(Bloomberg) — As Boeing Co. lurches from one crisis to another, there has been one constant for the beleaguered plane maker: Its situation appears to be getting worse.
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From a freak accident that ripped a door-sized hole in the fuselage of a mid-air 737 Max to revelations of sloppy workmanship and now a crippling strike entering its second month — the icon of American manufacturing has been beset by problems since the first days of January. Cash is dwindling, aircraft production is anemic and the stock is headed for its worst annual performance since the 2008 financial crisis.
Now the plane maker is taking another dramatic step by cutting 10% of its workforce, which equates to about 17,000 people. But it’s a risky move, given that Boeing is in the midst of testy labor negotiations and unions show no signs of relenting. Also left unanswered is where the cuts will occur, how much they could cost in terms of compensation and whether the measure is enough to stop the financial hemorrhage.
“Everything is getting a little precarious,” said Nick Cunningham, an analyst at Agency Partners LLP in London. “It is not a coherent plan as such, it is simply another quarter of large expenses, which the previous management would have had to take on anyway, as they reflect existing and developing problems and are not part of a restructuring as such. “
In his announcement of the job cuts, new CEO Kelly Ortberg hinted that even more dramatic measures may be necessary to get the company back on track.
“We need to be clear-eyed about the work we face and be realistic about the time it will take to reach key milestones on the road to recovery,” the Boeing boss wrote in the Oct. 11 memo to workers. “We must also focus our resources on performing and innovating in the areas that are core to who we are.”
The comments suggest that Boeing, under Ortberg, may double down on the field for which it is best known: commercial aviation. The unceremonious departure of Ted Colbert as head of the space and defense business highlighted the subsidiary’s shortcomings, which became even more evident on Friday when Boeing said the unit would have about $2 billion in charges in the third trimester.
The episodes plaguing Boeing have exposed quality failures at Boeing and its supply chain, along with a corrosive culture a quarter of a century in the making, where pressure on costs and schedules permeated decision-making. Earlier this year, customers finally rebelled and the board reshuffled leadership, hiring Ortberg in August to fix the beleaguered manufacturer.
Observers widely agree that the company will need more time to regain its footing: The Federal Aviation Administration’s top official has said it is a matter of years, not months, before Boeing stabilizes. When Ortberg, 64, holds his first earnings conference call as CEO on Oct. 23, investors will want more details about how he intends to comprehensively lead one of the toughest revivals in corporate America, rather than just put out fires.
Ratings agencies have warned Boeing that it could fall below investment grade, a move that would make the planemaker the biggest so-called fallen angel in U.S. corporate history. The company has only a small cushion beyond the $10 billion in cash and short-term securities it needs to avoid falling into the junk category. The cost of the strike increases the urgency of turning to the markets sooner rather than later for new financing.
Boeing has lost 42% in value this year, the second-worst performer on the Dow Jones Industrial Average behind Intel Corp.
Continuous loop
“For every issue that comes to a head and is then resolved, more issues arise,” Bank of America analyst Ron Epstein wrote in a note to clients. “All problems feed on each other, creating a continuous vicious cycle and aggravating negative impacts.”
In total, Boeing will record $5 billion in combined charges for its two largest businesses when it formally reports its third-quarter earnings, the company said late Friday in a surprise announcement. In addition to defense and space charges, Boeing will record additional costs for once again delaying its 777X model, leaving its largest wide-body aircraft about six years behind schedule.
Much is unclear about Boeing’s turnaround efforts. Increased production that was supposed to help cash flow has been undermined by the recent strike, and the space and defense business continues to lose money.
The company still needs to buy back Spirit AeroSystems Holdings Inc., which it had spun off in an unfortunate decision nearly two decades ago, only to see its key supplier’s manufacturing quality suffer as a result.
Longer term, Boeing may have to make some tough decisions in unprofitable areas like its space projects. The split made global news a few weeks ago when its Starliner capsule returned to Earth without humans on board. It was an ignominious end to its first manned mission to orbit after NASA decided not to risk putting two astronauts back on the failure-prone spacecraft.
Ortberg has not given media interviews since taking office, although he has reached out to customers, regulators, Pentagon officials and visited Boeing factories. An engineer by training, Ortberg spent most of his career at what is now known as Collins Aerospace, a well-known manufacturer of avionics equipment that is a key supplier to Boeing.
As CEO, Ortberg has appealed to a sense of camaraderie and shared destiny with the workforce. He made a point of moving to Seattle from West Palm Beach, Florida, unlike his predecessor, who largely ran the company from the other side of the continent.
Cash drain
When the strike began in mid-September, the CEO urged workers to embrace the future and not hold grudges, a nod to a 2014 contract that cost them their pensions. Senior management accepted compassionate pay reductions when Ortberg announced furloughs to preserve cash, and the latest job cuts will also include executives and directors, he said.
But with so-called contact work accounting for less than 5% of the total cost of a commercial aircraft program, some observers wonder why Boeing is not acting more urgently to end the work stoppage that is adding to its financial difficulties.
“It’s not a deal breaker in terms of Boeing’s profitability,” said Ken Herbert, an analyst at RBC Capital Markets. “What are we waiting for here? “Every day that passes, it is more disruptive and a bigger cash drain.”
With the job cuts, Ortberg wants to instill a sense of urgency and shared sacrifice, said George Ferguson, an analyst at Bloomberg Intelligence. But the move threatens to further anger the very workers Boeing needs to restart aircraft production, at a time when qualified mechanics are in high demand.
Even before Friday’s announcement, the war of words had intensified. Both Boeing and the union filed formal complaints accusing each other of violating labor bargaining protocol.
“He can’t win without the union,” Ferguson said of Ortberg. “He needs his heart and soul when they get back on the court. If there was a honeymoon for the CEO, it seems that it is over.”
–With the help of Siddharth Philip and Danny Lee.
(Updates with stock performance)
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