Odd Lots - A Longtime Aerospace Analyst Questions Boeing's Future

Episode Date: February 22, 2024

Troubles at Boeing just keep piling up, along with existential questions about the company's future. Not only is Boeing enormously important to US manufacturing, but it's also a major defense contractor for the US government and a big employer, which means its fortunes are of interest to more than just shareholders. So just how bad are the difficulties facing Boeing at the moment and what is the planemaker planning to do about it? On this episode, we speak to Richard Aboulafia, managing director of AeroDynamic Advisory, about Boeing's history and future. He talks about lesser-known developments at the company, including its recent decision to dissolve its firm-wide strategy unit, and the decisions that go into developing new aircraft.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the OddLots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Boeing have you? Boeing. Keep that in. Don't keep that in. No, keep that in. Now you've got to 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 20% 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 737 production for a day and the shares went up like 6%. That seems bad when the market is rewarding you for not making your signature product. There's two funny things to me. And again, funny, you know, all the caveats that it tells.

It's funny that Boeing has the reputation of being the company that, um, obsessed with its share price and pleasing shareholders. Airbus doesn't. And of course, Airbus has a much better share performance than Boeing. It's done phenomenally well over the years. And it's also just kind of crazy, setting aside competition, that Boeing is still nowhere near its peak in 2019, 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 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. have benefited from it. The share price has basically been flat for the past three years. Kind of amazing. And I think it's worrisome, right? Because, you know, setting aside of, you know, the concerns of Boeing shareholders and they're probably pretty unhappy, like, if the U.S. 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 domestic manufacturer for global

markets, one of only two companies that basically controls the commercial jet industry, like is getting worse at building planes. 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 737 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 seem 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 am 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 2006. He was the expert back then, and in 2024, almost two decades later, he is still the guy to talk to on aerospace. So I am very happy to say that we're going to be speaking with Richard Abulafia, 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. I'm 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 pointed to 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 a 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 Jack Welch G. e-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 the bad performance is kind of a plus in a strange way to regulators and everybody 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? What is, what are strategy teams? I thought everyone did strategy. Yeah, everyone does, right? It's kind of impossible to imagine a large corporation not having a strategy function. What is,

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 who their competitors are and are likely to be in what key enabling technologies are 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 35 years, I've never seen anything like it.

And it kind of resembles that common trope and horror film was very often the call comes from inside the house. You know, I mean, I spent last week in Seattle. You know, it's nothing short of horrifying. But it also sort of illustrates one of the strange aspects of this 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, again, 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 as much of an engineering culture or safety culture or they're just worried 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, 20 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, like, what, like, what, like, what is some, some boss, some boss three levels up has made decisions and various priorities 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 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, you know, you. 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 engineer, 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 737 model. And that resulted in the 737 max and its stablemates. And then that led to the crashes, which claimed, I think, almost 350 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 a 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, but even if we did, I'm not so sure that would have changed anything. What was important is that the Macs 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. As for the development of the Macs, there were cultural problems at play that led to the MCAS problems and the tragedies that resulted, but it wasn't economics. I mean, the economic difference between MCAS done right and MCAS 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 757, 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 McNerney back in the late 2000, you know, first decade of the 2000s. 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 2010s. And as a consequence, you had a badly demoralized workforce. Now, as part of his strategy, of course, McNerney back in the 2010s,

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 Nikki Haley was on it. And she left because she didn't think the company should be taking government money. It's a defense contractor. It's just like, seriously? So 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 MCAS tragedies.

But, oh, boy, that terrible culture of bad governance and that complete disconnect with the people who are charged with actually doing their jobs, a complete lack of redress and inability to push bad information. You know, I remember very well on 7807 when the 787 Dreamliner, their last clean sheet design, was rolled in, and I was talking to McNerney, and he told me, like, this plane's going to fly in September. Well, maybe October. Nope, it's September. 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.

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 chain. Hello, I'm Michelle Hussein, and for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further than the news of the day, to spend more time with the people shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage. Russia needs to be taught a lesson. Listen, love you trying ever so hard.

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Listen and subscribe to the Michelle Hussein show from Bloomberg Weekend, wherever. you get your podcast. You certainly ask interesting questions. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike,

but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading By Example, executives making an impact on the eye heart, radio app, Apple Podcast, or wherever you get your podcasts. 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 at Boeing is that, you know, McDonnell 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, McDonnell 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 30-year glide path towards irrelevance because of this focus on, you know, finance and nothing more between, you know, the creation of McDonnell Douglas in 1967. and its 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-2000s with Jim McNurney 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 McDonnell Douglas people, but really it's more that Jack Welch influence or that, I suppose, 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 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 contentious 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. If you look at it, this is a company now with $40 billion in net debt, down from 45 or so a couple years ago.

So to start a new program would be maybe $2 billion incremental per year in independent research and development funding for probably about six years, seven years, with overruns could go higher. Now, that's obviously a drag on, shareholder returns. But put it another way, we're now in a situation where Airbus' 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 money. of capital available. Not a lot of good ideas out there. This is a safe bet. 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 that, or imagining what that next plane would look like, what is the end buyer that they're not tapping into that may be going to Airbus? This has been apparent for at least a decade.

Basically, there's this middle market of about 200 to 230 seats, about 5,000 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 A321 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 321 Neo is now about the same as the order book for all.

variants of the 737 Max family. And last year after Dave Calhoun said, don't worry, we won't compete in that class. They sold a record 1,300 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. Boeing has had a second mover philosophy. 767, 767, 787, 787, 3,000, 300 ER. All of them were responses, and they all did somewhere between 5% and 10% 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 A320s, I guess it would have been in the 1980s, 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? Nah, I don't believe that because the 320 is a good plane, but, you know, the response to it basically, well, it was right in the middle of the 737, 3,400 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 737 line, no question of that. And it really is having, they're 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 737 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 10 years, which could mean that they don't have a clean sheet aircraft flying like until 2040 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 massed. 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 2004 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 2030s. I have no idea. That is such a fascinating point that, I mean, we talk about it in some, some context, this idea of like internal know-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 I'm on. You know, if it gets me there, that that's fine. What, when you say it's a good plane or it's not a very good plane when you're talking about the newest Airbus one,

What makes a good plan? Well, you know, obviously safety is table stakes. Sure. Let's 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 15 or 20 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 10 percent better, you win.

That's what happens. This is. So we talk about fuel efficiency, the cost of like a mechanic, like how much repair they need, Your total operating costs, you know, it's a function of fuel efficiency and, of course, maintainability, but really fuel efficiency. Now, revenue too 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. Sure. The 321 Neo is, you know, the latest development of. that 1980s era A320 family. It should have bigger wings to do longer routes, more powerful engines. It should have, you know, basically it should be more of a proper mid-market jet rather than a scaled-up 150-seater that's trying to do the job. Is it catastrophic? No. That's why everyone wants it. You know, it's good enough. But the point is that in an industry where everyone has 2% profit margins if they're super lucky and super good. Yes, you can beat that by

5 or 10% in efficiency, probably more like 15 or 20, I'm thinking at this 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 30% 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 2007 or 2008 when EasyJet 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 a jet but also propellers. Am I like completely misremembering that? No. And 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 737 max family can't really be a great middle market jet, what is the constraint there? You know, this is arcane, but, you know, the clearance under a 737 wing allows for about 69 inches of fan. We like arcane. So these details about clearance under the wing, this is catnip for us. Oh, cool, go on, go on, go on. Okay, let's get down on. 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. Yeah. The A320 can accommodate 81 inches of fin. 737 maxes out, if you will, ha, ha, ha, at 69 and change. So I'm conscious we've been talking a lot about the commercial aircraft side of 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 department, and specifically the Department of Defense about recent travise at Boeing and what they could actually mean for U.S. 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 U.S. defense, industrial base, and national security, there's been a shocking absence of interest. Speaking of defense and speaking of the military purposes, 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 like 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 enough commercial. I was wondering if that had to do with it. 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 in the event we're cut off, you know, or 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, But basically it's the folks in the lab coats battling with the folks in the flight jackets. And the folks in the flight jackets want best value for money. And the folks in the lab coats want to do something cool in country.

The commercial world is different. It's a global business. And again, if people have 2% margins, they're doing pretty good. So if they buy something that's six or seven percent worse than the other guy, 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 Airbus got a lot more launch aid which enabled it to do some mightily stupid things. The A380 being perhaps the worst product launch in the history of the business. And theoretically repayable launch aid 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 you taxpayer. End of story. Boeing didn't really get that. You know, there were some NASA technology development funding.

but 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. Airbus got enormous subsidies to build a plane called the A340, which was also a piece of junk. Boeing said, yeah, we're just going to do the triple seven, and we're not going to get government subsidies, and they clobbered Airbus on that.

So I think it is, if you look at purely the numbers, an issue, but in the real world of actually building and launching new products, it's a bit of a non-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 Ember 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's been working on it for a long time. How is there – talk to us – can you tell me just,

of my own curiosity. At some point I want to do an episode on this about how Brazil managed to produce a as a reasonably successful jet making company. Oh, we need another episode. I mean, I love this topic. I would love to just do

on it. We've been talking about doing an episode on this. A number story. But what is this sort of like the short, the tweet length version? The tweet length for, oh God. 140 characters. You can go a little long. If you pay, you can go longer. Oh, okay.

That's right. Certified X or whatever. Yeah. You know, first of all, remember, they did a bunch of incredibly smart things in the 1990s, but for 30 years before that, they were a ridiculous playground for some fascist hanta. I mean, nothing more. They got a couple of right products, and then they privatized. It became their own company.

And they became just absolutely the best aircraft, I think, company on the planet by some metric. 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 their, you know, it just has enormous respect. And they tend to get products right. The other thing they did, so that with that aspect of luck after many decades of trying and not doing so good. But then also, they did the exact opposite of what China is 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, 1979. And as a result, they're producing perfectly crap airplanes.

And Breyer 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 computer-stroke airplane we can, and it's worked brilliant. I'm Matt Miller. And I'm Hannah Elliott, inviting you to join us for the Bloomberg Hot Pursuit podcast. Every week we bring you news and industry insight on everything cars. And we do a whole lot more than just talk. about cars, Matt, we actually get behind the wheel of basically every latest model, especially the

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I'm Matt Miller in New York. And I'm Hannah Elliott in Los Angeles. Subscribe today wherever you get your podcast. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps.

Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts. I just remember the first time I ever went to Paris was to attend an Emberra event. And it's funny you say it's well regarded because I remember going there. and it was in a fancy building and 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 security considerations as well.

Yeah. I mean, in a lot of ways, Comac is sort of. of an insurance policy against autarky 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 Xi that these aren't really Chinese aircraft. Their 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 billions of dollars. Good luck with that. The other problem with Comac, of course, is it reflects President

Xi's desire to basically turn the economy away from the private sector and towards state-owned enterprises. The exact opposite of one Embraer did. So there are so many, and it's all very frustrating because you look at China, great market, great talent, and great resources, is 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 planes? Oh, they're. What's wrong with them? Because I only, 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 planes fall short or why? Well, first of all, selling is. one thing building is another. I mean, they've been selling for about 15, 20 years now. Okay, they do have some in the air now. So what is wrong? Yeah, they've delivered three C-919s and about

a hundred or so ARJ-21 regional jets. The ARJ-21 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, well, the 70s. 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 911 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 9112 is, you know, same design parameters, bring us your latest invest and no, 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 you IP protection. All we want to do is be like Embrae. I'd be terrified. They'd conquer the world. This is kind of an unfair question, but would you rather fly on a 737 max or a C-919? 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-resourced, but they do their job. and I think we simply have the safest 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 J.D. Vance, who've spent a lifetime trying to, quote, kill big government and now saying, what's government doing for me? Why isn't it keeping me safer? 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 accusations that, like, maybe it wasn't understaffing, but maybe it was just a too cozy relationship with Boeing. You know, it 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, unless you play a ball. Now, is there that cozy-ness?

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 Emberra, because I realized I didn't, I don't know this. 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 SkyWest or whoever, and then you've got a few mainline carriers here and there that also used. 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 jet side. They'd decided years ago to get into that market, and they've been doing really well there. On the C-919, 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 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 1C engines from General Electric working with Saffron under CFM, which should be too radically different from the Leap 1A's on Airbus and Leap 1Bs on Boeing's. 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 throughput must be difficult, even for Airbus, even with a huge order book because they're probably only, 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 at a given factor. 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 and the COVID-19 pandemic and everything else like that.

So they're having a hard time gearing up. 70% plus the value of a plane comes from the suppliers. So it's not the cynic and me yet again thinks that Boeing Top Management says industry with high barriers to entry, high switching cost, real challenge in 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 its entire fleet of 737s. But how difficult would it actually be for someone like a Southwest to just say, you know what? but we're going to move to a mixed fleet and we're going to have some A320s plus 737s, 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 pay off two suppliers against each other gives you advantages when it comes to negotiating price. 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 it's 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 prices 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 always 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 A320 or 737. It's stayed shockingly consistent over the past couple decades. A few ups and downs, but 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 asked.

and done the right thing or government or 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 serious. story in terms of revenue and market share. All right, Richard Abulafia. 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 the Ember era episode because I'm like fascinated by that story. And so if you think there's a full episode you want to talk about it, we'll make it happen. You should go there too. It's a fascinating place to visit. Let's go. Joe, I want to say that, was a fun conversation. It was. 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. 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 cost, R&D, all that. But if you go too long without doing that, then you have no one on the team who's done it before. 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 10 years, then it could actually be, you know, you could have a whole generation of engineers that basically retire and are gone by 2040 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 plane makers 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. It was so negative on the, on Comac. That was sort of interesting because you just think like all these like Chinese manufacturing

companies are just going to 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 Emberra episode. and I'm down to go to Brazil if you want to. 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 Oddlots 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 Kermann Armin, Dashel Bennett at Dashbot, Kale Brooks at Kail Brooks.

Thank you to our producer, Moses, Ondam. For more Oddlots content, go to Bloomberg.com slash oddlots. We have transcript blog and a newsletter, and check out the Discord. Discord.org.org. And if you enjoy Oddlots, if you find these Aerospace episodes useful, then please leave us a positive review on your favorite podcast platform. And remember, if you are able to be able to be able to be able to be able to be. Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is connect your Bloomberg account to Apple Podcasts. Thanks for listening.

On April 4th, 2023, around two in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Calfield. From Bloomberg Podcasts, this is Foundering, The Killing of Bob Lee, beginning April 16. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts.