By Sharon Terlep
A tough job just got much tougher for Boeing's new CEO.
When the jet maker's largest union went on strike Friday, the walkout compounded the list of problems facing Kelly Ortberg, who took Boeing's top job five weeks ago. Among them: rapid cash burn, a struggling supply base and a manufacturing quality crisis.
Hours after the walkout, debt-ratings firms warned that a prolonged work stoppage would prompt them to downgrade Boeing debt into junk status. With more than $45 billion in net debt, a ratings hit would drive up borrowing costs and hamper fundraising efforts.
Boeing shares on Friday fell nearly 4%, nearing a two-year low.
The jet maker burned through more than $1 billion a month in the year's first half and warned in July that the company would burn between $5 billion and $10 billion in cash this year. Largely to blame is Boeing's slowed production of the 737 as the company works to address quality issues after a door plug blew off in midair on an Alaska Air flight in January.
The company is struggling with production slowdowns on other models, too, because of supplier shortages and other issues. Its defense business, which makes F-15 jet fighters and Chinook helicopters for the Pentagon, is also unprofitable. Boeing's Starliner spacecraft faces an uncertain future after technical issues left two astronauts stuck on the International Space Station.
Thousands of machinists walked off the job shortly after midnight Pacific time Friday, rejecting a labor deal struck between the union's leaders and Boeing executives. The tentative contract had offered a 25% wage increase over four years.
On Friday, Boeing finance chief Brian West said the strike -- overwhelmingly approved by the 33,0000 members of the International Association of Machinists and Aerospace Workers union chapter -- took the company by surprise given that union leaders had unanimously signed off on the deal.
He said Ortberg spent last week visiting factories and is focused on coming up with a new deal workers would approve. The parties are scheduled to resume discussions on Tuesday -- this time with a federal mediator.
"His priorities are to reset, re-engage and rebuild," West said Friday at an investor conference.
A looming credit-rating cut
Ortberg is short on time.
Ratings firm Fitch said a one- or two-week strike likely wouldn't affect Boeing's rating, but anything longer could. Moody's cited cash-flow concerns in placing all of Boeing's credit ratings on review for possible downgrades. Both firms currently rate Boeing one notch above junk status.
Each bond-ratings drop would cost Boeing an extra $100 million in annual interest payments, Jefferies analyst Sheila Kahyaoglu estimated. The company has paid more than $2 billion in interest in the past year.
West, speaking Friday, said the company was giving priority to its investment-grade rating.
Ortberg last week took to Boeing's factory floors, speaking and listening to workers there in hopes of avoiding a strike. He acknowledged in a letter to union members that Boeing's mistakes contributed to its current situation.
Jon Holden, the union chapter's president, said Ortberg was in a tough position as a newcomer trying to mitigate years of animosity between the union and Boeing leadership. Longtime machinists are angry about union concessions over the past 16 years that have eroded retirement and health benefits. Recent hires, meanwhile, point to the ever-increasing cost of living and the company's stagnant starting wages.
"It's hard to make up for 16 years," Holden said. "And I think that's the position he was in."
Risks for suppliers
A prolonged stoppage would hit suppliers, who had just begun to recover from shutdowns caused by the pandemic and the 20-month grounding of Boeing's 737 MAX after fatal crashes in 2018 and 2019. Shutdowns have lingering effects, particularly on smaller parts makers that are forced to cut jobs when orders dry up and then must rehire and retrain workers.
To avoid that dynamic, Boeing largely refrained from cutting parts orders despite its own production slowdown. That means the company is holding billions of dollars in inventory of unused parts.
West, the finance chief, said that as soon as the strike started, Boeing told suppliers to stop sending parts if the company had sufficient inventory.
"If you're not behind, we have safety stock. Don't deliver anymore," he said.
Ortberg, an aerospace veteran who ran one of Boeing's big suppliers, Rockwell Collins, succeeded former Chief Executive Dave Calhoun, who said in March that he would step down. During the monthslong search, several high-profile candidates turned down the chance to run the company.
GE Aerospace CEO Larry Culp, widely considered a natural for the job, declined Boeing's request to consider taking over. David Gitlin, the current chief executive of manufacturer Carrier Global, also removed himself from the list of potential contenders.
RBC analyst Ken Herbert said Ortberg must resolve the strike in a week to avoid tarnishing his reputation. The strike pressures Boeing leaders, he said, but shouldn't derail Ortberg's long-term efforts to make changes at the company.
"Not the start expected for new CEO Ortberg," he said in a research note.
Write to Sharon Terlep at sharon.terlep@wsj.com
(END) Dow Jones Newswires
September 15, 2024 12:52 ET (16:52 GMT)
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