The Boeing Company released its 2019 results earlier this week, and the company’s financial health, driven by the MAX crisis, is now quite weak. This is, to a great degree, due to the stock buybacks over the last five years that have driven up the stock price and bonuses for executives. At the same time, that practice weakened the balance sheet to the point that Boeing must borrow money to support cash flow and enable management to continue foolish practices, including paying dividends while losing money.
Take a look at the balance sheet at year-end. Total assets are less than total liabilities, leaving shareholder equity of a negative 8.6 billion dollars. Essentially, the company, at this point in time, is insolvent from an accounting standpoint. That must be frightening to shareholders, with the current market capitalization of the company at around $182 billion. These numbers beg the questions of the day, will things improve quickly, is Boeing too big to fail, and is a government bailout potentially on the way?
Will Things Improve Quickly?
Boeing made it quite clear in their earnings call that things will not improve financially until 2021, as the MAX is not expected to re-enter service until June at the earliest, and Boeing needs to restart production and deliver nearly 400 completed aircraft that have been in storage. That cannot happen overnight and with a slow ramp-up, financial impacts will likely stretch into 2022, given shifting customer delivery skylines.
While Boeing is optimistic about restarting production before the MAX is approved to fly again, that process also entails financial risk if the FAA or other international regulators find other issues during their review of the aircraft. Several additional issues beyond MCAS have already been found and are being corrected, including the Flight Management System and wiring bundles, as there have been rumors regarding the potential strengthening of engine nacelles given the closer proximity of the larger engines to the fuselage and key control cables. But it looks like there is no light visible at the end of the tunnel, even though we don’t know how long it will take to get to the light.
BCA has Problems Across the Board in Virtually Every Program
Among Boeing’s three major divisions, Commercial Aircraft appears to be the most problematic, with issues across the board for virtually every program. We don’t believe things will improve quickly, but take two to three years to re-stabilize with strong leadership that changes the current dysfunctional corporate culture.
Their flagship program, the 787, is undergoing a second production cut to 10 aircraft per month, and AirInsight Research predicts this will likely go to 8 per month as the Coronavirus impact on long-haul travel to China impacts long-haul traffic demand. The 787 is also the subject of a separate investigation for quality issues at the Charleston facility in response to whistleblower reports of scrapped materials being installed on new aircraft and metal shavings not removed from areas containing wiring.
After an exceptionally long gestation period resulting in a three-year delay in getting the airplane into service, followed by a grounding for battery issues that required a system redesign, the 787 program became a success but accumulated such high costs that may result in the program never breaking even should production rates fall to 8 per month.
The in-service and popular 737NG is experiencing issues with the “pickle fork” that holds the fuselage and wing together, and as the relatively young fleet ages, this will become a maintenance issue. Also, the NTSB has recommended to the FAA that the engine nacelles be strengthened to avoid a repeat of the Southwest Airlines incident in which an engine blade penetrated the fuselage, causing a passenger to be partially sucked out of the aircraft, fatally. While no determination has yet been finalized, this could be an additional unexpected expense for Boeing.
The 777X, which just completed its first flight, is running late after engine problems at GE, and has missed its initial entry into service projections. During required testing, the fuselage failed and a major hole appeared that was large enough to cause the airframe to be scrapped. Boeing downplayed the seriousness of the issue, initially stating that a door blew off rather than the truth about the fuselage failure. Late entry into the market has resulted in a few orders and a likely arrival during a downturn in wide-body demand. With many 777-300ERs of recent vintage, the replacement market for earlier models remains years away.
The KC-46 tanker has been quite problematic with the US Air Force, which is now another unhappy customer. A nearly continuous series of deficiencies have been noted since the program began deliveries, and the reliability issues remain a serious problem.
The MAX return entails risk
This is all, of course, atop of the MAX crisis, which resulted from Boeing’s focus on cost and timing, placing pressure on engineers to cut corners. Boeing knew about the deficiencies before the two fatal crashes, yet failed to act to correct the problems, misled regulators, hid the MCAS system from airlines and pilots, and exposed an unhealthy corporate culture in which careers depended on “looking the other way” on safety issues.
The MAX crisis broke trust between Boeing and the FAA, airlines, pilots, and travelers, and will be difficult for the company to regain. Can Boeing turn around each and every program and be as successful as shareholders would like? It is within the realm of possibilities, but appears improbable given the daunting challenges he company faces in virtually every commercial product.
The Outlook Remains Weak
Our outlook is for continued poor financial performance for Boeing over the next three years. The company will continue to struggle in 2020 and 2021 to re-deliver all of the aircraft that have been built and rebuild their production rate for the MAX. The 787 will experience an additional, and perhaps a third, reduction in its production rate. The 777X has not been selling well, and is likely to continue to do so in a downturn for wide-body aircraft. 2022 will likely be a better year financially, but still not where it should be.
With the Coronavirus issue in China, demand for travel has dropped and airlines will want to push back their delivery schedules accordingly, which may, in a way, be beneficial to the MAX crisis, but detrimental to production stability.
BCA is not without challenges for Stan Deal and David Calhoun. But is the company too big to fail? The answer is yes, as it represents a substantial element of US international trade. Is a government bailout likely? If the MAX fails to regain customer confidence, that may be necessary, and in our view, the jury remains out.