Monday was a busy day at The Boeing Co. (NYSE: BA). Ray Conner is retiring, effective immediately, as CEO of Boeing’s commercial aircraft group, but will retain his role as vice-chairman of the company until December 2017. His successor, Kevin McAllister, was CEO of General Electric Co.’s (NYSE: GE) aviation services group.
Boeing CEO Dennis Muilenburg also appointed company veteran Stan Deal as president and CEO of a new Boeing global services unit. Deal had been president of the company’s commercial aviation services group. The new group incorporates the defense division’s services unit and will total about 20,000 employees and current revenues of $15 to $20 billion.
Both appointments were announced after equity markets closed Monday afternoon. Both appointments also place Boeing’s services offerings front and center in Muilenburg’s growth plans for the company.
Muilenburg has set a goal of tripling Boeing’s services revenues to around $50 billion over the next five years. The thinking is that the company’s services business is where future profitability and sales will come from and McAllister’s hiring, in particular, is significant proof of that. At GE, McAllister ran the aviation group’s services business for the engines that GE supplied to Boeing and other customers. It was a $9 billion business for GE and supported operators of some 34,000 GE commercial engines.
Initial reaction from analysts was limited, but positive. Leeham News has posted some first reactions from analysts at J.P. Morgan and Canaccord Genuity. Here are some highlights:
Cost cutting focus is unlikely to change
As an outsider and a product of GE’s lean culture, we assume McAllister will seek out more efficiencies, though we do not see his sole contribution being on the cost side since he once led sales for GE Aviation and we view him as well-prepared for the job overall.
We do not see this as a tipping point for narrow-body strategy
The head of [Boeing Commercial Aircraft] BCA will play a key role in executing whatever strategy management and the board select but we do not at this time view the leadership change as an indication of product strategy and Conner is expected to remain involved on this issue. Boeing intends to decide over the next several months and management has committed to flat commercial R&D dollars through the end of the decade, or ~$2.6bn, regardless of what development path it pursues.
New Global Services segment to launch in 3Q17
The services move is consistent with a renewed Boeing effort to play a larger role in the commercial aftermarket, a change in the business that may—depending on how it is implemented—adversely impact Boeing suppliers that earn high margins on spares and support.
We believe the appointment of Mr. McAllister is a strong move and will ensure continued customer focus within BCA, something Mr. Conner was known for. We also believe BA will benefit from an external perspective, and Mr. McAllister will bring a unique set of tools and perspective that should be valuable as Boeing looks to execute on its upcoming rate breaks, and drive FCF and margin improvement in the business. …
We believe the break-out of the services business, expected in Q3/17 for reporting purposes, will help with the focus on the services business, and is a positive step from a financial reporting perspective. …
… [W]e believe BA’s commercial services effort has been under-delivering in terms of its potential. We view these moves as positive, as they reflect a change of strategy at Boeing, and a willingness to take a risk in areas where it sees opportunity, but we remain cautious on the stock considering additional production downside risk, and the challenges with hitting the margin and [free cash flow] long-term targets.
Boeing’s stock traded up about 0.7% Tuesday morning at $148.00 in a 52-week range of $102.10 to $150.09. The consensus 12-month target is $151.22.