Can Boeing’s move towards the Pentagon solve its problems?

This is an audio transcript of the FT News Briefing podcast episode: Can Boeing’s move towards the Pentagon solve its problems?

Marc Filippino
Good morning from the Financial Times. Today is Monday, May 23rd, and this is your FT News Briefing.

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Our correspondent snagged a rare interview with a leader in the Russian oil industry. We’ll hear some highlights. And the US aircraft icon Boeing is moving its headquarters to DC. We’ll talk about what the move says about the company’s direction.

Peggy Hollinger
It tells you that they’re shifting the focus towards lobbying the government at a time when really they’re facing fundamentally an almost existential crisis in the commercial part of their business.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Saudi Arabia may be a longtime US ally, but right now it’s standing by its fellow oil producer, Russia. This comes as western nations and allies are increasing financial pressure on Moscow to stop its war on Ukraine. Saudi Arabia’s energy minister told the FT that Riyadh was hoping to work out an agreement with Opec+ which includes Russia. And he insisted the world should appreciate the value of the oil alliance. Riyadh has been resisting western pressure to raise crude output to help bring down oil prices. Opec’s output quota is set to expire in three months and a new production deal is in the works.

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The head of Russian oil group Lukoil was one of the few Russian executives to call for an end to the war in Ukraine. Vagit Alekperov has since stepped down after coming under western sanctions. But in a recent interview with the FT, he warned that an EU ban on Russian oil would be the worst outcome for everyone. He gave a rare interview to our Russia correspondent Nastassia Astrasheuskaya. She told us a little bit about him.

Nastassia Astrasheuskaya
He was working in the oil and gas ministry way before Putin’s time, and he started this company in 1991, just as the Soviet Union collapsed. So he was there in the government way before this regime came into play. And, you know, he started his path as an oil man. He worked at an oil rig in the Caspian Sea. He was an oil engineer. He is educated to be an oil man. He worked in the oilfields in west Siberia. And only then he became a manager. So he really built his way up. And he is really knowledgeable about the industry.

Marc Filippino
So the company now has gas stations all over the world, including the US. It’s a refiner, it operates in 30 countries — a real global oil company. Nastassia, tell us a little bit more about what he said on a potential EU ban on Russian oil imports.

Nastassia Astrasheuskaya
In his view, the sanctions and a potential EU oil ban on Russian imports will have a detrimental effect on the whole industry, raising prices everywhere, messing up the logistical flows which will require a change that will take years. Because you see, for example, if Europe does introduce an oil import ban, then it will have to buy from somewhere else, say the Middle East or Africa. In that case, the Middle Eastern supplies to Asia will be gone and Russia will just redirect its flows to Asia. But to do that, a lot of logistical things have to change. New pipelines be built, new shipment routes, new tankers, etc. And all of that, changing all of that, he says, will take years. And that means greater expenses for all parties. And what analysts would say is that the only winner here really is China, because it will get discounted Russian crude.

Marc Filippino
Was there anything else that really stuck out to you when you spoke to him?

Nastassia Astrasheuskaya
There were a few other things that didn’t make it into the interview, which I found interesting. And one is that he fears greater state consolidation in the industry in Russia because of the sanctions. The question we discussed was whether Lukoil will be acquired by Rosneft, the giant state oil producer. And Rosneft has been, you know, rumoured to want to acquire Lukoil for many, many years. It hasn’t happened. And right now, Alekperov said he doesn’t think it’s on the table. But he does fear that there will be greater state consolidation in the industry.

Marc Filippino
Nastassia Astrasheuskaya is the FT’s Russia correspondent.

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It’s hard to overstate just how important Boeing is to the US economy. The aircraft maker’s commercial jets are one of America’s biggest exports and it’s a top military aircraft maker. But the company is in constant crisis. Now it’s relocating its headquarters, perhaps an attempt to revive its fortunes. To talk more about the move, I’m joined by the FT’s international business editor, Peggy Hollinger. Hey, Peggy.

Peggy Hollinger
Hey.

Marc Filippino
So Boeing is moving from Chicago to Arlington, Virginia. That’s the home of the Pentagon. And you know, wouldn’t you know it, it’s just a stone’s throw away from Washington, DC, with all its lobbyists and regulators. You know, what does it say about Boeing’s direction of travel?

Peggy Hollinger
Well, personally, I think it says quite a lot. It tells you that they’re shifting the focus towards lobbying the government, towards their relationship with the Pentagon and the government at a time when really they face very big challenges, yes, on their defence contracts, which they have a number of problems they revealed in their first-quarter results in April. They have a number of problems with how they negotiated those contracts and cost overruns and delays. But they’re facing fundamentally an almost existential crisis in the commercial part of their business.

Marc Filippino
So I gotta ask, Boeing is already one of the biggest lobbyists in terms of spending in the US. What else could they possibly be lobbying for?

Peggy Hollinger
More defence contracts. I mean, frankly, they’ve lost a number of really important tenders in defence over the years. And defence, as we can see with the Ukraine war, defence spending is expected to really go up sharply over the coming years. So that’s a kind of stable, secure income that you can count on if you’ve got long term defence contracts. Commercial aviation is a lot more cyclical, a lot more volatile as we’ve seen through the pandemic. That’s what most people seem to think this says.

Marc Filippino
So a number of Boeing customers and other stakeholders are not, they’re not happy about the company’s decision to move its headquarters to the DC area. What’s their frustration?

Peggy Hollinger
Well, some of the airlines have suggested that Boeing might be better off if it looked towards its commercial business, which is based in Seattle. They also have operations for the commercial business in South Carolina and elsewhere. But really, Seattle is the cradle of Boeing’s commercial aerospace expertise. It’s where the 737 single aisle is made. Up until recently it’s where the 787 was made. The 787 is now, they’ve said they’ll move all production to South Carolina, but essentially the core of their expertise is on the west coast. And so there’s many, many engineers who have been through a very turbulent two, three, four years who are saying you’re turning your face away from the core, historical core of Boeing by moving over to Washington. But the view was they were too focused on investors and shareholder returns and they spent something like $43bn in share buybacks, giving that money to shareholders instead of investing in engineering.

Marc Filippino
So what can Boeing’s current CEO, David Calhoun, do to turn the ship around, if anything?

Peggy Hollinger
Well, his challenge since he came in has been to stabilise the company to get the Max recertified and back in the air, which he has done. But the problem for Calhoun is that he not only has to stabilise the company, but he has to find a way to catch up on rival Airbus, which, during the pandemic and pre-pandemic was taking market share away with its single aisle family, the 321. And Boeing just simply doesn’t have the capacity. So Calhoun has to manage all these fires and at the same time think to the longer term future of the company. When do we launch a new aircraft that can catch up on Airbus’s amazing 60 odd per cent market share in the single aisle segment? That’s gonna cost money. You know, you’re talking 10bn or more. They’ve got 45bn in debt. So how does he actually build the cash generation that will allow him to launch a new aircraft? And that’s the only way this company can catch up.

Marc Filippino
Peggy Hollinger is the FT’s international business editor. Thanks, Peggy.

Peggy Hollinger
Thank you, Marc.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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