Business / Corporate

For Boeing's new CEO, saving the troubled 737 Max is just the first hurdle

by Julie Johnsson

Bloomberg

Boeing Co.’s incoming boss David Calhoun faces a daunting task when he takes over as chief executive officer next year: rescuing the 737 Max while mending the company’s fractured relationship with U.S. regulators. But that’s just the first of the hurdles awaiting him.

Calhoun, who takes the reins Jan. 13, will be leading a once-proud company whose reputation for engineering prowess is now in tatters. On top of the grounding of its bestselling plane after two deadly crashes, Boeing has suffered production stumbles with its KC-46 tanker, delays to its 777X jetliner and an embarrassing mishap that caused its new space capsule to miss a rendezvous with the International Space Station over the weekend.

Then there are growing signs that jetliner sales are cooling after an unprecedented 15-year boom. And the aircraft demand that’s left? Airbus SE’s sales success at the top and bottom ends of the crucial market for single-aisle jets is likely to squeeze Max orders even after the global flying ban is lifted.

“At the outset, Dave Calhoun has one job: manage the Max crisis in all its operational, financial, regulatory, and reputational dimensions,” Seth Seifman, an analyst at JPMorgan Chase & Co., said in a note to clients Monday. “Mr. Calhoun will likely play a key role in product development and this starts with getting the 777X across the finish line but will extend to what new aircraft Boeing should develop.”

The shares climbed 2.9 percent to $337.55 at the close in New York, the biggest gain in six weeks, after the company named Calhoun to the top job. Boeing has tumbled 20 percent since the second Max crash March 10, which prompted the grounding days later. The decline was the worst on the Dow Jones Industrial Average over that period.

‘Restore confidence’

Boeing directors voted unanimously to install Calhoun during a special meeting Dec. 22, a person close to the board said. The 62-year-old had served as chairman since October.

He replaces Dennis Muilenburg, 55, who resigned from the post after months of growing pressure from investors and a chorus of calls for his ouster from the U.S. Congress and leading business publications. Earlier this month, Muilenburg drew a rare public rebuke from the Federal Aviation Administration, which is overseeing the Max’s return.

“A change in leadership was necessary to restore confidence in the company moving forward as it works to repair relationships with regulators, customers, and all other stakeholders,” Boeing’s board said in a statement Monday.

Director Larry Kellner, who once led Continental Airlines, will replace Calhoun as chairman. Chief Financial Officer Greg Smith will serve as interim CEO during a brief transition period while Calhoun, a senior executive at Blackstone Group Inc., unwinds a welter of corporate ties.

Calhoun is taking over during one of the bleakest chapters in Boeing’s 103-year history amid a crisis that is still getting worse.

The Chicago-based company told its suppliers to suspend parts shipments for a month starting in mid-January, a move that will ripple through a vast supply chain and potentially clip U.S. economic growth. Boeing said last week it would pause production of the Max indefinitely as about 400 new planes pile up in storage. The moves will lengthen the company’s recovery from the Max grounding, while denting future profit and cash.

David Calhoun | BLOOMBERG
David Calhoun | BLOOMBERG

‘Stabilizer’ CEO

Calhoun will serve as a “stabilizer” as Boeing works itself out of the Max crisis that began under Muilenburg’s watch, said Richard Aboulafia, aerospace analyst with Teal Group.

“There’s no doubt with Congress and regulators this is a lot better, and in the short run that matters a lot,” Aboulafia said.

But as Airbus extends its lead in sales of single-aisle planes, Boeing also faces major product-development decisions — starting with when to replace the Max and whether to go forward with a midsize jet to counter the A321neo, which has been racking up sales. Those calls will be difficult for a newcomer to Boeing’s executive ranks with no engineering background, Aboulafia said.

“How do you respond to a serious Airbus challenge in a very important market segment while repairing your balance sheet?” he said.

Given that Calhoun is just a few years shy of the traditional retirement age of 65 for Boeing executives, one of his most important tasks will be finding a successor.

“He is likely to have a relatively short tour of duty at Boeing,” Robert Stallard, an analyst at Vertical Research Partners, said in a note to clients. Calhoun’s priorities will be “getting the 737 Max back into service without further aggravation, and starting the process of finding a new CEO and senior management team that can potentially get Boeing back on track.”

He’s the third GE alumnus to run the company in less than two decades. The two CEOs who preceded Muilenburg — Jim McNerney and Harry Stonecipher — also rose through the ranks at GE while Jack Welch was chief executive.

Calhoun ran GE’s aircraft engines division from 2000 through 2004 and ascended to the vice chairman role before leaving the company in 2006. He’d been in contention to head Boeing at the time; directors instead selected McNerney. Calhoun has regularly tapped old contacts to monitor the Max fallout as confidence in Muilenburg faltered, said a person close to the board.

The new Boeing CEO is known as a polished communicator with deep professional connections. He oversees Blackstone’s private equity portfolio and serves as chairman of the Caterpillar Inc. and Gates Industrial Corp. boards. He will exit his non-Boeing commitments.

He also has professional and personal ties within Boeing, serving on Caterpillar’s board with Muilenburg and Susan Schwab, another director at the plane-maker. At GE, his career overlapped with two executives who would go on to prominent roles at Boeing: McNerney and director Mike Zafirovski.

“If there’s a criticism of Calhoun, it’s that he’s “overboarded,” said Cai von Rumohr, an analyst with Cowen & Co.

Longtime director

As a Boeing director since 2009, Calhoun will bear responsibility for decisions that have come back to haunt the firm — including scrapping an all-new single-aisle jet for the 737 Max. The company now faces calls from members of U.S. Congress to look beyond bolstering returns for shareholders — the company’s lodestar for the past two decades.

Calhoun and Boeing directors should pursue an independent, no-holds-barred investigation of the lapses behind the 737 Max accidents, said Howard Wright, an influential business leader in Seattle, Boeing’s industrial base.

Muilenburg adopted the recommendations of an earlier study by a special board committee. But that report was inadequate, said Wright, founder of Seattle Hospitality Group, and co-owner of a small regional airline.

Wright asked, “How on earth did they think they’d learn something new by appointing a board committee to look into the culture of pressure and shortcuts when in fact the board created the culture?”