Boeing and GE Share Earnings Day? How Fitting.

(Bloomberg Opinion) -- This time two years ago, General Electric Co. could do nothing right and Boeing Co. could do little wrong. GE had just shocked the markets by revealing a $15 billion reserve shortfall in its long-term care insurance business, proving that a tendency to dress up poor decision-making with an optimistic sheen ran much deeper than its power unit. Boeing, having surpassed GE in November 2017 as the largest U.S. industrial company by market value, continued to wow investors with ever-rising cash flow and escalating share buybacks amid an expected surge in output for its best-selling 737 Max jet.

As GE’s struggles continued, much was written about the tarnishing of its once-prized corporate culture and the deserved comeuppance of executives’ push for market dominance at any cost. In hindsight, some of that criticism should have also found its way to Boeing, which had counted many a GE executive among its leadership ranks and bore the same hallmarks of extreme corporate hubris. But shares of Boeing continued their rise even after the first fatal crash of the Max in October 2018. They peaked on March 1, 2019, about one week before a second Max jet crashed and everything changed.

As the global grounding of the Max approaches one year and troubling disclosures around its development continue to pile up, Boeing is having its own reckoning. Using GE as a guide, the road to redemption will be long and challenging. In a twist of fate, both companies are due to report earnings on Wednesday. The actual numbers matter less than whatever symbolic guideposts the updates might yield as far as the companies’ progress on putting their missteps behind them.

At GE, cash flow remains the focal point and the Max grounding affects that number. GE’s joint venture with Safran SA provides engines for the jet, and the company had predicted a $1.4 billion drag on receivables in 2019 in the event the Max grounding persisted through the end of that year. But the impact on overall free cash flow for the aviation unit is mitigated by the fact that GE loses money when it ships new engines and has likely been able to shift production to more profitable spares instead, according to JPMorgan Chase & Co. analyst Steve Tusa. Just as important for CEO Larry Culp’s turnaround efforts is the level of transparency on the puts and takes behind the numbers and the degree to which management is still trying to manage expectations to set up optical “beats” in 2020.

For Boeing, it will be the new management team’s first official appearance since CEO Dennis Muilenburg’s abrupt ouster and the subsequent release of damning internal messages that portray a culture where business goals trumped safety concerns. A recent warning that its “best estimate” for the Max’s return is now mid-2020 will likely translate into significant charges, but may signal a more conservative tone is finally taking hold. Jefferies analyst Sheila Kahyaoglu estimates payments to customers coping with continuing delays could add up to $16 billion, while the drag on the overall productivity of the program could force a $9 billion accounting charge in total. Boeing reportedly has secured commitments for more than $12 billion in financing to help backstop the company while it deals with the fallout from the grounding.

The Max crisis is the culmination of decades of bad decisions – from putting 2,000 miles between Boeing engineers in the Seattle-area and executives in Chicago to initially underestimating the appeal of a more fuel-efficient narrow-body offering from Airbus SE and declaring the market would wait for ”something more revolutionary” from Boeing. Those decisions were unique to Boeing and yet in some ways, they really weren’t. Having covered GE throughout its recent crisis, there’s a lot of deja vu and not just because some of the same characters come into play over and over again.

A stubborn aversion to coming in second place or admitting shortcomings runs deep at both companies. In the best of times, that can be a powerful motivational tool. In the worst of times, it leads to out-of-the-loop or willfully blind executives. This is how the $15 billion hole in GE’s legacy long-term care insurance business was allowed to lurk beneath the surface for years and why a convoluted way of reporting results persists to this day. It’s how Boeing senior executives didn’t know until after the first Max crash that company engineers had discovered much earlier that warning sensors meant to be standard only worked for customers who had paid up for additional features. It explains why Muilenburg was consistently overly optimistic, some might say arrogant, when it came to the Max. It’s why he initially blamed the crashes on a “chain of events,” of which the Boeing software system that triggered the planes’ nosedives was just one. And tragically, it’s how 346 people lost their lives when they boarded Max jets.

It’s hard to envision a better human realization of this melding of cultural dynasties than the current Boeing CEO, David Calhoun. He spent nearly three decades at GE, mostly under Jack Welch, and was thought by some to be a CEO contender, but lost the top job there to Jeff Immelt. He was also reportedly in the running for the Boeing CEO job years ago, but that went instead to Muilenburg’s predecessor Jim McNerney, another Welch protege. A Boeing board member since 2009, Calhoun blessed many of the decisions that led the company into the mess that he’s now being handsomely paid to fix. GE also tried to remedy its problems with an insider in John Flannery; it didn’t work. Whatever you think of GE’s longer-term prospects, it’s clear that the worst is behind that company and that’s largely to the credit of Culp and a much-revamped board. If Boeing’s crisis has parallels to GE’s woes, perhaps its path toward recovery can as well.

To contact the author of this story: Brooke Sutherland at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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