Boeing 787 and Jet Production – Top Priorities of New CEO Dennis Muilenburg

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Jun 29, 2015
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Boeing (BA, Financial) named Dennis Muilenburg as the new CEO of the company who will succeed Jim McNerney. Muilenburg will take the office from July 1 when McNerney will step down from his position after serving as the chief executive for 10 longs years. The new CEO will have to undertake various strategic decisions. Muilenburg has already set the priority and is preparing to manage the transition. McNerney said that "Dennis is an extremely capable, experienced and respected leader with an immense passion for our company, our people, and our products and services." What are the strategic moves and decisions the lie ahead of the new CEO? Let’s take a look.

The transition phase

Muilenburg, has been the vice chairman, president and chief operating officer of Boeing since 2013 and before this, he was heading Boeing’s defense division. Evidently, all this made him the obvious successor of McNerney. He joined the aerospace major three decades ago as an engineering intern. Richard Aboulafia of the Teal Group says Muilenburg “is quite respected in the industry and the investor community, although he’s not really familiar with the commercial side.”

McNerney’s retirement age made it mandatory for Boeing to find someone replace his position in the company. Though he shall leave his office soon, McNerney will stay as a chairman with Boeing until February primarily to make sure that the transition is smooth. Boeing said that he will be supporting on subject matters key to the plane maker’s domestic and international customers, associates and other stakeholders.

The plane maker is presently dealing with the issuer of rightsizing its production rate for various aircraft programs as air traffic is growing and demand for planes is rising. In its latest market forecast, Boeing estimates that airlines across the world would need around 38,050 planes in the next two decades.

Determining optimal production rate remains a key challenge

For both Boeing and Airbus (EADSY, Financial), ramping up production remains one of the most critical decisions. Several analysts fear the mounting aircraft demand to be a bubble that would burst. This would adversely impact plane makers’ who are spending in billions to expand their facilities to increase output rate. Besides, component makers would also get hit. Boeing and Airbus presently have piled up record orders of more than 12,000 aircraft.

The recently held Paris Air Show has further loaded their order books. The Chicago based jet maker has confirmed that it will increase 737 production to 52 a month by 2018. Airbus too targets to make 50 A320s a month by 2017.

Some critical moves

Muilenburg is also faced with the challenge of deciding on whether to continue producing of the poor-selling 747 jumbo. In addition, Boeing has been draining cash in every Dreamliner it sells and it will continue to lose more money until late this year. In the first quarter of this year Boeing lost $26 million per Dreamliner which ultimately narrowed the company’s operating profit. The company has already locked $30 billion in deferred production cost for the program. Muilenburg’s top priority will be to reduce the manufacturing cost of the groundbreaking jet, and convert it into a money making machine.

Muilenburg is aware about the task he needs to address. Not only does the company need to make the Dreamliner more cost effectively, but also arrive at the best possible production rate to match the demand pace appropriately. Boeing has so far amassed historic order backlog for about 5,700 commercial airplanes. In an interview at the Paris Air Show Muilenburg said “This [order backlog] represents the biggest single opportunity for the company… It allows us to make the right long-term decision on capital investment. We are also in a position to bring automation into the factories.” As the chief operating officer of the company in the last couple of years, Muilenburg has been responsible for discovering ways to get better performance across the divisions.

Other strategic moves likes introducing an all-new jet to plug in the gap between the largest 737 and the smallest 787 are already apparent. Though McNerney had dismissed the possibility of a clean slate plane last year after the Dreamliner cost overrun, things could move either ways.

Last word

Boeing’s commercial airplane division accounts for around 70% of the company’s revenue. The future of the segment depends on continuous innovations and on how well the company copes with the demand and manages smooth deliveries. Muilenburg is stepping in the company at a time when big crucial decisions need to be taken. And if they go right, it could take the company to new highs.