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[ Music ] >> Tom Layson: Commercial airliners burn jet fuel but Boeing is burning cash as COVID-19 crushes the airline sector with a return to normal still years in the future.

Tonight, vocational training in Snohomish County carries on despite the loss of 787 production to South Carolina.

Seattle Times writer Dominic Gates discusses a company in trouble even with the 737 Max flying again.

Industry analyst Scott Hamilton says Boeing's culture does not bode well for the future.

One of the region's largest employers and economic engines, Boeing is the discussion on Northwest now.

[ Music ] >> Tom Layson: All the optimism that came with landing 787 production and a huge order flow for the 737 Max almost seems like another lifetime ago.

Since then, about 13,000 Washingtonians have been laid off, billions of dollars of revenue never arrived, and the company moved production of the 787 -- an airplane with about 475 backlogged orders -- to South Carolina.

As Northwest Now contributor Megan Ronayne tells us, to maintain the area's viable and growing workforce, vocational training has to carry on in Snohomish County even while for now the news at Boeing isn't very good.

>> So when the alarm goes off, you need to understand why the alarm went off.

>> At the Everett Community College Advanced Manufacturing Training Education Center, Mike Patching is preparing students for their future careers.

>>MP As we make more and more composite parts, there's more and more need to understand how to repair those parts.

They're able to take those skills and go into any number of 200-plus manufacturing employers that are here in Snohomish County.

>> Mike says the AMTEC program meets regularly with industry partners to learn what skills his students need to be successful.

>> Here, there's welding and grinding going on.

>> Mr. Patching: We have a very important role as a community college in serving our community and providing the most current training that is relevant to jobs that exist now and jobs that are going to exist in the future.

>> But both the COVID-19 pandemic and the region's largest employer are changing the future of Snohomish County.

In October 2020, Boeing announced they would be consolidating all 787 airline production to South Carolina starting in mid-2021.

>> Mr. Holden: Well, of course, you know, we're disappointed that that decision was made.

You know, our membership put its heart and soul into that program.

>> Jon Holden is the president of the International Association of Machinists and Aerospace Workers District 751.

He emphasizes the existing capacity and capability in aerospace manufacturing in Washington State, and is focused on the next airplane program.

>> Machinists have asked for an objective and independent view of where this industry is heading.

>> IAMAW District 751 recently held a webinar with aerospace analysts to discuss building an airplane to fill a market gap between the 737 Max and the 787.

>> Mr. Holden: And independently, they all agree that Boeing needs to launch that next airplane program, which is, you know, around 210 to 240 passengers.

You know, around 5,000 nautical miles, that is a market that's not being addressed.

>> The union is also preparing a future workforce.

>> Mr. Holden: We have invested tens of millions of dollars into the Machinist Institute, which its sole purpose is to prepare the next generation of aerospace workers here in Washington State.

And, you know, upskill and combat workers, provide pathways for people that want to get into aerospace and, you know, benefit from what should be good middle class jobs.

>> Mr. Patching: Yeah, I mean, they're good jobs that pay well, and there's growth within those jobs.

Once you get in the door, that's just the beginning.

There's opportunities to move up and gain more skillsets, and gain more training and have a career.

>> And programs like AMTEC are preparing students for a new reality.

>> Mr. Patching: Just in the past couple of months, I've seen this movement of people who have had jobs and lost jobs, ben displaced and they're looking to say, "Hey, how can I get those skillsets that are going to be needed so when I enter the workforce, and when the job hiring starts again, and the economy starts to recover -- how can I position myself with fresh skills that is going to give me positive long term employment?"

>> So this program right here is just a little demonstration of what the robot's capable of doing.

>> While the future may have changed, AMTEC faculty's focus on student success will remain the same.

>> It's not just about getting a degree or getting a certification.

This is people's lives.

I mean, this is their livelihood.

They're investing their time, their money and their family's time and money with the understanding that I'm going to help them in the long run with their life, with their livelihood.

So, yeah, I'm really passionate about that.

>> For Northwest now.

I'm Megan Ronayne.

>> Tom Layson: Congressman Rick Larsen has called Boeing's decision to pull 787 production out of Washington State shortsighted and misplaced.

But the Snohomish Economic Alliance says it believes that Boeing remains committed to Everett in the long run.

In recent weeks, Boeing has agreed to pay billions of dollars in criminal penalties to settle the 737 Max investigation, and even the company's Space Launch System program has been hit with a wave of setbacks and cost overruns.

There is just very little good news.

Joining us now is aerospace reporter Dominic Gates, who's part of the team on the Seattle Times that won a Pulitzer Prize for coverage of Boeing and the 737 Max.

I want to start out with kind of a general question.

You know, turning out the lights on Seattle's almost as cliche as throwing salmon is in the Pike Place Market now.

But inside of that is a question that goes something like this, did Boeing at all come close to losing the company?

Or is there so much support out there in the capital markets that that's really not an issue anymore?

>> Mr. Gates: I don't think Boeing will disappear.

I don't think Boeing will go bankrupt.

It is literally too big to fail.

I often in stories refer to Boeing as the US aerospace champion.

There are only two companies in the world -- Airbus and Boeing that do this.

And for the US to lose its champion is unthinkable.

The government in the last resort wouldn't let it happen.

That's not to minimize the problems Boeing has.

It has enormous problems, probably worse than any -- certainly worse than anything I've ever seen in the 18 years I've been covering them.

But going much further back, there are huge production problems, huge demand problems, because of the pandemic.

And everything's on top of everything else.

The pandemic hit them after the Max grounding.

So they are in deep, deep trouble, and they're not going to disappear.

But they are going to shrink.

And they're going to shrink significantly.

And the CEO has said so.

>> Tom Layson: Yeah, and I think you make a good point about the layering on of these problems.

It really, you know -- another cliche that I apparently am not afraid to make today is the fact that it really was sort of a perfect storm for them.

To have an incident with production, several incidents with air safety, and then this pandemic to lay in on top of that.

My gosh, it really has been something.

You mentioned the new CEO.

I want to talk a little bit about Boeing culture, too.

Is the CEO going to fix the culture?

Does a broken culture remain internally?

What's your take on the culture at Boeing?

>> Mr. Gates: When you look at what happened with the Max, it seems to me that any corporation in this incredibly difficult and tragic position has to face it, and has to accept responsibility, admit what was wrong and fix it.

And if they do that, they can come out the other side.

Boeing has fixed it.

Boeing has fixed the Max.

But it hasn't admitted responsibility.

To this day, it still won't say what it did wrong properly.

I mean, it has made a sort of stab at, you know, we made wrong assumptions about what the pilots would do, which is just another indirect way of blaming the pilots.

So it worries me that a culture can't emerge strong and in a new direction if you don't admit what went wrong.

And the other thing that worries me is the attitude to the local workforce here in the Puget Sound region.

You know, obviously, we've got used over the last two decades now -- ever since the 787 was launched -- to Boeing basically threatening to move work elsewhere if the union's here don't give them concessions, if the legislature doesn't give them tax breaks.

And of course, people here in this region are quite fed up with that.

Now, just recently, a moment came when they, because of the pandemic, had to consolidate the 787 production in one location.

And it's South Carolina predictably.

Now, that's actually a legitimate business decision.

There are reasons for it.

If you had to pick one of two sites, there are reasons why it had to be South Carolina.

But it struck me that at the time when Boeing announced that, their local CEO Stan Deal issue issued a letter to employees trying to reassure them that everything was okay.

"Don't worry, we're not leaving the Puget Sound region."

But again, it was just words.

What I would have looked for in leadership at that moment, when you're dealing such a blow to the people who designed the 787, to the people who give billions of dollars of tax breaks from the 787, and you're taking it away from them.

I would have thought that the leadership could have said more than just words.

They could have said, "Listen, there is a future in the Puget Sound.

We commit now to build the next new airplane there."

>> Tom Layson: Let's talk about that new airplane.

You know, Everett sitting up there, that wing plant is sitting up there, a lot of investment has been made.

The CEO sort of hinted at it not long ago in a seminar covered by the late columnist Bill Virgin.

And I'm wondering, do you think that that's reality -- the mid-market airplane is apparently dead for now?

Is that is that a hope for the Northwest when we talk about workforce?

>> Mr. Gates: Well, it's always a hope.

It used to be a secure expectation.

I mean, until the 787, they never built it anywhere else.

And every single new plane since then, every single new plane and new derivative plane, they brought up this competition of state versus state.

I really think Boeing needs to grapple with doing away with that mentality.

It strikes me that in this pandemic, with the company on its knees, you need everybody in the company, every employee everywhere, to be pulling in the same direction and trying to salvage what's good about Boeing.

And there is much that's good and great about Boeing.

And yet, you make moves like this, like this moving the 787 to South Carolina, without any assurance, without any real assurance of future work here.

You do that and it just -- it's demoralizing for the workforce here.

Engineers who are here, are now working for Boeing, must be looking and thinking, "A, are they going to build a new airplane?

We don't know.

And, B, if they do, are they going to build it here?

And C, should I stay here?"

>> Tom Layson: Yeah, the interesting thing about the 787 too is, you know, it was having -- before the pandemic and before it moved to South Carolina, there were a lot of rework issues on that airplane.

And now some new production and quality control issues have emerged on that airplane.

Is the 787 in trouble even in South Carolina?

>> Mr. Gates: Yes, it's in trouble.

It's in deep trouble, not just in South Carolina.

This fuselage problem with the lamination of the composites at the joints is in all the fuselage sections.

So it's in South Carolina, it's in Wichita, it's in Japan.

And they have to fix it.

And they haven't delivered a 787 for two months.

And it's an ongoing problem.

And they're not even able to tell us when it will be fixed and when they'll be out of the woods there.

Unfortunately, this is another self-inflicted blow.

I mean, it was two years ago when I interviewed a senior VP at Boeing and wrote a story about their big plan to change the quality control system of Boeing.

And what it amounted to was introducing new techniques and new technology, and reducing the number of quality control inspectors -- reducing the number by 200.

Reducing the number of humans who would be checking the work.

And Boeing produced this long attempt to convince me that this was a great idea.

It sounded plausible, but I was skeptical then, and it doesn't seem to be working.

You've got to have the workforce on your side.

And that was another thing that alienated the workforce.

I mean, you're going to lay off 200 quality control inspectors?

What does that do to your quality system?

>> Tom Layson: Yeah, and there's also been a major layoff of supply chain managers as well at the company that has been detailed recently.

And it makes you wonder, you know, were any lessons learned from 787 in terms of trying to build an airplane by remote control?

And I think those are some of the ongoing questions going forward.

Any bright spots -- I guess comments on that and in your last comment, any bright spots going forward?

>> Mr. Gates: Well, lessons learned from the 787?

Yeah, Boeing learned.

The 787 global outsourcing plan was a disaster, an unmitigated disaster.

And Boeing leadership knows that.

And I think as long ago as nine or 10 years ago, admitted as much.

And I think therefore that the next new airplane won't be built that way.

And actually it will mean the next new airplane will be a bigger prize, because it will be more focused on a location here in the United States, hopefully here.

Any bright spots in the darkness of Boeing's future right now?

Well, I think the only bright spot is that the Max is flying again.

And it's been cleared to fly by the US and by Brazil, and yesterday by Canada.

And next week, it's going to be cleared by Europe.

So in all the Western world, basically, it will be operating again.

>> Tom Layson: Let's continue our discussion now with Scott Hamilton, an aviation industry analyst who pays close attention to Boeing and its customers.

>> Tom Layson: How has COVID changed the global demand forecast?

We know the airlines are being pounded now.

But this has got some legs too looking forward, doesn't it?

>> Mr. Hamilton: You know people really don't know when traffic is going to return to normal.

The best estimates -- and these are guesses, not even real estimates -- is that we'll return to 2019 pre-COVID levels around 2023, '24 or '25.

And you have domestic travel here in the states.

And I'll define domestic travel within Europe as domestic.

You have international travel with is intercontinental and trans ocean travel.

The international travel seems to be the least likely to come back quickly.

We know that the UK, for example has just put a complete hold on any travel into the UK.

The domestic travel in the US and the domestic travel within Europe and in Asia could come back in '23 or '24.

But again, those are best estimates, best guesses.

We don't really know.

I think it'd be safe to say that by the second half of the decade it should be back to normal.

>> Tom Layson: Can Boeing make it through this cash bleed as they try to keep facilities open, they try to keep people employed?

There have been a lot of layoffs, but obviously they don't want the whole workforce walking out the door.

Can they survive this cash bleed?

Have had the financial markets come in sufficiently to get them through this?

What are your thoughts there?

>> Mr. Hamilton: Yes, so the financial markets have come in.

And Boeing I think obtained about $27 billion dollars in loans at the start of the COVID endemic shutdown.

I think that they will be able to go back to the financial markets if necessary.

But let's also remember that Boeing has a defense unit that provides cash flow Boeing has started to resume delivery of the 737.

Now it's very low numbers.

It's going to be a very slow return to normal on that, again, multi years.

But yeah, I'm confident Boeing can survive.

>> Tom Layson: Backlogs are always a little squishy.

You know, that that money isn't into the bank until you've been paid for it.

But is the size of the backlog to some degree a little bit of a reassurance, if you will, that the company is going to make it?

They are going to stay in production.

We don't know where or what.

But the backlog should suffice for a while?

>> Mr. Hamilton: Well, the Max backlog has over 3,000 airplanes still on order.

And yes, 1,000 aircraft have fallen off either through cancellations, airlines going out of business or rather esoteric accounting classification called ASC-606.

Which means that the customer's financials are weak enough that delivery is questionable.

So the firmness of that order is unspecified.

But there's still more than 3,000 firm orders for the Max.

There are a few hundred firm orders for the 787.

There are ostensibly 309 firm orders for the 777 X. I think about 30% of those are probably squishy.

>> Tom Layson: Yeah, you know the demand even prior to COVID 777 X was questionable a little bit.

Some of the larger airlines, especially in the Middle East, were starting to ask questions about those.

Although I will say that, you know, the analysis that I've read from you and others is that the Max and the 787 seem to be good post-COVID products.

They're the right planes because they're super efficient.

So those planes should be successful.

Although I do have concerns about 787's quality control.

So I've thrown a lot at you there.

Go ahead and hit that.

>> Sure.

Boeing won't have any problem getting the quality control of the 787 under control.

It's just an odd thing that's happening right now.

If it's going to happen, it's probably not a bad time to happen, because airlines really don't want to buy wide-bodied airplanes anyway.

But by the time that the airlines are going to be ready to start taking delivery of those airplanes, those problems can be fixed.

As far as the Max product line is concerned, actually I think Boeing has a real serious product strategy problem with the Max because of the Airbus.

The Max 7 only has about 70 orders about 1% of the backlog.

The Max 9 has fewer than 300 orders.

The Max 10 has fewer than 600 orders.

And the A-321 which is a direct competitor to the 9 and the 10 has 3,500 orders.

So Boeing has a real product strategy problem with the Max.

They basically are a one-and-a-half-airplane family, taking all things into account.

And Boeing really needs to produce a brand new airplane.

>> Tom Layson: That's the segue into my next question.

I hadn't heard those kinds of concerns about the Maxs in terms of its niche and its marketability.

That's some interesting analysis from you, which then spawns the question for me.

There's been a little buzz and there always is about a new airplane, you know, that's everybody's dream.

And of course, everybody would love to have it in the Pacific Northwest to be built.

What are your thoughts about a new airplane?

Is that possible?

Can the company make that kind of an investment right now?

Must they?

Lay that out for me?

>> Mr. Hamilton: Well, I believe they must.

And I'm not alone in that.

Ron Epstein from Bank of America, Merrill Lynch, also believes that Boeing must make that investment.

Can they?

I think that they probably can, but not for a couple of years yet.

I think that even before the COVID crisis, it was clear that during the Max grounding that Boeing was not going to go launch a new airplane program until the Max was back in the air, and that positive cash flow had returned.

Again, the batch was just recertified in November here in the United States.

Canada and Europe are recertifying the Max this month.

It's going to take a while before Boeing starts delivering enough of the Maxes to return to positive cash flow.

I personally believe that by 2022, 2023, Boeing must launch a new airplane program.

>> Tom Layson: So in talking about a new airplane, I have to wonder, did Boeing learn a lesson from the global outsourcing of 787 and the difficulties they've had with quality control and construction?

Might that airplane -- might they decide to color in the lines next time, design it here and build it here?

Or do you think no, it could be a wide open competition?

How do you think they'll handle this new plane if they decide to do it?

>> Mr. Hamilton: You know, there are a number of questions there.

First off, what kind of an airplane is going to be?

We at Leeham Company believe that it needs to be an airplane family that starts at about 190 seats and goes up to 250 seats.

By our analysis, by definition, that should be a twin aisle airplane.

You get up to 250.

The airplane will take forever to enplane and deplane the aircraft.

We think that it could be called an NMMA light, a new mid-market airplane light.

That got to be a little too big.

That was going all the way up to 270 passengers, that had to be too big.

So that's what we think the next airplane should be.

Will it be built here in Washington State?

Very good question.

They certainly have the facilities and the empty space up in Everett to do that by the time that airplane would come around.

But I would fully expect that Boeing would do a national competition for that.

>> Tom Layson: Last question for you, and that's about Boeing's culture.

It's been criticized as being financialized.

You know, safety and engineering went away.

Those were for the nerds, the cool people did finance and high finance and manipulated money.

Do you think that's going to change it all with the new CEO?

Has Boeing maybe learned a lesson on that piece at all?

Or do you think, nope, here we go, the culture has changed forever?

>> Mr. Hamilton: Well, I can't speak what its going to be like under the new CEO when David Calhoun retires at the age 65 in April 2022 -- at least that's the mandatory retirement age for him.

We don't know who the new CEO would be.

If it's Greg Smith, the current CFO, I don't think you're going to see a cultural change.

If it's an outsider, who knows?

But I think the thing that you can point to at least for now is that when Carolyn Kennedy retired from the Board of Directors, instead of pointing somebody to that vacancy who had commercial aerospace engineering background or understood commercial aviation as supposed to military aviation defense work, they went out and appointed the former CEO of a major big ten accounting firm, another finance type.

And that's really troubling.

>> Tom Layson: Well, Scott, as always, I appreciate your analysis.

Boeing's a big company.

There's a lot of moving parts, no pun intended to keep track of and to think about.

And your insights are appreciated for the show.

Thank you.

>> Mr. Hamilton: You're welcome.

>> Tom Layson: There is a temptation at the conclusion of this program to say something like, look at the bright side, it can't possibly get any worse.

The bottom line, you're not going to hear that for me this time.

The airline industry, Boeing culture and quality control and the flying public have a lot of recovering to do before we're anywhere close to good news again.

I hope this program got you thinking and talking.

To watch this program again or to share it with others, as always, it streams on our website at KBTC.org.

And be sure to follow us on Twitter and Facebook at Northwest Now.

Thanks for taking a closer look on this edition of Northwest Now.

Until next time, I'm Tom Layson.

Thanks for watching.

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