Blain’s Morning Porridge – October 22nd 2019 – Boeing Boing Gone

Blain’s Morning Porridge  – October 22nd 2019

“Management was criminally negligent.”

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Bit late this morning after helping a cyclist knocked down on the Cable Street cycle-path. Apparently cyclists’ priority on the clearly market blue track doesn’t count if you are driving a black Audi hatchback. The woman claims she indicated, but she drove straight across the cycleway, knocking over a cyclist despite the lines on the road telling her she had to stop and give way. She stopped for a moment, surveyed the scene and drove off. I followed, got my camera out and was screamed for taking photos of her car. No one was badly hurt – this time. I’ve given the photos and my details to the cyclist and I do hope he reports her.

Back in the markets…

The Canadians have elected a minority Trudeau government – just what the world needs: another floundering exercise in dubious political leadership. Softbank has taken control of WeWork – at a $8 bln valuation – which still looks toppy. Trump says negotiations with China on a trade deal are progressing – which probably means they aren’t. Boris is going for another Brexit vote this even – we all want it finished except the very many politicians who think they know better. (Former Bank of England Governor Mervyn King agrees with my assessment Brexit will be a rounding error in the history books.)

Boeing, boing boing… 

What’s interesting me this morning is Boeing. The Stock has taken a spanking in the last few days – on the back of the revelation the Company was apparently playing “Jedi-Mind tricks” on the regulators to get the plane, and particularly a limited requirement for crew training, approved. The wobbles of the last few days means it feels like the Earth is finally shifting beneath Boeing.

There are three aspects to Boeing’s current travails.

The first problem is the aircraft: the now cursed Boeing 737 Max. No matter what Boeing believes the plane is now a toxic scab on the company.  Pilots have said they don’t want to fly it.  Passengers won’t want to fly it.  (Ryan Air – with typical regard for its customers has executed a simple solution – its rebranding its Boeing Maxes as the Boeing 737-8200.  They will probably charge you extra to fly it.)

The Max was the end result of a succession of compromises that took the original beautiful greyhound of the skies, the 1968 B-737-100 regional passenger jet, and grew it into an unbalanced monster on steroids as over-sized engines and undercarriages were squeezed into the original design, making the plane progressively less – less what? Less a plane anyone now wants to fly. (Putting the bigger, heavier engines further forward causes the plane to go noes up and potentially lose lift (aka crash). They wrote software, MCAS, to push the nose back down (written by Indian subcontractors on a couple of dollars an hour). When the MCAS programme took readings from a single faulty sensor, and pilots (unaware it had been fitted) didn’t know how to react.. the result was catastrophe. Twice.)

Boeing must bitterly regret not stopping B-737 development a few years ago, and innovating the lessons they learnt from the new B-787 Dreamliner programme to launch an entirely new plane. They certainly considered it. It would have been massively expensive – especially as they still aren’t turning a profit on the Dreamliner and are still paying its development costs.  The result – keep juicing the old 737 design.

The failure to develop a new smaller plane now looks a massive mistake – Dreamliner orders have stalled.  Airlines and passengers love the plane, but the airline executives would rather have a smaller more economic plane with similar characteristics. Designing a new smaller Boeing would cost billions, but lessons learnt mean it could avoid the many pitfalls such as electric problems and battery fires, and engine failures that blighted the Dreamliner’s early days.

The Second Issue is the company.  Boeing is massively important to the US economy.  The FT this morning points out the failure to deliver Max aircraft has been responsible for a sizable fall in US GDP and Exports. Its also the largest stock on the DOW. It has a special place in the US Military-Industrial Complex – even though the Air Force has been sending back new tankers because of poor build quality.

Boeing looks guilty of being too close to its regulator – The Federal Aviation Authority.  Its looks like a variation of state capture – the leading aircraft manufacturer telling the regulator how to oversee its product. As that was critical for Boeing. To sell the compromise B-737 Max to airlines they had to make it cheap to operate – which meant persuading The FAA it was essentially the same plane and thus crew would need little additional training or familiarisation.  The MCAS system held responsible for the crash wasn’t even mentioned in the aircraft docs – it was assumed pilots would recognise a problem and switch off systems. As the crash transcripts show – the pilots had little idea what was going on – that doesn’t make it their fault the planes crashed.

Meanwhile, Boeing C-Suite executives were living high. The company says passenger safety was paramount at all times. They were paying themselves enormous bonuses and salaries as the orders flowed in.  It’s worth reading the WSJ this morning about increasing “lawmaker scrutiny” of the company. When a company’s corporate governance is questioned, that’s when the market takes serious notice.  It means Boeing’s executives were driven by greed – not safety or quality.  It’s no wonder a number of US stock analysts including Bank of America are now negative on the stock.  The company has demoted its chairman/CEO and brought in a new Chair with a reputation for tough decisions.

The Third issue is fixing the plane.  Boeing is still building 42 of them a month and is running out of parking space. Every plane costs millions to build in materials, parts and labour. The company is earning a nothing on them. Wednesday’s results will be fascinating.  There are no clear signal of when it will return to service – the Americans say maybe this year, but its clear it wont get certification in Europe at the same time – which won’t help.

Boeing Stock is down about 25% since its peak in March 2019 – just before the second crash.  Does that reflect the reality? That the company made a massive strategic mistake by overdeveloping the B-737 design past the point of viability? That the company exploited its position and power over its regulator to push through an unsafe aircraft with limited training protocols in order to enrich itself? That the company now faces a deteriorating cash position and does not have an aircraft product airlines or passengers want?  These are not reasons to buy.

It feels like Boeing is in more trouble that the market acknowledges… Perhaps the moment to buy will be after the results when the C-Suite and CEO Dennis Muilenburg get shown the door. I said it yesterday – and others have picked it up: see Ralph Nader on CNBC calling for dismissal of the entire board: “Your mismanagement is replete with documentation. Management was criminally negligent, 346 lives of passengers and crew were lost. You and your team should forfeit your compensation and should resign forthwith”, said Nader.

At some point Boeing is a buy. Its needs new management. It will thrive – its part of a global duopoly between it and Airbus. The cost of entry is impossibly high. But its probably going to struggle in the short-to-medium term, or even, heaven forbid, require a US bailout to put back on track with new aircraft.

Out of time and back to the day job..

5 Stories to Read Today:

FT – Global growth downgrade masks underlying economic strength

WSJ – Boeing Shares Fall After Downgrades, Lawmaker Scrutiny

Bloomberg – Half the World’s Banks Are Too Weak to Survive a Downturn, McKinsey Says

FT – Investors start to ponder “QE infinity” from the ECB

ZH – Adam Neumann to be Paid another $200mm to Leave WeWork’s Board

Bill Blain

Shard Capital