Boeing’s new CEO Calhoun has little margin for error in 737 Max scandal
Dave Calhoun, Chairman of Boeing
Adam Jeffery | CNBC
Boeing’s new CEO, Dave Calhoun, has a daunting to-do list when he takes the reins at the company’s Chicago headquarters on Monday: improving the plane-maker’s strained relationships with regulators and airline customers, winning back public trust and getting the 737 Max — grounded for almost a year after two deadly crashes — flying again.
A more than decadelong Boeing board member, Calhoun has already signaled he will be more conservative than his predecessor Dennis Muilenburg. The board ousted Muilenburg just before Christmas after his botched response to the crashes and overoptimistic forecast that regulators would allow the planes to fly again before the end of 2019. The latter drew public ire from the Federal Aviation Administration, setting up a rare confrontation between the regulator and the biggest company it oversees.
Calhoun called on employees to learn from the painful lessons since the first of two 737 Max crashes, in October 2018.
“Many of our stakeholders are rightly disappointed in us, and it’s our job to repair these vital relationships,” Calhoun said in a note to Boeing’s more than 150,000 employees. “We’ll do so through a recommitment to transparency and by meeting and exceeding their expectations. We will listen, seek feedback, and respond – appropriately, urgently and respectfully.”
Calhoun, 62 and a veteran of General Electric and Blackstone Group, has been playing peacemaker with the FAA. He also favored the company recommending airline pilots undergo simulator training before the 737 Max can fly again, reversing the company’s position when Muilenburg was at the helm. The change promises to add millions in costs for Boeing but is one that aims to restore confidence in the planes’ safety.
“He’s certainly the right person to stabilize the situation,” said Teal Group aviation analyst Richard Aboulafia.
Culture takes priority
Perhaps Calhoun’s most challenging task will be fixing Boeing’s internal culture that has drawn criticism from lawmakers for prioritizing costs over safety, which has been blamed for killing the 346 people on the crashed flights in Indonesia and Ethiopia.
Calhoun urged the company to release hundreds of internal messages about the 737 Max’s development, a person familiar with his thinking said, adding that Calhoun will spend time at the company’s Seattle plant to talk with employees.
Those embarrassing messages showed Boeing employees bragging about bullying regulators into approving more lax training standards for the plane, saying the jetliners were “designed by clowns who in turn are supervised by monkeys.” Broadly, they showed employees under pressure to keep costs down and a general arrogance toward regulators and airline customers around the world. They also showed that some employees were worried about safety standards and spoke out.
“Would you put your family on a MAX simulator-trained aircraft? asked a Boeing employee to a colleague in a 2018 exchange. “I wouldn’t.” His co-worker replied: “No.”
Boeing called the messages “completely unacceptable.” It said the “language used in these communications, and some of the sentiments they express, are inconsistent with Boeing values, and the company is taking appropriate action in response. This will ultimately include disciplinary or other personnel action, once the necessary reviews are completed.”
“This is a crucial time for Boeing. We have work to do to uphold our values and to build on our strengths. I see greatness in this company, but I also see opportunities to be better. Much better,” Calhoun said in his note to employees.
Calhoun is an insider and the released messages were exchanged during his more than 10 years on Boeing’s board. Some family members of crash victims say he was too close the problem.
“It’s not going to change the culture within Boeing,” said Paul Njoroge, who lost his wife, three children and mother-in-law on Ethiopian Airlines Flight 302 in March. “There is a culture of ignoring safety … maximizing profits.”
Rep. Peter DeFazio, D-Ore., chairman of the House Committee on Transportation and Infrastructure, which is investigating the 737 Max, on Friday said he recently told Calhoun that he needs to change Boeing’s structure so executives are not as beholden to Wall Street.
The decisions that brought the planes to market faster was “all driven by watching the stock price and corporate pressure,” DeFazio told reporters.
Calhoun will have more to do than getting regulators to sign off on the Max, a task that will earn him a $7 million bonus if he does that and meets other financial targets, according to a securities filing on Friday.
He must also deal with delays and the possibility of additional regulatory scrutiny on the Boeing 777X plane as well as sliding demand for wide-body jetliners in general. Hobbled by the crisis, Boeing hasn’t been able to move forward with plans for a new midmarket jet, handing a bigger lead over to chief rival Airbus as the European plane-maker wins sales of its forthcoming long-range, single-aisle plane from airlines including American and United.
Layoffs, production shutdown
The worldwide grounding has wiped more than $50 billion from Boeing’s market value and is threatening to drive up costs further as it heads toward the one-year mark. Regulators say they have no firm timeline of when they will approve Boeing’s changes to the planes to bless them as airworthy again. That uncertainty has dented revenue for airlines that flew the Max by more than a $1 billion and counting.
In July, Boeing took a $4.9 billion after-tax charge to compensate airlines. It has already reached preliminary agreements with American and Southwest, but those customers don’t expect the planes to fly again until at least April, which will further add to Boeing’s tab. The company will likely provide an update to the cost of the grounding when it reports earnings in late January.
This month, Boeing is planning to shut down its 737 Max production facility in Washington state, reassigning some 3,000 of its workers to other facilities, including in California. It said it doesn’t expect to lay off employees, but the crisis is already hitting suppliers, including engine-maker General Electric. Spirit Aerosystems, which makes fuselages for the Max, said it would cut an initial 2,800 jobs because of the crisis.
Treasury Secretary Steven Mnuchin on Sunday said the Boeing 737 Max problems could slow U.S. economic growth this year by half a percentage point to 2.5%.
Larry Kellner, former CEO of Continental Airlines, was named nonexecutive chairman of Boeing in December, a role Calhoun is vacating. Other board changes are possible down the line, but nothing is imminent, a person familiar with the matter said.
“A crisis is not normally a time to rebuild the board,” said Michael Bell, a senior partner at executive search firm Korn Ferry. “You can act in haste and worsen the situation.”
But given the scale of the crisis and that most of the board was there for the years leading up to and including the grounding “at this point it probably needs to be refreshed,” said Charles Elson, professor and director of John L. Weinberg Center for Corporate Governance at the University of Delaware.
It remains unclear whether and how long it will take Calhoun and the board to fix Boeing’s problems. The company must act quickly, though, warned aviation analyst Aboulafia, to ensure it plows its money back into developing new planes.
“He could do this for nine months, and be remembered as the best interim CEO,” said Aboulafia. “Declare victory and get out.”