Boeing – frying pan into the fire…

Blain’s Morning Porridge – March 13th 2024: Boeing – frying pan into the fire…

“If its Boeing, we ain’t going…”

Boeing is my pick as the worst company on the planet. Its’ stock is down 30% this year. It has failed multiple corporate governance challenges, but is also a victim of QE over-easy monetary policy: ultra-low interest rates enabled its cost-accountant management to wreck the company. Can it recover?

Ah, the exciting life of an Independent Artisan Alternative Assets Financier – for that is what I now define myself to be. Over the past few days I’ve caught innumerable flights round the UK and Europe. As it turned out, I flew them all on excellent Embraer 190 aircraft operated by the somewhat less-than-excellent BA CityFlyer. The plane is human-sized, personable version of the B-737 or Airbus 320 – but a bit small if you have two fatties (like myself) sitting together – but still schweeet. Given the choice I would rather fly it than the Boeing-737 Max I’d flown the week before – which was like a cattle truck with the added frisson of wondering what bit might fall off….

I mention Embraer (which was acquired by Boeing in 2019, but then the deal was abandoned in 2020 amid the fallout from the MAX tragedies) because it’s a great plane, and not part of the Airbus/Boeing duopoly that dominates and distorts Air Travel.

There was a time when flying was exciting and glamorous, but not when BA’s online check-in is bust and you have to queue for 40 mins for the single airport service-staffer to confirm your seat at Zurich airport, or spend 3 hours bored in the Costa Coffee at Southampton because the (same) airline is short of staff, or your brand-new passport doesn’t work in City Airport’s auto-border-control gates, and then get accused of trying to use a fake entry document – to your own country! When the highlight of your 6 am morning is the “joy” of a bacon sandwich in an airport ‘Spoons, or a croissant apparently made of unrecycled plastic in a so-called business lounge… Yep… the jet-setting life is really, really glamourous these days.

Last week I was explaining US elections in Switzerland. Monday was lecturing post-grad students in financial markets at the Edinburgh Business School, while Tuesday was the superb Ishka Aviation Conference in London.

Ishka’s conferences are always interesting and very well attended by the great, the good and the Irish of the aircraft-financing market. (The Irish dominate aircraft leasing… hardly surprising… taxes are involved…) Many of the presentations and panel discussions were excellent – with some superb points made by the speakers. There are multiple challenges for the Aviation industry:  there are still post-covid airport operational problems, a succession of issues have emerged with new “efficient” engine tech, and delayed deliveries for multiple bad reasons by Boeing are now causing serious impacts for many airlines. These are all issues I’ve covered before in the Porridge. (I’ve added a reading list of current articles at the bottom of this morning’s porridge if you’d like to learn more, and you can always use the Porridge Search function to read my previous hatchet jobs on Boeing.)

As a consequence of the shortage of new aircraft there are some superb opportunities to invest in Aviation – particularly in mid-life planes, where airlines are extending leases and scrabbling to find the capacity they need to benefit from the post pandemic growth in travel. I’m more than happy to talk around these issues and opportunities any time.

However, Boeing really is becoming a bigger problem. I have a horrible suspicion things may get worse before they get better – and that will have knock on effects across travel.

Sure enough…. My phone started to ring early Tuesday morning in Edinburgh airport – had I read that a prominent Boeing Whistle-blower was found dead of “self-inflicted” injuries the day his case against Boeing was due to kick-off?

I am not one for conspiracy theories, but I’d watched this guy on TV and, in light of other evidence (like the US Airforce handing back planes because of poor build quality), he had a case to make. I suppose we will never know the mental costs and pressures of taking on a firm like Boeing after 32 years of service to the company cost him.  After 6 years of being stalled and attacked by Boeing trying to diminish his case…. How resilient would you be?

When I was young “if it ain’t Boeing, I ain’t going” summed up their reputation for superb aviation engineering. It was one of the reasons the UK’s once leading airliner business (the Comet, the Trident and the simply wonderful VC10) failed to make a meaningful impact in the global markets. Following the Max crashes (caused by the airline trying to “hide” the software used to control the badly oversized engines effect on the plane’s inherent instability) and a succession of subsequent safety issues, the new line is “if its Boeing, we ain’t going”.

Boeing lost its way after the cost-accountants at McDonnell-Douglas famously acquired Boeing (using Boeing’s money) in 1997. The accountants side-lined the engineers who had run the firm by moving the HQ to Chicago, leaving the engineers in Seattle. During the pandemic it is said Boeing sacked the engineers who built its products, but kept its accountants on full salary.

Today, Boeing is a text-book case of everything that can and did go wrong with a badly governed company, but also how ultra-low interest rates accelerated its’ descent from great engineering company into a failed nest of cost-accounting vipers consumed by toxic labour-relations. If the airline industry was not a duopoly, then Boeing would be bust by now. It only survives because Airbus also has capacity and labour issues, and due to the importance of its order-book to the US Military-Industrial complex.

On Monday I was lecturing the Investment Management students at the Edinburgh Business School on the Virtuous Sovereign Trinity theory of how a stable currency, a sustainable bond market and general political competency will result in a successful growth economy, I used Boeing to illustrate one of the multiple consequences of bad government policy at the corporate level:

Monetary and fiscal policy is a core responsibility of government (even if they choose to exercise that prerogative through monetary agencies such as independent Central Banks). The QE regime post 2008 illustrates just how distorting ultra-low interest rates are to markets and corporate behaviours.
Ultra low rates allowed Boeing’s senior management to justify “investing” the profits from its’ successful B-747 and B-737 programmes, plus substantial bond market borrowing, into stock buybacks rather than making a massive investment into a new energy efficient, carbon-fibre replacement for the aging 737 single-aisle jet.
Boeing spent $56 bln on buy-backs, creating enormous wealth from option driven bonuses for the C-Suite. They did yet another rejig on the 737 plane, and came up with the Max, fitting the tired airframe with new, “fuel-efficient” engines. 346 people died when two of them crashed because Boeing tried to hide the instability issue at the heart of the new design.
Boeing’s stock price subsequently tumbled. It is down 30% this year on the back of new safety concerns. There is no way it can afford to fund the development of a new replacement aircraft to the venerable B-737. The company is now plagued by toxic industrial relations as cost cutting is the only way the company survives.

A six-week audit of Boeing’s Max production lines by the US regulator following the door plug blow-out on Alaska Airlines was shocking. In the wake of the apparent carelessness in the fitting of the door plug, Boeing and its fuselage manufacturer Spirit (which Boeing sold, but now seeks to reacquire to give it supply-chain certainty and security) were subject to an intensive series of checks. They exposed multiple quality control issues in both plants, failing over 35% of “production process audits” examining how they construct the plane. Some of the engineers they interviewed barely passed required knowledge tests.

I can understand how Boeing engineers might use household soap to check a door seal (its exactly the same way we look for punctures on a bike inner tube), but it doesn’t seem..  well very professional. A Boeing spokesman admitted they were “reviewing all identified nonconformities for corrective action”. (I seldom have time to check for nonconformities in my spelling.)

Boeing now says it will evaluate staff on their contribution to a safety culture rather than profits. Bit late for that. It does not seem a business where professional engineers are dedicated to creating the safest, more efficient airliners on the planet. Instead, it confirmed the Public is right to question Boeing’s credentials.

Reading List

The Atlantic                 The Long-Forgotten Flight That Sent Boeing Off Course

Bberg                          Boeing calamities Push Stock to its widest cap with Airbus ever

Guardian                     Boeing whistleblower found dead in South Carolina

Japan Times               We’re stuck with the 737 Max, like it or not

BBerg                          Boeing Crisis Derails Airline Growth Plans as Output Stalls

Out of time… and back to the day job…

Bill Blain

Author of the Morning Porridge, Market Strategist

Wind Shift Capital