Boeing: Bad Today, Worse Tomorrow, Terminal Long-Term?

Blain’s Morning Porridge 19th Jan, 2024: Boeing: Bad Today, Worse Tomorrow, Terminal Long-Term?

“Plane crashes are invariably errors of teamwork and miscommunication.”

Boeing is a lesson in broken capitalism. It’s latest safety catastrophe highlights multiple management failures. Things are set to get worse as the Global Economy realigns and the US turns isolationist. Who will eventually dominate air travel?

Following multiple headlines regarding recent misfortunes at the World’s Worst Aircraft Manufacturer, a number of porridge readers have been asking when I was going to write this article. Well, here it is. At the base level, nothing has really changed. I still rank Boeing in the premier league of the World’s Worst Companies and a screaming long-term sell.

What has changed is its long-term outlook has got even worse.

Boeing could not have chosen a worse look. Unused doors falling off airplanes because someone forgot to tighten some screws sums up lax attitudes to quality and safety on the aircraft the company’s recovery depends upon. Revelations of loose rudders, cracked windows, hammers left in wing roots, and host of other problems have come to light, but the door issue has become a Ratners moment for Boeing – the no-kidding, confidence-sapping shocked realisation the company really is absolute rubbish.

It was luck or providence the accident happened at 16,000 feet and on-one died. If it had happened higher… It will now be 10 times more difficult for Boeing’s management to overcome growing customer distrust and dissatisfaction. It reinforces a sense of disbelief – how could a company get it so wrong.

Airlines depend on passengers – Ryan Air’s Mick O’Leary famously thinks flying cheap is the critical factor, but who really would want to fly in a new Boeing if something else was on the tarmac? Taken together with Boeing’s dismal delivery record, that’s something airline bosses will factor into their order plans. Maybe it’s just easier to go to Airbus. (Which is also struggling with a global shortage of aviation engineers and has significant engine issues.)

Boeing has had 6 years of unremittingly bad news – all of which is directly the company’s fault. It’s not just the corporate greed that led to the MAX crashes and the 346 deaths that should properly be described corporate manslaughter, or squandering profits on buy-backs leaving them no capital to develop new aircraft, or over-rewarding their appalling management, or piss-poor industrial relations, or just the general incompetency that pervades everything Boeing seems to do. They got Covid spectacularly wrong – sacking key engineers while keeping the cost-accountants on the books.

Deliveries remain a crisis – progressively delayed across the range. Things will only get worse, but there is little sign they will eventually get better. Boeing remains the USA’s biggest export earner – but the world is changing, and that’s likely to prove the ultimate bad news in practically every respect for Boeing now that it’s lost the lustre that previously made its premium reputation for quality and safety unmatchable.

(If you want to read previous comments on Boeing – use the search function on the Morning Porridge website… (the Q symbol on the top right).  This is a direct link. I think I’ve ranted about Boeing nearly as much as I’ve called out Tesla!)

Aside from being a protected component of the US Military/Industrial Complex, Boeing has one, and only one, real and discernible strength: it is part of a solidly entrenched duopoly. Only it and Airbus have the capacity to supply airlines with the products they currently requite to service their current business and markets. That could change long-term – but in the short-term Ryan Air’s O’Leary is not the only airline boss furious at its repeated failure to deliver planes on time, that work, and are flyable. Fundamental really.

If you want a large twin aisle to fly the Atlantic full of passengers, then it’s a straight up between the Airbus 350 or Boeing’s 787 Dreamliner. (The B-777X might or might not become a competitor if it garners orders in scale, but since we’re years late already.. let’s not worry about it.) The Dreamliner is also held up in slow production because of quality issues. Personally, I prefer the A350 – but not the BA ones, because the cabin seems to have been purposely designed not fit the plug for my MacAir.

If you want a short-haul single aisle, it’s a choice between the B-737 Max or the A320-21 Neo. Both are old designs upgraded with more efficient engines that, sadly, don’t work very well and are basically too big for the original design  – problems I’ve written about many times.

For anyone to break into the duopoly, the costs will be huge. Assume $60 bln to create the firm, build the infrastructure, hire and train staff, and build a brand and the IP, and alongside that another $60 bln to design, tool up, and build a new plane. You would need to sell – conservatively – 1200 plus new aircraft to even start to turn a profit. That’s about as much as the UK government will have squandered on the now pointless HS2 project by the time it remains uncompleted. It’s enough to re-equip depleted armed forces. Boeing made stupendous profits on the 11,600 B-737s and 1500 B-747s that it built and sold – squandering the money on stock buybacks. It has delivered over 1100 B-787 Dreamliners (with 800 still on order), but has yet to make on money on the programme.

(The maths makes you wonder… what would the multiplier effects be? Perhaps my concept for an industrial and technical renaissance in the UK with Avro-Supermarine building state-of-the-art new airliners from carbon and graphene wasn’t such a daft idea? Has anyone got Elon Musk’s number….?)

Boeing currently has zero capital to develop and design an efficient, sustainable successor to the now prehistoric B-737 design – the Max was just an expedient short-term attempt to put fresh teeth on an aging nag. Airbus could probably find capital from its member governments – but that would disbar it from the critical US market as the USA turns ultra-protectionist and would accuse its’ rival of state-aid and product subsidy.  (And the payback would questionable – new aircraft today will still use fossil fuel. Electric aircraft are decades away, but will eventually happen.)

The big issue that could see Boeing sink on the world stage is the likely future market for aircraft. Europe and North America are mature markets. The big growth will come from regional markets in Asia, Africa and South America. The richer these areas become, the more sophisticated the planes will become – but in the meantime they need planes to put seats under bums.

In the past other nations have tried to build jet airlines. Brazil had Embraer (very nice planes) while Canada had Bombardier. Both are now adjuncts of the big two. Mitsubishi spent decades over-engineering a very nice, but cripplingly expensive regional jet.

Everyone is talking about COMAC– the Chinese manufacturer which years late has managed to deliver the Comac C919 – which is about a generation plus behind current Airbus planes. It will not compete with Boeing or Airbus, but it will take the Chinese market (which hasn’t taken a MAX delivery since 2019). It’s being pushed as the perfect plane for short, regional flights in the dense Chinese market – with the added taste of patriotism. Comac is now winning foreign orders, the first being for 30 planes for Brunei. Others have followed. They are likely to become the airline workhorse of new Asian domestic routes, and will increasingly sell into Africa as Chinese influence waxes.

Geopolitics and global trade are clearly evolving into new alliances. China wants to become the primary hegemon of the new Asian co-prosperity sphere which will encompass the BRICS nations plus the Gulf states. That will not be an easy alliance as India and other more wealthy Asian states carve out niches. They no longer care about choosing between Europe or the US for prestige aircraft orders – they want to boost their economies with cheap, efficient air travel. Order a Boeing today and it might arrive in 8 years. Order a Comac and you need to start training the crew immediately.

Chinese planes might not be so good, or efficient.. but they are cheap and available. Safety.. well, let’s see.  Perhaps Boeing, Airbus and the US/European Governments should sit down and conclude that subsidies to develop new “world-beating” modern aircraft are priorities to ensure airliner supremacy remains in the West?

Aircraft have fascinated me since my dad (an aviation engineer) first helped me build a balsa Spitfire. Aircraft are also among my favourite asset classes. However, I am not an aviation financier – that would be unfair to those who properly understand the intricacies of contracts, international law and the tax efficiencies that accompany them. I do, however, understand how aircraft are assets that earn a return – on that basis I can make informed decisions on the likely returns they can make, and therefore their current value.

Over the past years as the global aviation ecosystem recovered and even bloomed post Covid I’ve come to a very simple thesis – the massive, ongoing and deepening shortage of new aircraft caused by producer delays boosts aircraft values. Because airlines can’t source the new aircraft they need from the OEMs (Original Equipment Manufacturers), the value of immediately available older aircraft has increased substantially.  (I’m currently working to find buyers of a portfolio deal of mid-life aircraft that will return over 15% over 5 years. Call or email me to chat about how it works.)

The demand for aircraft is primarily a function of availability, but in the future I suspect Boeing – even if it resolves its multiple current quality, control and delivery issues –  will face a market from which it’s increasingly excluded from. Geopolitics and the economics of using Chinese or other cheaper aircraft when Boeings aren’t available or even wanted will prove a long-term cancer for the plane maker. That will leave it confined to the North American market – which is large, but not large enough to bear the costs of a next generation aircraft programme.

Out of time, and have a great weekend..

Bill Blain

Author of the Morning Porridge, Shard Capital and Bowline Capital Advisors