After Boeing Fires CEO, Analysts Warn of Even More Turbulence Ahead

As the crisis over Boeing’s 737 MAX continues, a dramatic year-end corporate shakeup has left the company’s leadership with less aviation and engineering expertise than it started the day with.

Boeing’s board ousted CEO Dennis Muilenburg on Monday, replacing him with chairman David Calhoun to repair relations with regulators, customers, and other industry players.

“I am pleased that Dave has agreed to lead Boeing at this critical juncture,” Larry Kellner, who replaces Calhoun as Boeing’s chair said in a statement. “Dave has deep industry experience and a proven track record of strong leadership, and he recognizes the challenges we must confront.”

But while firing Muilenburg is a step in the right direction, analysts and investors tell Fortune that Calhoun may not be the right person to replace him.

“I think this is good news for Boeing,” says Ivan Feinseth, chief investor officer and director of research at Tigress Financial Partners, which advises large investors and also holds some Boeing stock for clients. “Muilenburg has dragged this on for over a year and has been ineffective. Hopefully this is more of an indication that they’re taking the situation seriously.”

Boeing stock closed at $337.55 on Monday, up 2.9%, or $9.50, from Friday’s close. But that is still more than 23% off the March 1 record close of $440.62.

Market reactions are only an initial response and not something Boeing can take for granted. “Investors lost faith with him and his senior executive team long ago, given their handling of the 737 MAX incidents and aftermath,” says Jeff Yastine, senior equities analyst at Banyan Hill Publishing. He added that the botched orbital test of Boeing’s Starliner—a manned space capsule for reaching the International Space Station—only underscored the company’s reputation under Muilenburg as an aerospace organization that struggles to get across the finish line.

Having Boeing’s chairman Calhoun step in may not placate markets on more than a “placeholder basis,” Yastine says, noting that as chairman, Calhoun defended Muilenburg’s handling of the 737 MAX crisis and in November told CNBC that the now-former CEO “had done everything right.”

Is it the path or the pilot?

Boeing is desperate to get the 737 MAX back to flying passengers. Regulators worldwide grounded the aircraft in early March after a new flight-control system precipitated two fatal crashes five months apart. More troubling, though, ensuing investigations have raised troubling questions about Boeing’s transparency about the plane with regulators and customers, and whether it put financial concerns ahead of engineering ones.

Muilenburg has been widely criticized inside and outside the industry for bungling relations with regulators, customers, and the flying public following the two crashes, which killed 346 people. With Boeing set to pause 737 MAX production in January, maintaining good supplier relations gains new urgency.

The 62-year-old Calhoun will take over as chief executive Jan. 13. Coming from private equity and is a consummate corporate insider, Calhoun has shown himself to be much more comfortable and self-assured than Muilenburg in public appearances and interviews, says Richard Aboulafia, an aerospace analyst and vice president of the Fairfax, Va.-based consulting firm Teal Group.

Calhoun has held a list of high-profile leadership positions at General Electric, Neilsen, and Blackstone. And though he does not have a background in engineering or aerospace, Aboulafia says that he likely can do a better job communicating with regulators, suppliers, governments, and the public.

“Private equity is really good at leaning companies and improving margins—that is not what Boeing needs now,” Aboulafia says. “Boeing needs to improve engineering relations and address its product lineup.”

The company that once introduced the 727, 737 and 747 in less than a decade has become better known for tweaking existing airplane models. It has shied away from big technological jumps since the problem-ridden and much-delayed 787 program, which Boeing finally got on track in the mid-2010s. Muilenburg’s predecessor, Jim McNerney, said at the company’s 2014 annual investor conference that Boeing would not pursue any more “moon shots,” focusing instead on incremental technological advances.

Muilenburg, who already was the heir apparent at the time, echoed his boss’s comments. Where once Boeing used to throw engineering talent at ambitious development programs, “now, we want our best engineers working on innovative reuse” of existing technology he said at the 2014 conference.

And while Boeing’s cautious strategy has been good for the company’s bottom line (upgrading an existing model is cheaper than developing a new airplane), it has left the company playing catch up to rival Airbus in the lucrative single-aisle airplane market, where the European airplane maker’s A321neo has dominated demand for larger, longer-range single-aisle jetliners. Demand for Boeing’s mini-jumbo 777X, which is still in development, has been anemic. And for several years, Boeing has struggled to plug the gap in its product lineup between the 737 and the 787.

The new boss…

Boeing’s past decade has been marked by relentless cost-cutting, development and production delays across airplane programs, strained labor relations, and an unprecedented boom in its share values. Over that time, the company’s shares have nearly tripled. Calhoun joined the company’s board in 2009, meaning he’s been a big part of its growing emphasis on financial performance and increasing shareholder payouts.

According to Scott Hamilton, an aerospace analyst and owner of the Seattle-area consulting firm Leeham, Boeing’s board, to a person, seems to be wedded to putting shareholders first, second, and third. “I’m not sure Calhoun is the right guy to pull Boeing out of its dive,” Hamilton says.

Admiral John Richardson, who oversaw the U.S. Navy’s nuclear operations and was appointed to the board this fall, is the only engineer in the top leadership ranks, which also lacks technical aviation experience.

Calhoun’s appointment as CEO just leans into a culture that a growing number of analysts credit for at least queuing up the MAX crisis. The company should have gone outside Boeing’s insular boardroom for Muilenburg’s successor, Hamilton says. “Why not appoint someone with the stature of a (Chesley) Sullenberger?,” the US Airways pilot who with co-pilot Jeffrey Skiles successfully landed their stricken A320 on the Hudson River. In June, Sullenberger slammed Boeing for downplaying how much training pilots required on the new 737 MAX.

Moreover, CFO and acting CEO Greg Smith has orchestrated much of Boeing’s transformation into an earnings powerhouse. There is no reason to think Smith has simply been following orders, Aboulafia and Hamilton say.

“My sense is Greg is fully on board with the policy of returning 100% of free cash flow to shareholders and increasing margins,” Hamilton says. Since 2013, the company has bought back more than $42 billion worth of common stock. In that same time, Boeing spent about $3 billion to $4 billion a year on research and design.

Since the 737 MAX was grounded in March, Boeing has racked up about $9 billion in losses. That number could hit $20 billion, meaning the program will never be profitable, Hamilton says.

Boeing needs to figure out how to compete with Airbus’s largest, longest-range A321neo, and how to meet demand for a slightly larger airplane—and soon, say both analysts.

Hamilton says the decision has to come as soon as 2021.

“It’s going to take a gutsy and expensive decision,” he says. “I’m not sure Calhoun is the one to make it.”

But if Boeing can turn it around, stock watchers like Feinseth see a big upside. “I think within six to 12 months from this plane being put back in service, you’ll see a new all-time high in the stock,” he says. But that’s a big “if.” By February 2020, Boeing must show it has a plan to go forward and have the MAX back in the air by early summer—at the very latest. If not, the next crash could be more of Boeing’s share price.

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