Boeing's endless cycle of doom gives new CEO Ortberg no peace

From a freak accident that blew a door-sized hole in the fuselage of a flying 737 Max, to revelations of shoddy workmanship, to a crippling strike that's now in its second month, the icon of U.S. manufacturing has been able to thrive ever since don't allow any rest in the first days of January. Liquidity is dwindling, aircraft production is stagnating and the stock is heading for its worst annual performance since the 2008 financial crisis.

Taken together, the episodes exposed quality deficiencies at Boeing and its supply chain, as well as a quarter-century-long corrosive culture in which cost and schedule pressures permeated decision-making. Earlier this year, customers finally revolted and the board replaced leadership, hiring Kelly Ortberg out of retirement in August to fix the struggling manufacturer.

In his two months in office, Ortberg has made a number of outspoken moves. He fired the head of the defense and space division and tried to avoid a strike by making a higher offer directly to workers – a move that backfired and only strengthened the union's resolve.

Core areas

His latest maneuver came late Friday when Ortberg said Boeing would cut 10% of its workforce, equivalent to about 17,000 people. And he added a hint that more dramatic steps may be needed to get the company back on track.

“We must have a clear view of the work ahead and be realistic about how long it will take us to reach key milestones on the road to recovery,” the Boeing boss wrote in the March 11 memo to workers .October. “We also need to focus our resources on performance and innovation in the areas that are key to us.”

The comments suggest that under Ortberg, Boeing could double down on its operations in the field it is best known for: commercial aviation. The unceremonious departure of Ted Colbert as head of the defense and space business brought that subsidiary's shortcomings into sharp relief – made even more apparent on Friday when Boeing said the unit suffered charges of around $2 billion in the third quarter would have to calculate.

Put it all together and the impression is that a company needs more time to regain its footing – the Federal Aviation Administration's top official said it would be a matter of years, not months, for Boeing to stabilize. When Ortberg, 64, holds his first earnings call as CEO on Oct. 23, investors will want to hear more details about how he plans to fully lead one of the toughest revivals in corporate America, not just put out fires.

“It’s all a bit hand to mouth,” said Nick Cunningham, an analyst at Agency Partners LLP in London. “It is not a coherent plan as such, but just another quarter of major burdens that previous management would have had to make anyway, as they reflect existing and evolving issues and are not part of a restructuring as such.”

Ratings agencies have alerted Boeing that the company may slip 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 buffer on top of the $10 billion in cash and short-term securities it needs to avoid slipping into “jut” status. The toll of the strike increases the urgency to tap markets for new financing sooner rather than later.

Continuous loop

“For every problem that comes to a head and is then resolved, more problems arise,” Ron Epstein, an analyst at Bank of America, wrote in a note to clients. “The problems all feed into one another, creating a continuous doom loop while compounding negative impacts.”

Read more: Boeing is considering a stock raising worth at least $10 billion

All told, Boeing will record a total of $5 billion in charges across its two largest businesses when it officially releases its third-quarter results, the company said in a surprise announcement Friday evening. In addition to defense and space fees, Boeing will record additional costs for delaying its 777X model again, giving its largest widebody aircraft a delay of about six years.

Much is unclear about Boeing's turnaround efforts. The increase in production that was supposed to improve cash flow has been undermined by the recent strike, and the defense and space business continues to lose money.

The company has yet to buy back Spirit AeroSystems Holdings Inc., which it spun off in an ill-fated move nearly two decades ago, only to see it erode manufacturing quality at its main supplier.

Longer term, Boeing may have to make some tough decisions in unprofitable areas like its space efforts. The division made headlines around the world a few weeks ago when its Starliner capsule returned to Earth without people on board. It was an ignominious end to its first manned mission into orbit after NASA decided not to risk putting two astronauts back into the trouble-prone spacecraft.

Ortberg has not given any media interviews since taking office, although he has contacted customers, regulators and Pentagon officials and toured Boeing factories. An engineer by training, Ortberg spent most of his career at the company now known as Collins Aerospace, a respected manufacturer of avionics equipment that is a major supplier to Boeing.

As CEO, Ortberg appealed to a feeling of camaraderie and sharing fate with the workforce. He made it clear that he wanted to relocate to Seattle from West Palm Beach, Florida, unlike his predecessor, who largely ran the company from the other side of the continent.

Cash outflow

When the strike began in mid-September, the CEO urged workers to face the future and not hold grudges – a reference to a 2014 contract that cost them their pensions. Senior management took solidarity pay cuts when Ortberg announced furloughs to preserve cash, and the recent job cuts also affected executives and management, he said.

Read more: Boeing Union resists sweetened wage offer for employees

But with so-called touch work accounting for less than 5% of the total cost of a commercial aircraft program, some observers wonder why Boeing isn't taking more urgent steps to end the work stoppage that is worsening its financial woes.

“It's not a critical driver of Boeing's profitability,” said Ken Herbert, an analyst at RBC Capital Markets. “What are we waiting for here? With each passing day it becomes more disruptive and leads to a greater outflow of funds.”

The strike is spreading through Boeing's supply chain, raising the risk that the recovery at the plane maker's own factories will be slow and stalled, even as workers are back on the job. And so far, Boeing has not said where the workforce cuts will take place or what severance payments might cost the company.

“Can’t win”

Announcing job cuts in the middle of collective bargaining is also a risky strategy.

On the one hand, Ortberg wants to convey a sense of urgency and shared sacrifice, said George Ferguson, an analyst at Bloomberg Intelligence. On the other hand, the move threatens to further alienate the very workers Boeing needs to restart aircraft production at a time when skilled mechanics are in high demand.

Even before the announcement on Friday, the war of words had intensified. Both Boeing and the union filed formal complaints accusing each other of violating collective bargaining protocol.

“He can’t win without the union,” Ferguson said of Ortberg. “He needs their heart and soul when they get back on stage. If there was a honeymoon for the CEO, it appears to be over.”