Al Root

Boeing has experienced some turbulence recently -- to say the least. The problems have created a lot of anxiety for investors wondering how Boeing will find its way out of the current mess.

Thankfully, the commercial aerospace giant is nowhere near a bailout or restructuring. Focusing too much on that runs the risk of missing what really matters more for the company in the coming months.

Boeing's list of problems is long and well known. Design decisions impacting the 737 MAX led to the tragic deaths of 346 people in two crashes. The MAX was grounded worldwide between March 2019 and November 2020. Then came the COVID-19 pandemic which decimated demand for air travel and created significant and lasting turmoil in the aerospace supply chain. Just as things started to improve for the industry, an emergency door plug blew out of a 737 MAX 9 while in flight on Jan. 5, leading to more questions about production quality and culture at the aerospace giant.

There's more. Workers in the Pacific Northwest walked out on Sept. 13 after their labor contract expired, paralyzing most of Boeing's production. Wall Street estimates the strike will cost Boeing about $1.5 billion a month. Not great for a company that has amassed more than $40 billion in long-term debt since the end of 2018.

And there's still more. With all that debt, and no production, S&P Global, on Tuesday, put Boeing's BBB- issuer credit rating and senior unsecured debt ratings " on CreditWatch with negative implications." BBB- is the last run of investment grade. Boeing's debt is on the verge of being downgraded to junk status.

It seems like Boeing is teetering on the edge of something truly horrible. The path forward, though, doesn't include the worst outcome. A few numbers show why.

$23 Billion

Boeing ended the second quarter with roughly $23 billion in cash, investments, and revolving debt available. That nice cushion means it can weather the current labor stoppage for many months.

6,179

Boeing has almost 6,200 unfilled orders. Those planes represent years of work, hundreds of billions of dollars in sales, and tens of billions in free cash flow.

2

What's more, Boeing's backlog isn't going anywhere. Customers can't just go down to the new plane dealer for an alternative plane.

Aircraft are highly engineered, highly regulated machines, requiring significant training to operate. They cost tens of millions of dollars, and are ordered years in advance from one of two players -- either Airbus or Boeing.

Airbus, for its part, has roughly 8,500 unfilled orders. That backlog represents more than a decade of deliveries at current build rates. Airbus couldn't take on much more business even if it wanted to.

42,430

Existing backlogs are one thing. Future demand is another. The industry is still in good shape. Airbus estimates the world will require 42,430 planes over the next 20 years.

That's more than 2,000 a year. Boeing and Airbus delivered just over 1,600 commercial jets in 2018.

$13,600,000,000

Down the road -- or runway -- it's easy to see Boeing delivering more than 800 jets a year. Boeing delivered 806 jets in 2018. It generated $13.6 billion in free cash flow that year.

There's still good money in making planes. Boeing's future free cash flow might not approach $14 billion a year, but it should generate enough to repair the balance sheet, pay striking workers, invest in new products, and, eventually, reward shareholders.

Wall Street projects free cash flow will top $10 billion a year by 2027. A 40% wage increase asked for by the striking union would raise costs about $1.6 billion a year by the end of the four-year contract. The strike, while painful, isn't existential.

What To Focus On

If survival isn't the main concern then what should investors focus on? As surprising as it might sound, labor and production matter far more than the current cash burn or stated of Boeing's balance sheet or credit rating.

Boeing needs to make more jets. To accomplish that, with the required quality, it needs all employees engaged and happy. That's easier said than done. It's also why the call that Boeing easily survives in its current state isn't an endorsement of the stock.

What to do with Boeing stock is something investors can think about after the current strike ends.

Write to Al Root at allen.root@dowjones.com

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October 09, 2024 13:50 ET (17:50 GMT)

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