Boeing Loses Patience With Muilenburg, But Calhoun May Be No More Than A Short-Term Fix As CEO

Amid mounting criticism over CEO Dennis Muilenburg’s handling of the 737 MAX crisis, Boeing on Monday said that he would be replaced by chairman and longtime board member David Calhoun.

While Calhoun may do a better public relations job than Muilenburg, some observers questioned whether he represents a real change in direction for the embattled company.

CFO Greg Smith will serve as interim CEO until Jan. 13 while Calhoun exits non-Boeing commitments.

“The Board of Directors decided that a change in leadership was necessary to restore confidence in the Company moving forward as it works to repair relationships with regulators, customers, and all other stakeholders,” the company said in a statement.

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The move comes nine months after global aviation safety regulators grounded the 737 MAX, Boeing’s best-selling plane, after the second of two deadly crashes. Muilenburg has been faulted for a leaden public response to the crisis, angering the families of the deceased, lawmakers and members of the public with his reluctance to acknowledge that faults with the plane’s flight control system were responsible for the crashes, which killed 346.

Under Muilenburg’s leadership, Boeing repeatedly promised airlines and investors that it was near winning approval for fixes for the flight control system and other changes that would allow the plane to return to service.

Two weeks ago, Muilenburg was upbraided by FAA Administrator Stephen Dickson, who summoned Boeing’s CEO to a meeting in Washington to address concerns that the company was attempting to publicly pressure the agency to move more quickly.

Last week, Boeing announced it would halt 737 production in January, with roughly 400 planes in storage that it had produced since March that it has been unable to deliver to customers.

Calhoun is well-respected, having spent 26 years as an executive at Jack Welch-era General Electric, including a stint running the aircraft engines unit, and he helped guide Caterpillar through a delicate time recently as chairman of the board when the heavy machinery maker was under investigation by the IRS over its accounting and facing troubles in China.

A much more comfortable speaker, Calhoun should be a more effective face for the company than Muilenburg with Congress and the public, and help improve its strained relationship with airlines and the FAA.

While that might be a solution for Boeing’s short-term problems, Richard Aboulafia, an aerospace analyst with Teal Group, cautions that Calhoun’s recent experience doesn’t lend confidence that he has the skills Boeing needs long-term. Calhoun has spent the past five years in private equity as a managing director at Blackstone Group, and before that eight years as head of the market research firm Nielsen. “[It] is perhaps the wrong toolkit for an engineering company that needs to restore its capabilities and reputation,” he says.

Given that Calhoun has been on Boeing’s board since 2009, it’s questionable whether he can offer a fresh approach, analyst Ronald Epstein of Bank of America/Merrill Lynch wrote in a client note. “We wonder if appointing from within, especially an insider that has been with the company for 10 years, signals more of the same from Boeing vs. an outside appointee who may have offered more of a change of pace and culture.”

Calhoun, who was appointed chairman in October when the title was stripped from Muilenburg, will be replaced as chairman by Lawrence Kellner, a board member since 2011 who was CEO of Continental Airlines from 2004 through 2009.

Boeing has a mandatory retirement age of 65 and Calhoun is 62. While the board could be amenable to giving Calhoun an extension, CFO Smith may be in position to take the job eventually, says Jeffrey Sonnenfeld, a professor at the Yale School of Management. “This gives him runway to be an appropriate successor.”

Boeing shares rose 2.9% to close at $337.55 on Monday on the New York Stock Exchange.

It’s an abrupt end for Muilenburg, who spent his entire 34-year career at Boeing, starting as an intern and rising to run the defense division before he was tapped to become CEO in 2015.

Until this spring, Boeing seemed to be going from strength to strength on Muilenburg’s watch, riding a boom in aircraft orders amid a historic expansion in air travel. Like his predecessors Jim McNerney and Harry Stonecipher, Muilenburg rewarded shareholders handsomely, devoting roughly 95% of operating cash flow to the company’s steadily rising dividend and share buybacks. Boeing shares climbed fourfold from February 2016 to a peak of $446 at the beginning of March, compared with a 63% rise for the Dow industrials over the same period.

However, critics have charged that the focus on financials has served to erode the primacy that engineering concerns used to have at the company.

The seeds of the 737 MAX crisis were sown well before Muilenburg was involved with the commercial airplanes division, with the decision in 2011 by Boeing to develop an updated version of the aging 737 with larger, more efficient engines rather than build an all-new single-aisle plane. Those larger engines changed how the 737 handled, prompting Boeing to develop software called the maneuvering characteristics augmentation system (MCAS) to automatically push the plane’s nose down in certain situations. MCAS’ design flaws are believed to be primary causes of the two deadly crashes in Indonesia and Ethiopia.

However, Boeing’s response to the crisis has been seen as squarely Muilenburg’s responsibility. He came under fire for public statements that were seen as scripted, lawyerly and lacking in empathy for the families of the deceased. Airlines and regulators have accused Boeing of being slow to share information, including the fact that the company knew in 2017 that an alert wasn’t working on most MAX aircraft that was intended to warn of a disagreement between the plane’s angle of attack sensors, which played a key role in the crashes.

It’s indicative of a corporate identity that under Muilenburg’s leadership “has been less than humble,” analyst Robert Stallard of Vertical Research wrote in a client note Monday, pointing also to the decision to raise production of the 787 Dreamliner to 14 planes a month, which has been walked back, and a strategy that seemed to assume that the historic boom-bust pattern of the aerospace sector is a thing of the past.

Muilenburg was widely seen as on his way out, with the ideal scenario being that he would depart sometime after the 737 MAX had returned to service. But with commentators increasingly calling for Muilenburg’s head last week following the announcement that the company would idle 737 production, the company suffered a stinging embarrassment Friday when a test launch of its Starliner space capsule went awry. Because a timer was set incorrectly, it was unable to reach an orbit to rendezvous as planned with the International Space Station.

The union representing Boeing engineers welcomed the leadership transition, saying in a statement that under Muilenburg, the company’s reputation for quality had “been unquestionably tarnished.”

Michael Stumo, who has become a prominent critic of Boeing since his daughter Samya Stumo’s death in the Ethiopia crash, said, “Mr. Muilenburg’s resignation is a good first step toward restoring Boeing to a company that focuses on safety and innovation.” He called for “underperforming or underqualified” board members to resign as well.

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I help direct our coverage of autos, energy and manufacturing, and write about aerospace and defense. Send tips to jbogaisky[at]forbes.com

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CNBC’s Phil LeBeau reports that Boeing’s board removed CEO Dennis Muilenburg as chairman so he can focus on running the company after the 737 Max crisis.

 

 

Airplane Deicing: The How & Why

If you’ve traveled by air in wintry weather, you’ve probably looked out your window before takeoff and seen vehicles circling the plane, spraying deicing fluid on the wings. Passengers often ask me why it’s so important to make sure the aircraft is free of snow and ice accumulation.

Not just removing, but also preventing a build-up of snow and ice on the wings and tail of an airplane is crucial for a safe take-off. A plane’s wings and rear tail component are engineered with a very specific shape in order to provide proper lift for flight. Snow and ice on these areas in essence changes their shape and disrupts the airflow across the surface, hindering the ability to create lift.

Whenever snow, ice, or even frost has accumulated on the aircraft, the pilots call on the airport deicing facility to have it removed. Deicing fluid, a mixture of a chemical called glycol and water, is generally heated and sprayed under pressure to remove ice and snow on the aircraft.

While it removes ice and snow, deicing fluid has a limited ability to prevent further ice from forming. If winter precipitation is falling, such as snow, freezing rain or sleet, further action needs to be taken to prevent ice from forming again on the aircraft before takeoff.

In these cases, anti-icing fluid is applied after the deicing process is complete. This fluid is of a higher concentration of glycol than deicing fluid. It has a freezing point well below 32 degrees Fahrenheit or zero Celsius and therefore is able to prevent the precipitation that falls into it from freezing on the plane’s surface.

Anti-icing fluid also has an additive that thickens it more than deicing fluid to help it adhere to aircraft surfaces as it speeds down the runway during takeoff.

Pilots temporarily disable the aircraft’s ventilation system during the deicing/anti-icing process to prevent fluid fumes from entering the cabin. Although the fumes are considered nontoxic for inhalation, we try to keep the odor out of the cabin regardless. Sometimes the scent, similar to maple syrup, does find its way into the aircraft cabin.

As the anti-icing fluids lose their effectiveness in flight, the aircraft is still equipped with systems that prevent frozen precipitation from building on the wings, tail and various sensors around the airplane. These systems are not only important in the winter months, but also in the summer months, because at higher altitudes, the temperature is well below freezing year-round.

Typically aircraft systems prevent ice buildup in one of two ways. On most jet aircraft, hot air from the engines is routed through piping in the wings, tail and engine openings to heat their surfaces and prevent icing.

Preventing ice formation in the engine openings is important, as ice here could dislodge and cause damage as it’s ingested into the engine. This occurrence would be similar to throwing a rock into a running washing machine — clearly not a good idea.

On propeller driven aircraft, balloon-like devices attached to the wings and tail are inflated and deflated with air from the engines, breaking up any ice accumulation.

We can’t promise your trip to the airport will be ice-free, but there won’t be any icy buildup on the plane getting you to your holiday destination.

By Daniel E. Fahl

Source: Airplane deicing: The how and why

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A snowstorm left snow piled on top of this Norwegian 737-800 bound for Copenhagen, Denmark from Oslo, Norway. The video features pushback, taxi, de-ice, and takeoff. It’s certainly not something you see everyday. Enjoy! Please LIKE & SUBSCRIBE to support my channel!

Plane Talk: 737 MAX In Focus For Boeing Q2, With F-35 Top Of Mind At Lockheed

Getty Images
Getty Images

Key Takeaways:

  • Lockheed and Boeing are reporting Tuesday and Wednesday
  • Boeing’s troubled 737 MAX likely to be in spotlight
  • Lockheed navigating geopolitical issues

It’s a tale of two planes this week as Boeing (BA) and Lockheed Martin (LMT) earnings line up on the runway.

After months of grappling with 737 MAX troubles, Boeing (BA) doesn’t seem likely to get much of a lift from earnings season when it reports Wednesday. Thanks to BA’s announcement last week of a nearly $5 billion charge related to the situation, some of the financial mystery surrounding the crisis is out of the way as earnings approach.

At LMT, geopolitics are a potential challenge for sales of the popular F-35 jet fighter and might be a discussion point on its earnings call Tuesday.

Boeing Quarter to See No Contribution from Key Airliner

For BA, Q2 is the first this year to fully reflect the complete grounding of the troubled 737-MAX plane after two deadly crashes.

Last Thursday, Boeing said it will record an after-tax charge of $4.9 billion, or $8.74 per share, connected with its estimate for potential concessions and other considerations to customers for disruptions. This charge will result in a $5.6 billion reduction of revenue and pre-tax earnings in the quarter. The entire estimated amount will be recognized as a charge in Q2.

The good news—if you can find any in a situation like this—is that BA also said it expects to get the plane back into service by early in Q4, which is earlier than some analysts had expected. Before BA’s announcement, some media reports speculated it wouldn’t get into the air again until next year. Also, the charges might look relatively small compared to BA’s $210 billion market capitalization.

Big Drop in Q2 Deliveries for Boeing

Maybe even harder to swallow for BA and its investors is the competitive impact of the crisis. Deliveries of BA’s airliners slid 37% in Q2, even as Europe’s Airbus (EADSY)—the world’s other leading aircraft manufacturer—made solid strides.

Airbus said it delivered 389 planes in the first half, up 28% from 303 a year earlier. It’s on pace to deliver a record number of planes this year. Meanwhile, BA’s deliveries went the wrong way in the first six months of 2019, falling to 239, from 378 a year earlier. Deliveries of the company’s 737 model fell by more than half.

BA reported no orders of the 737-MAX in June for the third-straight month since the separate crashes that killed 346 passengers earlier this year and in 2018. The company continues to work through software issues with the troubled jet, including another flight control issue involving failure of a microprocessor announced by the Federal Aviation Administration (FAA) last month.

BA’s earnings conference call is probably going to sound more like a “737-MAX” conference call, so consider listening closely for any updates on fixes to the jet. Some analysts say BA is doing the right thing by not focusing too much on timetables and emphasizing a quality outcome over timing.

Even if BA can satisfy the government that it’s taken all the necessary steps to make the plane safe again, airlines would need more than a month in many cases to get the planes back into flying condition, The Wall Street Journal reported recently. Several airlines have now pushed back their estimates of when they can get the 737 MAX back into their rotations, with Southwest (LUV) the latest to do so. Last week, LUV pulled the plane off of its flight schedule into early November, a month longer than it had expected in June. LUV is the largest U.S. operator of the jet.

BA’s Q1 earnings report barely reflected the 737-MAX issue, because the plane wasn’t grounded until nearly the end of that quarter. In Q2, it was on the tarmac for all three months, so now investors can get a sense of the full impact.

However, even in Q1 things weren’t all that positive, with BA noting then that cash flow fell nearly 10% from a year earlier due to lower 737 aircraft deliveries. Revenue came in slightly below expectations in Q1 and fell $500 million from the same quarter in 2018.

This time around, struggles could get worse, if analysts are correct. Beyond that, BA—like other industrial companies—faces the challenge of higher materials costs due in part to U.S. tariffs on steel and aluminum from China. These are important components of aircraft building.

If you’re looking for any good news from BA, perhaps it’s worth noting that the company did deliver a record 18 of its 787 Dreamliner jets in June, with monthly production of that jet now at 14.

Boeing Earnings and Options Activity

When BA releases results, it is expected to report adjusted EPS of $1.78, down from $3.33 the prior-year quarter, on revenue of $19.99 billion, according to third-party consensus analyst estimates. That revenue would represent a 17.6% drop from a year ago. These earnings projections don’t reflect the charges announced by BA last week.

The options market is implying about a 3.1% stock move in either direction around the upcoming earnings release. Implied volatility was at the 22nd percentile as of Monday morning.

Looking at the July 26 weekly expiration, put volume has been light overall, but heaviest at the 365 and 370 strikes. Call volume has seen a little more action, most heavily at the 375 and 380 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

No Turkish Delight for Lockheed

Like BA, Lockheed Martin (LMT) faces a possible headwind from tariffs on materials it uses to build products. It also has its own issues with a plane, though arguably they’re nowhere near the level of BA’s concerns.

LMT’s F-35 fighter jet, which makes up about 30% of the company’s sales, recently came into the spotlight when the U.S. government halted delivery of two F-35 planes to Turkey. This was in response to Turkey making a multi-billion dollar deal to buy a Russian missile system. The issue becomes more serious for LMT because Turkey also faces the forfeiture of 100 promised F-35 jets, CNBC reported.

Complexities build for LMT when you consider that the F-35 is financed and manufactured partly by Turkey. That means LMT could need to replace the manufacturing done in that country.

For now, LMT sounds hopeful about its fighter jet despite the Turkey controversy.  “We continue to see strong demand both from our existing partners and potential new international customers and are confident the F-35 program will continue to grow,” a company official told the WSJ.

However, the company’s earnings call tomorrow could include questions from analysts about any deeper financial impact LMT might face.

A couple other factors to consider going into the call include whether the recent strong dollar is having an impact on foreign demand for LMT products, and whether business is seeing any impact from the U.S./China tariff situation.

There’s a sense that LMT and other defense companies could be getting helped by rising defense budgets, including in the U.S. However, the U.S. defense budget for next year remains contested in a battle between Democrats who control the House of Representatives and President Trump and congressional Republicans. Democrats in the House passed a $733 billion defense budget bill earlier this month that Trump and Republicans oppose. Trump had proposed $17 billion more in spending.

The House and Senate have a few weeks left to reconcile their competing versions of a defense bill. Any delay on a new budget agreement might raise questions about demand for LMT’s products in the coming months.

Lockheed Earnings and Options Activity

Lockheed crushed estimates in Q1, with earnings up 49% from a year earlier. At the time, LMT updated its forecast for 2019 financial results, with earnings anticipated between $20.05 a share and $20.35 a share. Expected full year revenue was also increased, to a range between $56.8 billion and $58.3 billion.

One thing to watch when LMT reports tomorrow is whether any of that guidance changes.

Lockheed Martin is expected to report adjusted EPS of $4.77, up from $4.05 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $14.2 billion, up 6% from a year ago.

The options market is implying about a 2.5% stock move in either direction around the coming earnings release. Implied volatility was at the 18th percentile as of Monday morning.

thinkorswim chart

TREADING WATER: Boeing shares (candlestick) have basically been treading water for a few months now, as this year-to-date chart shows, while Lockheed shares (purple line) have retreated from recent highs. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

thinkorswim

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

I am Chief Market Strategist for TD Ameritrade and began my career as a Chicago Board Options Exchange market maker, trading primarily in the S&P 100

Source: Plane Talk: 737 MAX In Focus For Boeing Q2, With F-35 Top Of Mind At Lockheed

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