GE Is Breaking Apart. Is Boeing Next?

Tuesday’s announcement that General Electric will break itself up and shed its healthcare and energy businesses was a surprise, but perhaps it shouldn’t have been. Industrial conglomerates have fallen from investors’ favor while pure-play companies are in vogue, largely because investors believe they can do a better job allocating capital and making investment decisions. As GE puts it, “GE will be an aviation-focused company shaping the future of flight.” That approach is likely to appeal to the market.

But the GE announcement could be a foreshadowing, or even a rehearsal, for the breakup of another industrial giant.

Boeing is not a conglomerate, as GE is. There is no particularly good reason to break Boeing up, especially given the technology synergies and market counter-cyclicality associated with the company’s exposure to all major aerospace segments. And the company benefits from its sheer critical mass, global presence, and buying power as the world’s largest aerospace company (except last year, when it was hit by the 737 MAX production halt).

On the other hand, executives don’t always do what’s best for a company’s long-term competitiveness. It’s just a hunch on my part, and not based on any inside knowledge, but consider reasons why Boeing might just follow GE’s lead and break itself up:

First, Boeing leadership is now dominated by people who think like GE people, largely because they were GE people. Dave Calhoun, who became CEO at Boeing in late 2019, spent 26 years at GE, with most of his other experience in private equity, which generally has a similar mindset. He has worked to replace top Boeing executives with GE people, such as CFO Brian West, appointed in June, and David Joyce, former CEO of GE Aviation, who is the most recent Boeing board appointment.

Consider the mindset of the GE crowd. To use an almost-clichéd term, it’s all about “unlocking value.” Boeing today is largely perceived of by investors as a jetliner stock, with its share price largely driven by jetliner-related developments, like border openings, airline orders, or fuel prices. Therefore, the reasoning might go, why not “unlock value” by selling the businesses that are not jetliner related? Besides, there might even be an argument for letting Boeing’s core units focus on their specific businesses.

To look at it from another standpoint, the idea of a large aerospace behemoth that competes in every major segment might have made sense, from a shareholder standpoint, when Boeing’s market capitalization was $249 billion, as it was at its peak, on March 1, 2019. Its market cap today is $128 billion, around 50% off that peak. That leads to a completely different way of thinking, or of “unlocking value,” even if that different approach isn’t what’s best for the company’s long-term future.

It’s possible that Boeing’s senior leadership has already shifted its focus to a breakup strategy. This would explain the baffling array of troubled programs, and the company’s seeming unwillingness to invest in the resources needed to improve execution, restore an engineering culture and to invest in new products.

The 737 MAX is now back in service, in all key markets except China. But now 787 production has halted. The new 777X faces serious delays and cost overruns. Then there’s the defense and space unit’s troubled programs – KC-46, Starliner, MH-139 – and its monumental string of losses in bidding for new contracts, including the Air Force’s next generation bomber (won by Northrop Grumman’s B-21) and the next-generation ICBM (also won by Northrop Grumman).

A management focus on a future breakup would also explain why Boeing has refused to even discuss a new jetliner to counter Airbus’s growing dominance in the middle market, a strong growth segment where Airbus’s A321neo enjoys a five-to-one lead over Boeing. It’s understandable that Boeing management doesn’t think it’s in a position to launch a new, mid-sized, medium-range jetliner, given the company’s financial pressures. But the fact that it refuses to even publicly discuss the idea of a new jet is telling. Boeing Commercial’s research and development budget fell 27% last year. In January, the company closed its Advanced Developmental Composites (ADC) center in Seattle. The message to airlines is that Boeing won’t do anything soon to stop Airbus’s strong market share growth.

If Boeing does indeed follow GE, the ramifications for its competitors will be enormous. For example, Boeing’s defense unit would fit very well with Northrop Grumman. The latter company has successfully invested in the future and is extremely well managed, but is relatively light on legacy programs with existing revenue streams. Boeing is heavy on legacy programs and existing revenue streams, but has not invested in the future. What would it mean to Lockheed Martin, and other military primes, if the two were combined? In fact, Boeing’s defense unit would be sold to any high bidder, except Lockheed Martin, for antitrust reasons. Whatever the outcome, Lockheed Martin would have cause for concern.

To come full circle, you can’t rule out a combination of Boeing’s commercial unit and GE Aviation. Vertical integration is frowned upon, but the overwhelming bulk of Boeing’s jetliners (around 90% by value) are GE or GE/Safran (CFM) powered, anyway. This too could guarantee a competitive response, perhaps even a merger between Airbus and Rolls-Royce.

There may be big regulatory obstacles between a Boeing Commercial/GE merger. The U.S. government broke up United Aircraft, a combination of Boeing, Pratt & Whitney and what became United Airlines, in 1934 for antitrust reasons. But there’d be no airline in the mix this time. And since we’re talking about 2024 or 2025, it’s entirely possible that a new administration would adjudicate on this, and a Republican one, particularly if it’s a second Trump term, would likely approve it.

If this merger happens, once again, “an aviation-focused company shaping the future of flight” might just appeal to investors, even if it’s not the best way to lead the broader aerospace industry.