Boeing provides the biggest intrigues for me because of the complexity of issues and challenges it has. It’s almost like an onion, where you can approach the question layer by layer. And the question is probably one that many ask nowadays- how did we get here? And is this the end yet?
And to define what we mean by “here”, is the current stock price of~ $90 dollars from mid $420s a year ago. I think there is this school of thought of trying to buy stocks while “cheap” and when something as thematic as covid19 happens, people tend to focus on themes as well. And Boeing naturally comes to a lot of people’s minds, certainly mine. However, it is a value buy at $90?
First, to talk about Boeing, we have to talk about the Max, which is the plane model of 2 tragedies, in October 2018, and again in March 2019. The plane was grounded in the same month. Boeing suspended deliveries to airlines but produced another 400 aircraft before temporarily halting manufacturing from January 2020. However, delivery date projection was pushed back multiple times as problems and a culture of concealment, as used in the US Congressional hearing, emerged. In January 2020, an issue was discovered in the software update, further clouding the future of the MAX. Currently, with the FAA taking away Boeing’s delegated authority to certify the MAX, the timeline of return to service is a big question mark.
Unable to deliver the MAX planes, Boeing has been cutting production since 2019 to slow inventory build, save cash, and clear parking spaces.
Boeing never commented on the timeline of the Max, which is the only that would move the price. Due to the regulatory nature, it is hard to come up with a baseline, and many research analysts concur as well. What we do know is the timeline is pushed back again and again with more problems surfacing.
Currently, some researchers point to an 18 months timeline as the best-case scenario. And the delay in being able to deliver the MAX and the subsequent production slowdown will cost Boeing an estimated ~15bn a year. For a company with $100bn in annual sales, it is a significant impact still.
In addition, there is a cost to grounding. This includes costs for putting the aircraft into storage, required maintenance on return-to-service, continued depreciation, the costs of having these aircraft, not in service (missing out on revenue) and the aircraft that are currently not being built and their associated profit losses.
Assuming an 18-month grounding as the optimistic estimate, we are estimating the Boeing 737 MAX crisis to cost Boeing $28.9B. Roughly $14.8B is related to lower production and associated margin contraction and $12.3B is related to airlines missing out on capacity as well as growth and fuel burn savings and cost components such as storage and maintenance. Out of this $14.8B, $8.6B already has been recognized by Boeing, and so, on paper, an extension to the grounding would significantly drive up Boeing's liabilities.
The U.S. aerospace industry, which includes Boeing and its smaller suppliers, is eligible to receive a piece of the $454 billion the Treasury Department will manage under the stimulus bill, like at least $60 billion.
However, Boeing’s CEO has been resistant to the idea of taking the bailout money. For one, Boeing currently doesn’t see the liquidity crunch the banks have seen in 08. Bailouts are emergency money to tie over the day to day operations.
For what it’s worth, BA ended 2019 with $9.5b of cash on the balance sheet + $14b loan = $23.5b of dry powder. Boeing is already drawing down the bank loans right now. And the problem of Boeing is not one with an immediate cash crunch and taking a bailout with even more government scrutiny does not align with shareholder’s interest and it is plausible that the Boeing CEO David Calhoun will not take any bailout money at all.
And there are other ways to save the airline industry without bailing out Boeing as well. The government is more likely to bail out the airlines, given that they face a much bigger and more immediate cash crunch and have more players in the industry. The government could also provide support to Boeing’s suppliers such as GE and spirit aerospace. In doing so, the government can secure the supply chain and the demand side for Boeing without actually taking over control of it.
Boeing stock has risen dramatically over the past week. From the mid 90s to mid 180s in the week of the 23rd. That could be market sentiment improvement. The government stimulus did provide some confidence in the market overall. And the timing of it all probably also coincided with the month-end rebalance for many pensions and real money (which means to maintain a certain percentage allocation of stock and bonds, it needs to rebalance the portfolio between the 2. With stock declining in value, those managers would have to buy more stocks as a result).
Could this rally be sustained? I don’t believe so. Because what clouds Boeing’s future is still unresolved. MAX timeline is even murkier and coronavirus timeline adding to the uncertainly.
Chinese airlines have been the marginal demand for both Airbus and Boeing. And it has realized the dependence on the duopoly. In 2008, the Commercial Aircraft Corporation of China, COMAC was founded. It is a state-owned entity that designs and manufactures airplanes.
The first model it came out was the COMAC 919, a narrow-body twinjet airliner and a direct competitor of Boeing 737 MAX and Airbus A320neo, which is also the Boeing MAX archrival. The plane has debuted in 2017 and the first delivery to Chinese Eastern Airlines is scheduled in 2021. As of 31 August 2018, Comac has 1008 commitments including 305 firm orders, mostly from Chinese leasing companies or airlines.
Just to go back at Boeing’s timeline- the best case scenario currently for Boeing to return MAX to service is in 18-month in the best-case scenario. By then, the COMAC 919 could have already been in service.