Crisis-ridden American aviation giant Boeing has appointed Kelly Ortberg, a veteran of the aerospace industry, as its new CEO in an attempt to turn around the aircraft manufacturer plagued by legal and regulatory issues following a quarter in which it lost more than USD 1 billion.
During a quality crisis, Ortberg will take on the enormous challenge of restoring confidence with authorities, the business community, and the general public on August 8. The company’s finance chief has cautioned that it will continue to burn cash. A mid-air cabin panel blowout on an Alaska Airlines-operated 737 MAX 9 jet carrying 171 passengers on January 5 has left Boeing embroiled in a reputational and safety crisis.
The planemaker posted a loss of $1.4 billion on revenue of $16.9 billion, short of the consensus among analysts for USD 17.2 billion, according to LSEG data. It lost USD 2.90 a share, worse than expectations for a loss of USD 1.97 a share. Boeing CFO Brian West informed analysts that he anticipates cash burn in the third quarter of 2024 and that cash use will be higher than anticipated. USD 4.33 billion was used by the company in free cash flow during the second quarter during a conference call.
Board chair Larry Kellner announced he would not seek re-election and CEO Dave Calhoun decided to retire by year’s end following an executive reorganisation brought about by the company’s crisis.
Calhoun told analysts he did not think Ortberg’s arrival would lead to a big leadership overhaul at Boeing. Stephanie Pope, the head of Boeing Commercial Aeroplanes, was seen as a possible candidate to succeed Calhoun. Calhoun will be a special adviser to the board until March 2025, informed Boeing Chair Steve Mollenkopf.
Problems Galore Boeing
Shortly after the January 2024 accident, the United States Federal Aviation Administration (FAA) barred Boeing from raising the production of its cash-cow 737 MAX family of jets above 38 a month, without estimating how long the limitation would last. As per Brian West, Boeing had been making aircraft far below that level for some weeks to plug quality gaps.
Kelly Ortberg will now have to help revive production of the 737 jets from about 25 in June and July to 38 by 2024 end. He will receive a long-term incentive award targeted at USD 17.5 million, apart from getting an annual base salary of USD 1.5 million, an annual incentive award target of USD 3 million and a USD 1.25 million cash payment in December.
During the 2024 Q2, Boeing delivered a total of 92 aircraft, down 32% from 2023. It posted a loss of USD 2.33 a share, as its troubled defence and space business exacerbated the financial strain on the company. The Defence, Space and Security unit, one of Boeing’s three main businesses, lost billions of dollars in 2022 and 2023, which executives attributed to cost overruns on fixed-price contracts. Such contracts have high margins but leave defence contractors vulnerable to inflationary pressures that have dented US corporate earnings in recent years.
Meanwhile, the chair of the US Senate Commerce Committee, Senator Maria Cantwell, wants the FAA to conduct a thorough review into its oversight of Boeing and other manufacturers, raising serious questions about the government’s scrutiny of the planemaker.
She said the FAA in April 2024 disclosed that it had conducted a combined total of 298 audits of Boeing and Spirit AeroSystems over the prior two years that “did not result in any enforcement actions.”
Cantwell said that “a root cause analysis would ensure both Boeing and FAA have discovered the core causes of problems, rather than just symptoms.”
She wants the analysis “to identify any deficiencies in its oversight of Boeing and other manufacturers” and to “develop corrective actions and a plan for implementing them.”
After the Alaska Airlines incident, the FAA conducted a 737 MAX production audit into supplier Spirit and found multiple instances where the companies had failed to comply with manufacturing quality control requirements. FAA is already facing heat for being “too hands off” in oversight of Boeing.
The FAA’s approach before the mid-air incident was “too focused on paperwork audits and not focused enough on inspections,” FAA administrator Michael Whitaker commented recently, while adding, “We will utilise the full extent of our enforcement authority to ensure Boeing is held accountable for any noncompliance.”
Whitaker in February barred Boeing from boosting production of its best-selling plane. Whitaker also said the agency will continue to increase its on-site presence at Boeing and Spirit for the foreseeable future.
The National Transportation Safety Board (NTSB) earlier said that the door panel that flew off a Boeing 737 MAX 9 jet mid-flight was missing four key bolts and no paperwork exists for the removal of those bolts. Whitaker also confirmed no paperwork exists.
Boeing, meanwhile, has finalised a guilty plea to a criminal fraud conspiracy charge and agreed to pay at least USD 243.6 million after breaching a 2021 agreement with the US Justice Department. The planemaker allowed potentially risky work at its factories and did not ensure key aeroplane record keeping was accurate or complete, the Justice Department said as it outlined why it believed the planemaker had violated the 2021 deferred prosecution agreement.
In what seems to be a silver lining for the aviation giant, it has resumed deliveries of 737 MAX jets to China after a lengthy delay stemming from regulatory issues. The deliveries got delayed in recent weeks due to a Chinese regulatory review of batteries powering the cockpit voice recorder.
However, in the recently concluded Farnborough Airshow, Boeing got only 96 orders and commitments plus 22 options, much lower than the 356 orders it won at the Paris Airshow in 2023. Rival Airbus, on the other hand, pulled ahead of its American competitor, by securing 164 aircraft orders and commitments.
Who Is Kelly Ortberg?
The 64-year-old Ortberg began his career as an engineer at semiconductor maker Texas Instruments in 1983. Four years later, in 1987, he left to work as a programme manager at aircraft electronics supplier Rockwell Collins.
He was appointed CEO of Rockwell Collins in 2013 and oversaw United Technologies Corporation’s purchase of Rockwell in 2018. He became a member of the board of directors of Aptiv PLC after retiring in 2021 and is presently employed by a supplier of automotive technology. During his tenure at Rockwell Collins Ortberg also oversaw the company’s development programmes for Airbus A350 XWB, Boeing 787 and the Bombardier CSeries.
He also served as the former Chair of the Aerospace Industries Association (AIA) Board of Governors.
“There is much work to be done, and I’m looking forward to getting started,” Kelly Ortberg said after being appointed as Boeing’s CEO.
Kelly Ortberg’s recovery plans for the aviation giant will most likely be based in Seattle, near Boeing’s 737 MAX and 777 factories, which will be a step in the right direction, said Jon Holden, union local president for more than 30,000 Boeing workers who are negotiating a new contract, while interacting with the Reuters.
Holden also said that Ortberg needs the support of the International Association of Machinists and Aerospace Workers union “more than ever.”
“This is a strong and safe pick. We can appreciate Ortberg’s age may be higher than some investors would have liked to see. However, we believe Ortberg’s reputation at Rockwell Collins and United Technologies/RTX is strong,” RBC Capital Markets analyst Ken Herbert said in a note.
Kelly Ortberg’s experience in integrating acquisitions such as steering Collins through an USD 8.3 billion deal to purchase BE Aerospace in 2016 will face a fresh test at Boeing. The latter is working to integrate Spirit AeroSystems into its fold after clinching a deal earlier in 2024 to buy back the fuselage maker.
High Hopes From The New Boss
Kelly Ortberg will have to strengthen relations between Boeing and its airline customers, and earn trust with the regulators and lawmakers.
“While we hold Kelly in high regard, we note that it has been some time since he was a public company CEO, and as he is 64 it will probably fall to others to continue the work of fixing Boeing,” said Vertical Research Partners analyst Rob Stallard, while interacting with Reuters.
Bob Jordan, CEO of Southwest Airlines said the company looks forward “to working with Kelly Ortberg in his efforts to return Boeing to its place as the leading American aerospace company.”
“I think Mr. Ortberg is likely a great choice for CEO. He has an impressive resume with an engineering background, which is crucial for operating in a complex technical environment,” said Tony Bancroft, portfolio manager at Gabelli Funds, which holds shares of Boeing.
Industry insiders had previously hoped Boeing would hire someone on the younger side, in the expectation that it would take years to turn the company around. Kelly Ortberg is 64, however, and Boeing said it waived the mandatory retirement age of 65 just like it did for CEO Dave Calhoun, who is departing after a management shakeup earlier in 2024.
Kelly Ortberg is said to have beaten out Boeing Commercial Airplanes CEO Stephanie Pope and Spirit AeroSystems boss and former Boeing executive Pat Shanahan for the job. GE Aerospace CEO Larry Culp, Carrier Global CEO and Boeing board member Dave Gitlin and American Airlines Chairman and former Boeing CFO Greg Smith were seen as potential contenders but all indicated they were unwilling to be considered for the role.
Boeing had faced pressure from industry executives and American lawmakers to choose new leadership with an engineering background and without lengthy ties to the company. Whether Ortberg’s appointment is enough to calm down the situation, remains to be seen.
“Mr. Ortberg is a mechanical engineer. I hope that means he will ensure that his top message for everyone is building the best aeroplane means building the safest aeroplane in the world,” said Rep Rick Larsen, top Democrat on the House Transportation Committee who represents a district in Washington State home to major Boeing operations.
Analysts and acquaintances described Kelly Ortberg as being a good listener, honest and willing to take decisive action. One such person is Jefferies analyst Sheila Kahyaoglu, who wrote in a note, “We believe during his leadership at Collins he was well liked by employees and direct reports and very personable. This was while being a tough negotiator dealing with a diverse set of customers and suppliers and managing the complexity of its diverse customer base.”
Image Credit: Boeing