Boeing’s flightpath to safety is getting narrower all the time

Strikes, we assume, are more a European thing than American. As Homer Simpson tells his daughter Lisa, they’re not the norm. “If you don’t like your job, you don’t strike. You just go in every day and do it really half-arsed. That’s the American way.”
The Simpsons must not be popular in Seattle. That’s where Boeing, the American aerospace and defence company, has most of its commercial aircraft factories, which are standing idle thanks to a strike. Boeing has been shut down several times by industrial action over the past few decades and there have been at least seven instances of strikes lasting a fortnight or more since 1948. The present one is the most important yet, coming at an existential moment for the company.
Even before the industrial action hit, Boeing was on the rack. It is burning through more than $1 billion a month owing to a freeze on production rates imposed by safety regulators. The crisis began with an alarming incident in January, when an emergency door plug fell off an Alaska Airlines flight. The aircraft landed safely and nobody was hurt, but the safety scare set in motion a chain of investigations, whistleblower revelations and management upheaval that has left the company in a febrile state.
On top of all that have come the strikes. Boeing has had two offers rejected by the International Association of Machinists and Aerospace Workers, which represents 33,000 assembly line staff. There has been an added destabilising effect. The strikes have given wide exposure to rank-and-file workers’ utter disdain for the company’s management, adding weight to the view that its culture and leadership have gone seriously awry.
The strikes also have focused attention on the relative weakness of Boeing’s finances. At the start of the year, investors were looking forward to a period of stability and solid returns after years of turbulence caused by two fatal crashes of Boeing’s 737 Max aircraft, in 2018 and 2019. That upheaval had left it with big debts, totalling about $45 billion, half the present stock market value.
But good times were on the way. Carriers were desperate to replace old aircraft and to expand their fleets after the enforced grounding during the pandemic. There are only two places to shop. Boeing and Airbus in effect have a duopoly on commercial airliners and there are long queues to buy. Airbus has a backlog of just over 8,000 jets, Boeing 6,500, or six-to-eight years of work at expected production rates.
Shareholders in the American group expected it to be able to cash in on the boom, cut debt and pay decent dividends and for the share price to reflect this flood of cash. They were right. The shares climbed from $179 in October last year to north of $260 in the weeks before the Alaska Airlines glitch. Even after the shock of the disappearing door plug, Wall Street maintained its rosy view. If the fallout could be limited, there was no reason why Boeing should not prosper.
However, that view has evaporated in recent weeks as the problems have piled up. First, American aviation safety watchdogs are in no mood to let Boeing have an easy ride. More revelations about the state of quality control on its production lines have crept out via whistleblowers and official inspections. Now the National Transportation Safety Board has issued a new urgent safety instruction to airlines, saying that there could be problems with some aircraft rudders. Mike Whitaker, head of the Federal Aviation Administration, rammed the point home in evidence to a Senate committee, saying it would take “years” to carry out the necessary change in the company’ culture.
Second, the increased scrutiny has drawn investors’ attention to problems in Boeing’s other divisions. The defence business (Boeing is the fourth largest supplier to the Pentagon) is lossmaking, with Ted Colbert, its boss, abruptly leaving last week. There also have been embarrassing technical problems with Starliner, Boeing’s new space vehicle, which has left two astronauts stranded on the International Space Station.
One of the first analysts to call “time” was Matthew Akers at Wells Fargo, who published a note at the start of this month with the title Cash Opportunity out the Door and downgraded the shares to “underweight”.
“We think Boeing had a generational free cashflow opportunity this decade, but, after extensive delays and added cost, we now see growing production cashflow running into a new aircraft investment cycle,” Akers said. In other words, Boeing’s hoped-for flood of cash from aircraft sales will materialise eventually, but only in time to be eaten up by the big investment needed to launch a new aircraft. Dave Calhoun, Boeing’s former chief executive, put a number on how much a new jet might cost not long before he left: $50 billion.
Last year Boeing promised investors that it would achieve free cashflow of $10 billion a year. Akers thinks it will peak in 2027 (much delayed from the original timetable) and at less than the $10 billion promised. By then, spending will have started on the new aircraft. Boeing could opt to delay the new model, but, according to Akers, only at the expense of losing substantial market share to Airbus.
This sea of troubles laps around the desk of Kelly Ortberg, the former Rockwell Collins boss who took over from Calhoun at the start of August. His first priority is the strike. Boeing can’t build aircraft without workers. Mediated talks between the company and the union are expected to resume this week. Second, and more difficult to grasp, is the reform of Boeing’s culture to the satisfaction of safety regulators.
And looming over all is the need for cash. Most analysts think Boeing will have to raise tens of billions of dollars in new equity (Akers thinks $30 billion), either through a rights issue or the sale of shares to new investors. The timing is crucial. Ortberg ideally would go to investors with the strikes resolved, regulators assuaged and full-rate production restored. He may not be able to wait until all those boxes are ticked.
Boeing has about $12 billion in cash and $10 billion in undrawn bank facilities to play with, which in theory is a year of headroom, although the exact margins are a matter of judgment. It is a test of nerve: go too soon with an incomplete story to sell to investors; or wait and risk running out of cash.
As always with big American aerospace and defence companies, the US government is waiting in the wings. It has stepped in frequently to tide over suppliers that are important to national security and could do so again.
Dominic O’Connell is business presenter for Times Radio