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February 26, 2024
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News:

On NBC’s Today show, Boeing CEO David Calhoun made a bold prediction that a major US airline will go out of business by the end of the year, and that it will take up to five years before the industry recovers from the coronavirus pandemic. When asked if a major airline will go out of business, he answered “Yes, most likely. Something will happen when September comes around,” which is when the airlines run out of their federal government bailout. One observer described the situation as “Boeing’s CEO finds another rake to step on.”

He went on to say “traffic levels will not be back to 100 percent, they won’t even be back to 25. Maybe by the end of the year we approach 50. So there are definite adjustments that have to be made on the part of the airlines.” He was more positive about the long-term future, stating “we believe we will return to a growth rate similar to the past but it might take us three to five years to get there.”

Analysis:

The gloomy predictions from Calhoun are in line with other industry analysts who estimate that traffic will not return to 2019 levels before 2023 or 2024. The industry recovery is expected to be quite slow. Boeing is laying off 10% of its workers, as it did not take a federal bailout and has no restrictions in how it manages its labor force.

But no other industry prognosticator has come out to forecast the loss of a major US carrier, which would be devastating to the industry. The comments from Calhoun have increased the volatility in airline stocks, particularly American and United, both of whom are 737 MAX customers.

This comes the day after Boeing released its April orders and deliveries, which show net negative orders of 255 aircraft, and negative 516 when new accounting rules are applied. There were no new orders in April, and only 6 aircraft delivered last month.

Insight:

While Calhoun is predicting an airline failure, he might need to look a bit closer to home. Boeing’s losses are massive at it continues to fund an operation at 90% staffing but faces supply chain shortages, a lack of demand for deliveries, and an inventory of 737 MAX aircraft on the ground that has resulted in about 800 aircraft that will return to a market that doesn’t need them in the near term.

This includes the 370 plus MAX aircraft that have been grounded (which after 14 months airlines have learned to live without) and another 450 that were completed during the grounding but haven’t yet been delivered. Plus hundreds of canceled MAX orders. It will likely take the airlines 2-3 years to accept delivery of this additional capacity that it currently does not need.

With fuel prices down and cash flow an issue for airlines, they will likely ask Boeing to defer deliveries rather than taking them quickly. Given the MAX debacle, and the contractual right for airlines to walk away from their orders after the 14-month grounding, Boeing is in a weak negotiating position. As a result, we don’t expect the delivery of the fleet sitting in various Boeing parking lots to occur as rapidly as Boeing would like.

Compounding this are continuing quality issues with the 787, a delayed 777X program, and continuing issues with the KC-46 tanker. Boeing’s commercial operations are currently impacted by problems with every program.

After watching $43 billion of Boeing profits disappear in stock buybacks, the benefits of which have now disappeared. Boeing was forced to increase its borrowing and load its balance sheet with debt. Boeing has not yet re-certified the MAX, and all of its projections to date on the return data have been missed. If the MAX takes another six months on the ground, Boeing itself could be the company in financial difficulty.

While like GM, Boeing may be considered “too big to fail,” the potential now exists that Boeing itself could be in trouble, particularly if one of the airlines that could be in trouble is a major MAX customer like American or Southwest. While the government might “bailout” Boeing through defense contracts, things will get harder before they get better for David Calhoun. It would have been better not to say anything. But Mr. Calhoun has shown himself to stumble from one gaffe to another.



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President AirInsight Group LLC

News:

On NBC’s Today show, Boeing CEO David Calhoun made a bold prediction that a major US airline will go out of business by the end of the year, and that it will take up to five years before the industry recovers from the coronavirus pandemic. When asked if a major airline will go out of business, he answered “Yes, most likely. Something will happen when September comes around,” which is when the airlines run out of their federal government bailout. One observer described the situation as “Boeing’s CEO finds another rake to step on.”

He went on to say “traffic levels will not be back to 100 percent, they won’t even be back to 25. Maybe the end of the year we approach 50. So there are definite adjustments that have to be made on the part of the airlines.” He was more positive about the long-term future, stating “we believe we will return to a growth rate similar to the past but it might take us three to five years to get there.”


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