Insight: Calhoun’s rabbit could be Embraer |

Boeing’s President and CEO's line about pulling a rabbit out of the hat may resonate in unintended ways. It was, on reflection, not the way David Calhoun might have given his message. Firstly, it was not a signal of strength. It was back to the “moonshot” - akin to buying a lottery ticket. Secondly, don’t be surprised that if and when Boeing’s next airplane emerges, it is nicknamed Rabbit. If Volkswagen could have one, why not Boeing? On the face of it, the rabbit comment reflects poorly on Boeing. A company with a century of aviation history. The company with an unmatched heritage. After 100 years of leading aviation, we are asked to wait for a rabbit out of the hat. Seriously? However, assume Mr. Calhoun has a plan. After all, he surely must. What Boeing CEO wants his legacy to be leaving a market to Airbus? A 51-year-old relative startup. Which Boeing CEO does not want an airplane launch during his tenure? Something that will be flying for the next 30 years - something his grandchildren can look at with pride. On November 15, 2022, Boeing employees were invited to a “Global Webcast with Dave Calhoun.” On the call, Mr. Calhoun clarified that product development teams have a full plate, so there is no new airplane. Does this all fit together? What do we know about Dave Calhoun? He has experience leading teams of engineers. He has a reasonable life balance and is not a “self-promoter.” Notably, he threw his predecessor under the bus on the MAX. Which is an odd thing to do since he was on Boeing’s board for a decade, all through the MAX era, from its start. “He’s not new blood,” said Bank of America Merrill Lynch senior aerospace and defense analyst Ron Epstein. “He seems like a capable manager, but he was on the board when all the decisions were made.” Calhoun co-owns the MAX project, warts, and all. Calhoun took over as Boeing’s CEO in January 2020. When markets opened on January 3, 2020, Boeing’s stock was $332.76. Here’s the chart of the past five years for Boeing’s stock price. The big price drop came on February 22, 2020. There was a pandemic that impacted all companies tied to air travel. This was a big influence in that price decline. Here for comparison, is the same chart for Airbus over the past five years. Tellingly the Boeing chart is in red while Airbus’ is in green. Boeing’s stock is down 33% over the past five years, while Airbus' stock price is up 17%. Both OEMs took a hit in February 2020. The recovery at the two firms went differently. Combining the data points (we agree it is incomplete and limited) leads us to conclude that Mr. Calhoun must be frustrated by a dearth of resources. Boeing’s product development team is busy with three programs. There aren’t enough people to do a fourth. In October 2021 he spoke of a new aircraft. That plan now seems to be in the freezer. Mr. Calhoun exhorts his colleagues to ignore the press. Let’s hope they ignore that advice because there are useful and interesting conversations they might miss. Like this one. Note Aviation Week's Jens Flottau’s excellent summation: “I just don't believe that it is not possible for Boeing to build a new airframe, new wings that are 10% better than a design that's been developed in the '60s. It's 50 years. Come on, guys; you got to be better than that.” Boeing must develop a new aircraft – it’s that simple. If it doesn’t, the company's loss could be permanently damaging. The loss of R&D skills, supply chain negotiating power, and, almost certainly, the loss of ambitious and smart talent. If you’re in the aircraft business, that is what you do; you develop aircraft. Shareholders might love David Calhoun’s plans of paying down debt and getting the company back to $10 billion in free cash flow. Yet, that could make Boeing vulnerable because aviation is a long-term industry – billions in costs for new aircraft development and at least a half-decade in time. That is what it takes, whether it’s Boeing or Airbus. How to pull all this together? The purpose of this note is not to be negative to Boeing or Mr. Calhoun. There’s plenty of media out there doing that. Rather our approach is that, given all the data points, how does Boeing move forward? Because it must. Hurdle 1 – Resources If Boeing lacks the resources it needs to develop an aircraft to compete more effectively with Airbus, it needs to insource them. The obvious place for this is Embraer. There is a history to overcome. There are scars in Brazil that are only now healing. But Embraer needs a deal as much as Boeing. Embraer has the talent pool to work on new programs as their commercial focus is now on regional turboprop and eVTOLs. The big money is in big airplanes, and a combination of Boeing and Embraer is the only team that can take on Airbus. COMAC isn’t strong or fast enough to work with Embraer. Embraer needs help selling the E2 family. Boeing’s MAX 7 is not a best seller either. Combing efforts allow Boeing and Embraer to offer aircraft from 100 seats to over 400 seats. Matching Airbus in every category. The Russia/Ukraine war problem removed a useful talent pool for Boeing based in Russia. Talent needs remain as crucial now as before, and Brazil is the best place to find it. Boeing has hired several Embraer engineers. There is an active lawsuit between Embraer and Boeing. This is not a showstopper – remember the Mitsubishi vs. Bombardier lawsuit? It went away when Mitsubishi bought the CRJ program. Can Boeing and Embraer cut the Gordian knot? Yes, of course, they can and save a fortune in attorney fees. Boeing and Embraer can start collaborating on deals as they come along and take on Airbus’ preferred strategy of the A220/A321 combo that Boeing and Embraer struggle against operating separately. The collaboration puts them back in the game. Both sides want that. A combination of the E195-E2 and MAX 9 is the combination that Boeing and Embraer could bring to market immediately. What do some of the numbers look like? When the Boeing/Embraer deal was "on," a concern at Embraer was the level of discounting Boeing might force on Embraer. The former has a wide product over which to offset discounts, while the latter has no such flexibility. That issue remains a factor, as we can see. Even now, the E2 trades at a 5% discount on the Current Market value (CMV) per seat to the A220-300. The MAX 9 CMV is 13% discounted to the A321neo on a per-seat basis. A Boeing/Embraer combination would have to price aggressively to match Airbus. Boeing/Embraer would need to develop a working solution. Boeing Capital could potentially close the pricing gap by sourcing the aircraft and acting as the seller, lessor, or trading with other lessors. Creativity is needed, and this is not an insurmountable hurdle. The big picture is that Boeing and Embraer together can win more business. Because, frankly, they have to. The entire supply chain needs this. In the words of Shakespeare, “Misery acquaints a man with strange bedfellows.” Hurdle 2 – Vision and Leadership Getting over the first hurdle requires fresh vision and leadership. Boeing’s current leadership broke up the pending deal with Embraer. The deal fell apart overnight – people were cut off from each other from one day to the next. Relationships that were mushrooming and synergies that were blossoming hit a wall. No communications and employee IT equipment are kept untouched in case of discovery. The train had left the station and was picking up speed, only to be derailed. Embraer leadership no doubt harbors negative feelings towards Boeing’s leadership and vice versa. This is the primary Gordian knot that needs to be cut. There is likely insufficient trust between the two sides. On the other side of this hurdle is the Promised Land, a verdant field of opportunities. Airlines and lessors are desperate to acquire new, greener aircraft. Cutting emissions and noise is a growing requirement in Europe. This trend will only grow, and as it does, a new aircraft is the fastest way to get there. Can leaders put aside their feelings about the other? It gets harder the higher you go on each side. A solution, in our view, is Boeing bringing in an outsider to lead. They can’t take somebody from inside because of history. Embraer has fresh leadership that isn’t tied to the former merger. Who is the person who can play the role required to bring these two firms together? We have a suggestion, but this is not the time to share a name. The list is very short. Mr. Calhoun’s swansong The situation at Boeing is suboptimal and has been so for some time. That is not only our opinion – that is what the market is saying. As stated before, this is NOT a dig at Mr. Calhoun or Boeing. We are where we are – the goal is to move forward, out of the current situation, and get back to a robust duopoly. The unbalanced duopoly is hurting the entire industry. Mr. Calhoun spoke of pulling a rabbit out of the hat - and here’s one ready for deploying and allowing him to take credit. The move would eclipse the capitulation message from the last investor day. Because Mr. Calhoun was at the center of the Embraer breakup, he co-owns the deal losses against Airbus. Losing a long-standing customer like Qantas was hard for Boeing. Boeing will likely lose more deals without a solution to the Airbus combo offers. But having set up a fresh look at collaboration with Embraer and putting the pieces in place at Boeing, Mr. Calhoun could leave the stage with his reputation intact. He would be remembered as the CEO who stepped in during a crisis, guiding Boeing through its toughest challenges and then setting it up to move forward, reinvigorated. What an excellent career epitaph. What a superb rabbit pulled from the hat.

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