Boeing: Can A New CEO Fix A Broken Corporate Culture?

Summary:

• Boeing’s prolonged crisis stems from deep-rooted cultural issues, exacerbated by the 737 MAX 8 disaster and subsequent leadership failures.
• New CEO Kelly Ortberg promises cultural change, but faces significant challenges, including a costly labor strike and systemic issues.
• Investors should brace for a long, expensive turnaround, with potential short-term trading opportunities via cash-secured put options.
• Boeing’s recovery hinges on meaningful cultural transformation, making it a risky bet for some time.

The Boeing Co. (NYSE:BA) has seen better days. The venerable aerospace giant has been in the throes of a multi-year crisis of confidence.

The proximate cause of Boeing’s litany of woe was the revelation in 2019 that it had cut corners in an effort to curb costs and boost the profitability of its new 737 MAX 8 aircraft. As a result, Boeing allowed a number of design and system flaws into the aircraft, including catastrophic software issues that caused a pair of fatal commercial plane crashes and a prolonged grounding of the model worldwide.

The 737 MAX 8 was meant to be a game-changer for Boeing, replacing the aging, but still highly popular, 737 aircraft. Instead, it ushered in an era of decline and disaster.

While Boeing promised a strategic reset and major changes in the wake of the 737 MAX 8 disaster, the company’s efforts to date have failed to impress. Indeed, Boeing has been in a state of near-perpetual crisis for more than five years.

Having struggled and failed for years to solve its own problems, Boeing has looked outside itself for answers. On Aug. 8th, the company announced the appointment of a new CEO, Kelly Ortberg. The move appears to have reignited the dying embers of hope, at least among some investors. In particular, Ortberg’s promise of a much needed — and long overdue — cultural shift has galvanized positive sentiment.

Is there finally a light at the end of the tunnel for Boeing? Can Boeing fix itself?

These are important questions for investors to ask. While they have yet to be answered definitively, it makes sense to explore the possibilities.

Diagnosing Boeing: Causes of Culture Collapse

Before we can talk about Ortberg, we must first talk about the company he now leads, and the scale of the problems he has inherited.

Sometimes a corporate turnaround is simply a matter of formulating and executing a particular solution to a particular problem. Unfortunately, Boeing’s problem is not so simple, nor is it solvable with any single fix. That is because Boeing’s problem is essentially pathological, permeating its entire organization.

Boeing’s particular pathology is visible across virtually every aspect of its business. You can see it in the way Boeing handled the 737 Max 8 program, from development and construction to its reactions and responses to multiple fatal crashes. You can see it in Boeing’s space program, which has managed to strand a pair of astronauts on the International Space Station. The examples are pretty much endless, as The Wall Street noted in late January:

“Boeing and its supply chain have been beset by snafus—from misdrilled holes on 737 fuselages and production slip-ups on the 787 Dreamliner to mishaps with the new Air Force One—which have disrupted production at several factories. None of those issues resulted in an in-flight incident.”

The underlying pathology behind all of Boeing’s many and varied failures and faults ultimately stems from a common source: corporate culture.

Boeing’s current culture crisis has been long in the making a long history, as the New York Times has discussed:

“Boeing survived and thrived, sustained by an engineering culture steeped in designing superior aircraft built to demanding tolerances. Its airplanes were industry-changing…Since the mid-1990s, the company has bought out McDonnell Douglas, a domestic rival, moved its headquarters twice, shifted some assembly to the East Coast (which allowed the company to sidestep the unions) and changed chief executives the way you would planes in Atlanta. What got lost in all this shuffling is a corporate culture that once prized engineering and safety, replaced by one that seemed to be more focused on delivering profits over perfection.”

Boeing’s corporate culture crisis goes back all the way to 1997, when Boeing merged with McDonnell Douglas. While Boeing technically absorbed McDonnell Douglas into itself, it was really McDonnell Douglas that ended up eating Boeing. Boeing had long maintained a collegial corporate culture that was focused on solving problems; in essence, an engineering company above all else. This approach had played a large part in making Boeing into the respected and successful aerospace giant it was. Unfortunately, it also left Boeing’s leadership vulnerable to threats from within.

When McDonnell Douglas joined Boeing, its leaders brought their highly bureaucratic, sharp-elbowed, profit-maximizing culture with them. Over time, the McDonnell Douglas culture won out, eroding away and dismantling the established leadership and philosophy that had made Boeing the greatest aerospace company in the world.

Boeing is something of a modern tragedy: one of the greatest companies in the world being laid low by a total breakdown of the culture that made it great. Boeing’s problems would likely have been fatal to almost any company that is not Boeing. But for all of its recent failings, this is still a giant and systemically important aerospace company with value worth preserving from a government policy and strategy standpoint. Even so, it is unclear right now whether the company itself has the wherewithal to, or even the desire, to heal itself.

Boeing’s Leadership: The Price of Resisting Accountability

One of the most perplexing aspects of Boeing’s responses to the many and varied crises that have befallen it has been its persistent resistance to making a clean break with the leadership team and management philosophy that led the company into danger in the first place.

Dennis Muilenberg, Boeing’s CEO at the time of the twin 737 MAX 8 crashes, held onto his job for several months despite the ever-growing external condemnation and public revelations of his responsibility in the disaster. It was only in December 2019, fully nine months after the 737 MAX 8’s grounding by the FAA, that Muilenberg finally stepped aside. A month later, Dave Calhoun was announced as the new CEO.

Calhoun was hardly an outsider appointment. Indeed, he had been on Boeing’s board of directors since 2009, and had served as chairman since 2019. Calhoun endeavored to strike a different tone and style from his predecessor. Calhoun was, as The Wall Street Journal put it, “Known for a style that focuses on holding senior leaders accountable for their approaches…Unlike Muilenburg, who could be defiant and opaque in the wake of disaster, Calhoun has been apologetic and has promised transparency.”

Despite being a relative upgrade to Muilenberg, Calhoun ultimately fell short of expectations and failed to deliver the hoped-for changes to Boeing’s culture and operations. Another embarrassing faulty aircraft incident in January 2024 was the final nail in the proverbial coffin. Calhoun stepped down on March 25th as part of a broader leadership shakeup, which included the departure of both Boeing’s commercial airplanes unit chief and its board chair.

Now, more than five years after its leadership and reputation crisis began, Boeing is under the leadership of an actual outsider.

Boeing’s New CEO: A Glimmer of Hope Despite Bitter Inheritance

Kelly Ortberg assumed the mantle of Boeing CEO in August, coming out of retirement in order to try his hand at steering the ailing aerospace company onto a better course. Ortberg was quick to strike a new tone, promising in an email to Boeing employees that he would “focus on true culture change, empowering employees to speak up when they see potential issues and bringing the right resources together to solve them.”

While Ortberg has pledged change and reignited hope that Boeing can reclaim its lost strength through cultural renewal, delivering on that promise is obviously much easier said than done. Even in the most favorable conditions, executing a sweeping cultural transformation across a vast corporation is a tough lift. Unfortunately, the situation Ortberg has inherited is far from favorable.

Ortberg has spent much of his brief tenure to date attempting to navigate a fraught labor situation. These efforts failed to prevent more than 33,000 factory workers from going on strike this month, a move that analysts estimate could cost Boeing $3.5 billion. In response, Ortberg announced a raft of aggressive cost reduction measures on Sep. 16th, including cuts to supplier spend, pauses on most commercial aircraft orders, and a broad hiring freeze.

Whether Ortberg can overcome his first major obstacle at the Boeing helm remains to be seen. If Boeing survives this latest crisis in one piece, the real work can begin.

Rebuilding Efforts: Getting Started and Measuring Progress

If Boeing does seriously commit to reversing its internal degradation and to rebuilding itself, how can we measure progress? How can we know if the culture is really changing for the better?

The first thing we should look for as investors is how Boeing responds to problems.

For years, Boeing has generally taken an approach of responding to each new problem individually, rather than addressing them systematically. When the 737 MAX 8 crisis exploded in Boeing’s face, company leadership was quick to assert that it was an isolated problem. Boeing has struck a similar line when addressing other problem programs, including the Starliner and the equally troubled Space Launch System (SLS). When talking about problems, Boeing has all too often tried to balkanize issues, treating the symptoms rather than the disease. Worse still, Boeing has resisted acknowledging that an underlying pathology exists at all.

To solve a problem, one must first recognize that the problem exists. Under this new leadership, there is an opportunity, the first opportunity in a long time, for Boeing to take a step back and engage meaningfully with the core affliction that has robbed it of its reputation, its profitability, and its technological leadership. Whether it will do so remains to be seen.

If Boeing’s new leadership really wants to build the company long-term, rather than try to maximize share performance over the next one-, two- or five-year time horizons, it will have to make decisions that the stock may not like. Pulling back on things like stock buybacks and stock-based compensation could well put further downward pressure on Boeing’s shares, at least in the short- and medium-term. Even so, I would contend that investors would be wise to accept a degree of pain for a while, so long as that pain is a side-effect of efforts to rebuild the company’s foundations.

Boeing Stock: Investing and Trading Perspective

If the debt market is any barometer, confidence in Boeing appears to be at an historic nadir. The company’s bonds face the imminent loss of investment-grade status and its debt is trading near junk bond level. Even so, it beggars belief that a company as systemically important as Boeing is could actually be allowed to fail. Hence, investors hoping for a total collapse should probably think again. Boeing will muddle through its labor crisis somehow. The bigger question is how damaging the terms of the eventual resolution will be—and how much Boeing will have to revise its production and productivity targets.

Whatever shape Boeing is in going forward, the true test remains. To truly draw a line under the past five years, and finally set itself back on a footing that will make it long-term investable again, Boeing must deliver on its pledge of cultural change.

Yet even if Boeing does do the hard work of rebuilding itself, investors will have to resign themselves to the fact that it is going to be a long, and probably expensive, process. Moreover, improvement may be hard to track or measure from the outside. The necessary changes will largely be incremental, and may be virtually invisible to an outside observer. That will make Boeing a devilish stock to follow as an investor, even one with a long-term lens.

Investors have to look at Boeing not only from the perspective of how the stock is performing and how the company is performing from a cash generation standpoint, but also from the perspective of what makes Boeing important in the first place. But investors are rarely in the business of sinking money into stocks they expect to go down. As such, holding Boeing through the early growing pains of its restoration may not be the most prudent allocation of capital, even if management executes perfectly.

That does not mean investors have to avoid the name entirely, however. There may be some interesting opportunities for shorter-term trades, especially through the options market. One way to play Boeing in the near term would be to sell cash-secured put options. Boeing has ranked high in terms of implied volatility over the past year, which has led to some premium expansion. This has made selling cash-secured puts look rather attractive, either as a way of getting a position in the stock at a lower price, or to simply collect some sizable premiums. This trade has a fairly enticing risk-reward profile; if the option expires worthless, you get to keep the option premium. Even so, this strategy only works if you are prepared to own the stock, at least temporarily.

To conclude, I will leave you with just this: If you choose to approach this name, whether through equities or options, do so with caution — and expect a bumpy ride for the foreseeable future.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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