography, she served as Vice President of Finance and controller of Boeing Defense, Space & Security before becoming the VP and CFO of Boeing Global Services. From December 2020 until March 2022, she served as the VP and CFO of Boeing Commercial Airplanes. After that, she became the CEO of Boeing Global Services before becoming the COO of Boeing and since the immediate departure of Stan Deal, CEO of Boeing Commercial Airplanes, announced together with the departure of Calhoun she now serves as the CEO of Boeing Commercial Airplanes.

If the internal promotion path that led to Muilenburg becoming CEO is a template for Boeing’s search of a new CEO, things are looking good for Stephanie Pope as she serves as the COO of Boeing which is a role Muilenburg had as well before becoming CEO. The only thing that stakeholders might not be keen on is her accounting degree. The general sentiment is that Boeing needs an engineer to turn things around, someone who understands the engineering complexities from an engineering point of view rather than a finance point of view.

So, while Pope has served at key positions within Boeing I do believe that she doesn’t quite fit what stakeholders are looking for. In 2022, I published a report pointing out that the appointment of Ted Colbert also put him on the fast-track trajectory to be prepared to become Boeing’s next CEO. That is still an option, but the reality is that Boeing’s Defense segment has had a very hard time performing well with continued cost overruns and that could work against Colbert who was aiming to proactively retire risk but costs kept growing.

Boeing never seems to be putting its eggs in one basket and the promotion paths of Pope and Colbert is an example of that. Years ago, when Boeing needed a successor for McNerney, it was Dennis Muilenburg and Pat Shanahan that were on the short-list to become CEO. The former became the CEO and had to depart during the MAX crisis and the latter, generally lauded as a problem-solver, is now the CEO of Spirit AeroSystems (SPR).

Boeing is aiming to absorb Spirit AeroSystems and that could very well be an opportunity for Pat Shanahan to become Boeing’s next CEO. As mentioned, he is generally seen as a problem solver and no-nonsense guy and that is actually what Boeing needs. In my report published earlier this month, I had no idea that Calhoun would be announcing his departure two weeks later but noted the following:

The only problem I see with viewing Shanahan as a candidate for the CEO position is his age. He’s currently 61-years-old. The Boeing board increased the mandatory retirement age for Calhoun to 70 years. If virtually, Shanahan took over as CEO today he would be able to lead Boeing’s recovery and perhaps see the company developing a new airplane before retiring. That’s how long the development cycles are in the aerospace industry.

So, I do believe that Shanahan possesses the desired qualities but his age might be a problem. Less so, if the board increases the retirement age as was also done for Calhoun.

Overall, I believe there are three possible straightforward candidates but each has something working against them. For Pope, it is the accounting background while for Colbert it is the continued struggles in the Defense segment, and for Shanahan, it is his age. There also is a possibility for Boeing to attract other executives, but I believe that Shanahan has what it takes to get Boeing on track.

What Does The Leadership Shake Up Mean For Investors?

I believe that the leadership change was necessary, because the current company ethos does not sufficiently emphasize safety, quality, and transparency as key pillars and without those I believe it is impossible to make a successful product. So, the leadership change is valuable granted that the next CEO actively promotes safety and quality standards throughout the organization ultimately realizing cash flow growth rather than putting cash flow growth above everything. Cash flow growth is obviously a goal, but it should be the reward of manufacturing a safe and sound product rather than a goal for which every other KPI has to bend or even break. So, for investors, it is incredibly important who the next CEO becomes as a new culture at Boeing has to be cultivated from the top and I believe that it provides a good moment for Boeing to break with its past.

Conclusion: Calhoun’s Departure Was Long Overdue

I believe that Calhoun’s departure is long overdue. I have been following him since the day he became CEO and even before that. From the start, in my view, he made some comments that indicated he was not being realistic about his own role as a board member during the MAX crisis and Boeing’s role in the crisis, which would render him less capable to cultivate a tangible and much-needed change in the company mindset. In some way, you could even say that the various issues that Boeing experienced over the past twelve months showed that Boeing did not make enough progress under the lead of Calhoun.

However, looking forward is what matters to airline customers and shareholders. I believe that Boeing’s actual turnaround will only start with the next CEO taking a vastly different approach toward cash flow generation. Cash flow generation should be an outcome rather than a target and should be firmly supported by core engineering principles such as safety, quality, and integrity. So, Boeing’s stock prices might not skyrocket on the news that Calhoun is stepping down, but if Boeing selects the right CEO it should help the company regain trust with the FAA, the flying public, and airlines not just by word but by action.

Eventually, being laser-focused on quality will allow the company to recover its production capacity, launch competitive aircraft developments, and recover balance sheet with an input-focused approach rather than an output or outcome-focused approach. I am maintaining my buy rating on The Boeing Company stock but will be closely watching the selection of a successor.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of BA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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