BA - Boeing

[Jurgis]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


 

I haven't read the article, but based on that quote, the premise seems to be false. This seems to equate engineering and innovation with big step changes. These are rare, and most of innovation and engineering has always been more iterative and incremental. Some look down on that, but that's where a lot of progress comes from, and the problems can be just as hard as anything out there even if the results aren't always as flashy. People overrated novelty, and underrate making stuff just better and cheaper and more efficient and scale...

 

I think the point of the quote is that as management / ownership views engineering as more of a cost center and less of a source of revenue growth, they begin to minimize the importance and capital allocated to engineering, focusing instead on minimizing costs throughout the value chain to improve profitability.

 

This.

[Spekulatius]

Excellent article on Boeing’s recent history and how it came about the 737 max. I recall the merger with MDD. I even had some shares back then. It’s also interesting how well Airbus has done and it seems that they will become the market share leader now.

https://qz.com/1776080/how-the-mcdonnell-douglas-boeing-merger-led-to-the-737-max-crisis/?utm_source=YPL&yptr=yahoo

[Liberty]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


 

I haven't read the article, but based on that quote, the premise seems to be false. This seems to equate engineering and innovation with big step changes. These are rare, and most of innovation and engineering has always been more iterative and incremental. Some look down on that, but that's where a lot of progress comes from, and the problems can be just as hard as anything out there even if the results aren't always as flashy. People overrated novelty, and underrate making stuff just better and cheaper and more efficient and scale...

 

I think the point of the quote is that as management / ownership views engineering as more of a cost center and less of a source of revenue growth, they begin to minimize the importance and capital allocated to engineering, focusing instead on minimizing costs throughout the value chain to improve profitability.

 

This.

 

If that's what it is, then it's obviously a problem. But that's not quite what I got from the quote. ¯\_(ツ)_/¯

[Jurgis]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


 

I haven't read the article, but based on that quote, the premise seems to be false. This seems to equate engineering and innovation with big step changes. These are rare, and most of innovation and engineering has always been more iterative and incremental. Some look down on that, but that's where a lot of progress comes from, and the problems can be just as hard as anything out there even if the results aren't always as flashy. People overrated novelty, and underrate making stuff just better and cheaper and more efficient and scale...

 

I think the point of the quote is that as management / ownership views engineering as more of a cost center and less of a source of revenue growth, they begin to minimize the importance and capital allocated to engineering, focusing instead on minimizing costs throughout the value chain to improve profitability.

 

This.

 

If that's what it is, then it's obviously a problem. But that's not quite what I got from the quote. ¯\_(ツ)_/¯

 

I think it's both this and what you got.  ;)

Depends on a company and management.

I think in the case of Boeing it is a lot of this, but of course it's likely not 100%. Clearly Boeing has done some of what you talk about too. ;)

[Gregmal]

And....another one.

[RuleNumberOne]

Very very sad. We need compensation clawbacks. Their CEO for 10 years was another McKinsey guy like Michael Pearson of Valeant. Never risk McKinsey guys as CEOs of an engineering company.

 

Jim McNerney's bio:

 

"At Yale, he excelled in baseball and hockey. After graduating from Yale, he worked for a year at both British United Provident and G.D. Searle, LLC, then attended Harvard Business School, receiving a Master of Business Administration in 1975.[8]

 

McNerney began his business career at Procter & Gamble in 1975, working in brand management.[9] He worked as a management consultant at McKinsey from 1978 to 1982."

 

https://en.wikipedia.org/wiki/James_McNerney

[Jurgis]

Crash in Iran: https://www.nytimes.com/2020/01/07/world/middleeast/iran-plane-crash-boeing-ukraine.html?action=click&module=RelatedLinks&pgtype=Article

 

Articles before the crash in Iran:

 

https://www.nytimes.com/2019/12/24/business/boeing-737-max-survey.html?action=click&module=RelatedLinks&pgtype=Article

https://www.nytimes.com/2020/01/05/business/boeing-737-max.html

https://www.nytimes.com/2020/01/07/business/boeing-737-max-simulator-training.html?action=click&module=RelatedLinks&pgtype=Article

 

Boeing is (was?) planning spring relaunch.

[Viking]

I am surprised with how well the shares have held up...

[Spekulatius]

I am surprised with how well the shares have held up...

 

Yes, I am too. Teflon market, nothing sticks. It wouldn’t touch the stock with a ten foot pole.

[DooDiligence]

Elephant in the rumor?

 

:o

[fareastwarriors]

52 week low today. Is it getting interesting?

 

 

[longlake95]

interesting but not nearly cheap enough. expect significant narrow body sales headwinds going forward.

[StevieV]

The thing with Boeing is that they have a real problem, not just a problem of perception.  We don't know when and how it will be resolved.  We don't know how it will affect sales, regulation, litigation.  We don't know exactly how existing orders will be resolved - will there be discounts?  To what extent?

 

We are already close to a year into the grounding, but it may be years before this cloud is behind them fully.  Maybe at some price, but it doesn't seem to be particularly cheap given the problems.

 

Anyway, I don't find it interesting.

[longlake95]

agreed. There is a problem with Boeing's DNA. That will take some time ( a few years ) to repair.

[Spekulatius]

What is Boeing worth if the 737 max never flies again? The external liabilities to their customers (which they would need to make whole) and their supply chain are huge. It’s probably a doughnut in this case, or close..

 

Mr Market has been underestimating the problem and is starting to wake up. Perhaps regulatory capture will bail them out, perhaps not. It’s hard to handicap in an election years and sometimes politicians need heads on sticks.

 

Airbus may well be dominating the commercial airplane business, if they play their cards right.

[walkie518]

What is Boeing worth if the 737 max never flies again? The external liabilities to their customers (which they would need to make whole) and their supply chain are huge. It’s probably a doughnut in this case, or close..

 

Mr Market has been underestimating the problem and is starting to wake up. Perhaps regulatory capture will bail them out, perhaps not. It’s hard to handicap in an election years and sometimes politicians need heads on sticks.

 

Airbus may well be dominating the commercial airplane business, if they play their cards right.

it's unlikely max doesn't fly again

 

that said, they're saying June/July for FAA approval so likely this turns into December

 

BA's balance sheet, however, is starting to look a little less solid than it was only a year ago... not sure the additional interest expense that they will pay on the $10B is baked-into the price especially since they likely pay it all to LUV and AAL?

 

[Spekulatius]

What is Boeing worth if the 737 max never flies again? The external liabilities to their customers (which they would need to make whole) and their supply chain are huge. It’s probably a doughnut in this case, or close..

 

Mr Market has been underestimating the problem and is starting to wake up. Perhaps regulatory capture will bail them out, perhaps not. It’s hard to handicap in an election years and sometimes politicians need heads on sticks.

 

Airbus may well be dominating the commercial airplane business, if they play their cards right.

it's unlikely max doesn't fly again

 

that said, they're saying June/July for FAA approval so likely this turns into December

 

BA's balance sheet, however, is starting to look a little less solid than it was only a year ago... not sure the additional interest expense that they will pay on the $10B is baked-into the price especially since they likely pay it all to LUV and AAL?

 

I think it is possible that software changes won’t suffice and they have to change the hardware. This will probably cost $10B‘s , cause a lengthy delay and most likely the plane won’t be called 737 max any more. So in that sense, it may never fly again.

[InelegantInvestor]

This has still not gone below its low of December 2018, though it is finally close. In December 2018, it was still flying these planes and delivering orders. Company is in miles worse shape right now. The  $10 billion they are borrowing is the first indication of a liquidity crunch that will only get worse. This needs to go down a great deal more before it makes sense to buy. Remember also, that the current price is 8-10x its 2009 lows.

 

The only thing going for Boeing in commercial is that airlines can't switch their orders to the other supplier and get them any time soon. But they have zero chance of getting new orders anytime soon. What happens as they move through their pipeline? What if Airbus adds another production line? Increasingly Boeing will have to rebate and credit to keep its orders. This will get much, much worse.

[Guest Schwab711]

This has still not gone below its low of December 2018, though it is finally close. In December 2018, it was still flying these planes and delivering orders. Company is in miles worse shape right now. The  $10 billion they are borrowing is the first indication of a liquidity crunch that will only get worse. This needs to go down a great deal more before it makes sense to buy. Remember also, that the current price is 8-10x its 2009 lows.

 

The only thing going for Boeing in commercial is that airlines can't switch their orders to the other supplier and get them any time soon. But they have zero chance of getting new orders anytime soon. What happens as they move through their pipeline? What if Airbus adds another production line? Increasingly Boeing will have to rebate and credit to keep its orders. This will get much, much worse.

 

Boeing has already received new orders for 737 MAX since the grounding

[InelegantInvestor]

This has still not gone below its low of December 2018, though it is finally close. In December 2018, it was still flying these planes and delivering orders. Company is in miles worse shape right now. The  $10 billion they are borrowing is the first indication of a liquidity crunch that will only get worse. This needs to go down a great deal more before it makes sense to buy. Remember also, that the current price is 8-10x its 2009 lows.

 

The only thing going for Boeing in commercial is that airlines can't switch their orders to the other supplier and get them any time soon. But they have zero chance of getting new orders anytime soon. What happens as they move through their pipeline? What if Airbus adds another production line? Increasingly Boeing will have to rebate and credit to keep its orders. This will get much, much worse.

 

Boeing has already received new orders for 737 MAX since the grounding

They received a total of two LOIs in 2019: one from IAG and one from FlyArystan. They had negative net orders for the year. It is unclear how firm those orders are or what BA needed to promise to get them- they are unlikely to be profitable orders.

 

This company is in a lot more trouble than the market is pricing.

[Castanza]

https://www.boeing.com/defense/#/products-services

 

There isn't a chance this is a zero. I agree that the damage isn't priced in though. I hope there is a large pullback. BA has been on the watch list for some time.

[InelegantInvestor]

https://www.boeing.com/defense/#/products-services

 

There isn't a chance this is a zero. I agree that the damage isn't priced in though. I hope there is a large pullback. BA has been on the watch list for some time.

I think zero is unlikely, but possible. It is true that the defense business is hugely profitable. Commercial business is insolvent right now. Is there a point where the government steps in to keep commercial from taking down defense, GM-style?

 

How easy has it been for BA to borrow this $10 billion? How much harder will the next $10 billion be? How about if it happens in a recessionary environment?

 

This should currently be priced somewhere between $100 and $150. I wonder how much of the fact that it's above that is due to its prominence in indexes and ownership by passive funds.

[Guest Schwab711]

This has still not gone below its low of December 2018, though it is finally close. In December 2018, it was still flying these planes and delivering orders. Company is in miles worse shape right now. The  $10 billion they are borrowing is the first indication of a liquidity crunch that will only get worse. This needs to go down a great deal more before it makes sense to buy. Remember also, that the current price is 8-10x its 2009 lows.

 

The only thing going for Boeing in commercial is that airlines can't switch their orders to the other supplier and get them any time soon. But they have zero chance of getting new orders anytime soon. What happens as they move through their pipeline? What if Airbus adds another production line? Increasingly Boeing will have to rebate and credit to keep its orders. This will get much, much worse.

 

Boeing has already received new orders for 737 MAX since the grounding

They received a total of two LOIs in 2019: one from IAG and one from FlyArystan. They had negative net orders for the year. It is unclear how firm those orders are or what BA needed to promise to get them- they are unlikely to be profitable orders.

 

This company is in a lot more trouble than the market is pricing.

 

You said there was a zero chance of new orders.

 

You may very well be right that the market is underestimating how impactful the issue is, but I don't think you are making that case very well. You are just stating it as if it were fact.

 

Castanza is right that BA is not going to $0. If anything, they will merge with LMT or sell off various lines of business. BA earns 50%+ returns on capital which implies a ton of off-balance sheet assets. Assuming normalized returns of 10%, BA's true goodwill value is probably in the range of $80b-$120b (instead of $5b on the books). BA is far from insolvent.

 

I think the question is how big of a hit to margins is this issue and how long will that impact last. That's definitely up for debate.

[Guest Schwab711]

Commercial business is insolvent right now.

 

This should currently be priced somewhere between $100 and $150. I wonder how much of the fact that it's above that is due to its prominence in indexes and ownership by passive funds.

 

You are stating ridiculous things without any attempt to justify them. I don't want to defend BA since I'm trying to decide when and how much to invest, but the commercial segment is clearly the most profitable segment. You have no idea what the cross guarantees are when you state a single segment is valuable but another is insolvent. It should be obvious the commercial segment would be more profitable since defense contracts have capped returns (TDG is a rare example of a defense contractor earning outsized returns due to loopholes in procurement rules). $100-$150 is a range plucked from the sky.

[InelegantInvestor]

This has still not gone below its low of December 2018, though it is finally close. In December 2018, it was still flying these planes and delivering orders. Company is in miles worse shape right now. The  $10 billion they are borrowing is the first indication of a liquidity crunch that will only get worse. This needs to go down a great deal more before it makes sense to buy. Remember also, that the current price is 8-10x its 2009 lows.

 

The only thing going for Boeing in commercial is that airlines can't switch their orders to the other supplier and get them any time soon. But they have zero chance of getting new orders anytime soon. What happens as they move through their pipeline? What if Airbus adds another production line? Increasingly Boeing will have to rebate and credit to keep its orders. This will get much, much worse.

 

Boeing has already received new orders for 737 MAX since the grounding

They received a total of two LOIs in 2019: one from IAG and one from FlyArystan. They had negative net orders for the year. It is unclear how firm those orders are or what BA needed to promise to get them- they are unlikely to be profitable orders.

 

This company is in a lot more trouble than the market is pricing.

 

You said there was a zero chance of new orders.

 

You may very well be right that the market is underestimating how impactful the issue is, but I don't think you are making that case very well. You are just stating it as if it were fact.

 

Castanza is right that BA is not going to $0. If anything, they will merge with LMT or sell off various lines of business. BA earns 50%+ returns on capital which implies a ton of off-balance sheet assets. Assuming normalized returns of 10%, BA's true goodwill value is probably in the range of $80b-$120b (instead of $5b on the books). BA is far from insolvent.

 

I think the question is how big of a hit to margins is this issue and how long will that impact last. That's definitely up for debate.

 

Let me be explicit: those are not solid orders. IAG has a lot of vagueness and came before the extent of the issues was clear. FlyArystan is a startup airline and it is unclear it will ever take delivery on a single plane.

I don't think BA's problems are insurmountable, but I do think that the market is vastly underestimating the scale of the problems and what they will cost.

BA spent a year building planes that it is parking. That is an enormous amount of inventory build. Once there is a path to approval, how much time and money will it take to get these to delivery. They've stopped production now. The longer it is stopped, the more difficult it is to restart. Will passengers be willing to fly in this plane once it is re-approved?

 

They bet everything on the 737Max. It is the bulk of the commercial business.

 

I understand that you feel I am failing to justify what I am saying, and perhaps that is true. I know that there is an awful lot more smoke here than one would expect given what people are saying the size of the fire is. If they got approval tomorrow the stock would still be overpriced at this level. We are at least 6 months from approval, and, quite likely, longer.

 

We are a long way from this being buyable.