Insight: Friday 19 June 2020: When Rumors May Have an Element of Truth

News: The industry rumor mill this week is that Boeing may spin-off either its commercial aircraft operations or its defense business. That could provide a return for Boeing shareholders as some financial engineering could pull additional value if the parts turn out to be greater than the whole. As with all rumors, we like to run them through a simple test - does it seem to make sense or is it too good to be true? The Boeing franchise in commercial aircraft has a long and successful history, as since the dawn of the jet age it has taken the leadership position as the largest player in the industry. With recent problems with the 787 and 737 MAX groundings, however, the company is now number two to Airbus when future orders are examined and will produce fewer aircraft than its competitor in 2020 and for the foreseeable future. Nonetheless, the Boeing name remains a solid brand known the world over, and separation from the military business could enable a sharper focus on the fundamental issues plaguing the company. A focus on innovation, rather than harvesting higher margins from using older designs, will be needed to leapfrog the competition, who frankly have superior products in the narrow-body market today in the A220 and A321neo. The defense side of the house also has a storied history, dating before WWII when the B17 Flying Fortress was a major factor in the war effort, the B29, and through to the B52. The merger with McDonnell-Douglas brought another major military contractor into the fold and a major commercial competitor that had followed on hard times. Analysis:The merger created a new culture at Boeing, after Harry Stonchipher, formerly at MDC, took over as CEO. That period of leadership changed the company’s focus away from innovation to financial performance. Many of the characteristics that were found at Douglas Aircraft prior to its demise in 1997 are now found at Boeing -- retreads of older models rather than new designs and a risk-averse attitude towards modern technology, especially after the development delays and cost overruns with the innovative 787 ballooned to over $30 billion. Those attitudes led to the ill-fated 737 MAX, which will likely impact the company for the next decade with slow sales and lower production levels. Boeing has a culture problem that was clearly evidenced in the e-mails regarding the development of the MAX. The lack of respect for the basics, including “misleading the FAA” indicates the depth of the problems. A spinout of the commercial aircraft business might be just what the doctor ordered to enable a “clean slate” that could result in positive cultural change at Boeing. Insight:Is a spin-off of one of Boeing’s divisions feasible? The answer seems to be yes. Does it make sense? Perhaps it does, depending on whether the market believes that two entities each clearly focused on specific targets makes sense. Is it too good to be true? Not really. Synergies between the two groups do not appear to be particularly significant, with little technology transfer. Normally we don’t believe in rumors. But in this case, there may be something to consider. If each unit is perceived as more valuable separately, a McDonnell Defense and Boeing Commercial companies, it is not such a far-fetched idea.

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