Can Boeing come back?

0:05Pushkin. When you think of great American companies, the names that come to mind are companies like Coca-Cola, IBM, General Motors, Apple, Microsoft. They've all had their ups and downs. One great American firm that is having its downs right now is Boeing. Today on the show, can Boeing make planes great again? This is Unhedged, the markets and finance podcast from the Financial Times. I am Rob Armstrong coming to you from fabulous New York City, which is the location of Unhedged World Headquarters. And I'm joined today by Claire Bushy, who is the Financial Times Chicago correspondent. Claire, how are you?

0:54Hi, thanks. How are you, Rob? I'm really glad you're on the show. I'm really interested in this company because it has been a great company. It's been around for decades and decades. Returns to investors have been great. But now we have to ask a very rude question about them, which is, can they make and deliver airplanes to their customers? Well, that is definitely the question that the ratings agency analysts all want answered because their credit rating is kind of hanging on the balance. If I remember correctly, they're at the lowest rung of investment grade. So if one more thing goes wrong, they get knocked down to junk.

1:35Yeah. The thing that really matters to Boeing, like fundamentally as a company, is can they make and deliver commercial planes? It sounds incredibly simple and dumb, but like they're struggling to do it at the moment. Are they delivering any planes this year? I mean, just give us the what's the revenue picture look like for them? Certainly they have been delivering planes. I didn't mean to create the impression that like no planes are coming out of Washington state. That's not true. But at the moment, their factories in Washington state are stopped because their workers have walked off the job as they tried to improve their pay and benefits.

2:13And earlier in the year, they were slowing production because, if you remember, they had this really high-profile quality failure earlier in the year where a panel of the fuselage on a 737 MAX flew off the plane at 16 ,000 feet. Now, I don't know a lot about planes, Claire, but my understanding is that sort of thing is not supposed to happen. It is frowned upon, yes. Yes. Particularly by the passengers and crew of the plane where it's happening. Right. So there's a question about labor relations and there's a question about quality control, which actually goes back to the earlier. They had two max crashes and there was questions about that design as well.

2:54Yes. And it's actually two separate problems because the max crashes were a failure of engineering. And what the door panel incident was, was a failure of manufacturing. Basically, you can break it down to like the first time people followed the specifications and the planes crashed. The second time they didn't follow the specifications and the plane had a panel fly off. The people who were building the plane did not follow the specifications for building the plane. Typically, you want your doors bolted on and this was not. Okay. I mean, those issues have to be related at some level. the labor issue on the one hand, and the quality control issue, you would think that this is a highly complex manufactured product.

3:37These two issues are related. Yes. I remember being on an earnings call after the crashes, and one of the analysts who'd been sort of doing this for a long time, and he simply asked, what happened? And I feel like the entire time I've been covering Boeing. That is the question to answer here. What has led to this diminution? So if we pan out a little bit and look at the question historically, there is a certain story about Boeing that basically the bean counters rather than the engineers got in charge of this plane company. And that was the beginning of all the trouble. It was run by a bunch of Jack Welch-a-lites or whatever derogatory term you want to use.

4:22Do you think that is a fair analysis or a kind of caricature? I do think it's a fair analysis, although I think it glosses over, you know, there's a lot of excitement about the new CEO having an engineering background. And I just think it's worth pointing out that Dennis Muhlenberg, who had the MAX crashes happen on his watch, was also an engineer. But overall, I think this idea that Boeing became more interested in presenting improved financial returns to its shareholders and that they did that by squeezing the workforce, squeezing their suppliers. You can only do that for so long before eventually you have problems.

5:08I mean, it's funny because that story really echoes with other American industrial stories. Decades ago, the big American car manufacturers, and I think of GM, but I think the others were probably involved. True. They just squeezed their suppliers to the last penny to the point where the supply chain broke down and the cars weren't working optimally. GM is a reference that I have heard before from other people who are very familiar with the aerospace supply chain. And they talked about how the architect of that particular strategy for GM, like you still can't be at a Detroit dinner party without like you mentioned his name and somebody spits.

5:45Spits on the ground. It's like being in the northern UK and somebody mentions Thatcher. Yes, exactly. An icy breeze flows through the room. So this is a story often told. I guess another thing was there was a move away from Washington to like Chicago. You know, the headquarters moved away from the factory. Yes. And it was done on purpose to be away from the factories. And, you know, that was not lost on the workforce whatsoever. But Phil Condit was the Boeing CEO who was the architect of that move. And he said at the time that they wanted to move the corporate center away from Washington state.

6:30So executives wouldn't be. God, I wish I could remember the exact words. It was something along the lines of don't want them caught up in the day to day of running the business. Yes. Who wants that? Yes. Like, what are you doing, sir? What do you want to be caught up in? It was a pretty breathtakingly remarkable statement. You know, so they moved the headquarters to Chicago and they never had more than like 800 people here. It might be less than that. It's maybe 500. You should mention that Claire is coming to us from windy Chicago. Yes. And I have been to the Boeing office in Chicago, which is no longer the headquarters, by the way.

7:11Like in 2022, they moved it to Arlington, Virginia, ostensibly to be closer to their key client, the U.S. government. Correct. But it really makes about as much sense as having it in Chicago. And very significantly, when the new CEO was chosen, Kelly Ortberg, when he started the job in August, he was living in Florida and he moved to Washington State, bought a house. And that has generally been viewed quite favorably. Across stakeholders, everyone's pretty happy he did that. So, Claire, I am looking at Wall Street estimates for per share earnings for Boeing. And for 2024, so far from making money, it's going to lose$14 or$15 a share, which is very bad, however you slice it.

8:04But, you know, if you look back to 10 years ago, even six years ago, this was a company that could earn 10, 15,$17 a share in a great year. And according to Wall Street, it's going to be 2027, 2028 before we even approach those kind of numbers again. Why does this take so long and what needs to be done to get Boeing flying right, as it were? Well, I mean, it takes a long time. First, just aerospace cycles in general are very long. You know, designing, launching a plane is something that takes a long time. So they're developing new products. They're not just trying to get back to being able to make the stuff they used to make.

8:50That's actually a really important question. Boeing has had it hanging over its head for years now about when they are going to launch their next clean sheet airplane. And Ortberg, the first time he spoke to investors last week, he specifically brought that up. And I think to me, it seemed like he was saying, we've got a whole bunch of things that we need to get through before then. But I want you to know I'm thinking about this because at the end of the day, as he said, we are a plane maker. We make planes. We must launch a new plane in order to – well, he didn't go into this part. But in order to continue to be viable against our arch rival, we must launch a new plane.

9:32That's Airbus. Yes. What is the kind of new plane? Do you know – what is the kind of new plane that the world wants? There was a period during which everybody wanted a humongous plane and now they wanted smaller planes. Like what does the next generation of commercial aircraft look like? Do you have any thoughts on that? I think that's a good question. I don't think there's an answer to it yet. Prior to the MAX crashes, there was talk of a new midsize airplane. So, you know, a little bit more seats than the 737, but not as big as the wide bodies. So it's not clear exactly what Boeing is going to launch at the time they're going to launch it.

10:11But they have got big hurdles to clear before then. And Ortberg kind of laid out what he sees as what they have to do, and they have to stabilize the business first and foremost. And that involves figuring out what they need to do to end the strike and making sure that they hold on to their credit rating. They've taken one step forward with the credit agencies and with the balance sheet. Yesterday, they announced they were going to sell new shares and raise$20 billion. So that should help the balance sheet a little bit. Yes. I don't know whether their current shareholders will love being diluted.

10:52Well, the stock didn't crash, right? Which I took to be a good sign. I don't think they were happy, but they didn't. It wasn't a rush for the exit. I think this news was expected. And they need the money. Like, it takes$10 billion to run Boeing. Like, you need$10 billion in cash. And so at the end of the third quarter, they were at$10.5 billion. So like it was time to go looking for more money. One idea that I have heard kicked around, Claire, and this is the kind of idea people always kick around because it makes investment bankers money. But people have talked about Boeing spinning off or selling non-core businesses, namely the defense business and or the space business.

11:33Do we know if that's really on the table here? And do we think that would help? So they said last week that they are in the midst of a total portfolio review. And part of what they want to do is they want to focus on what they do best. And at the end of the day, Boeing's a commercial plane maker. Space is one part of the defense business. They are not going to get rid of the defense business as a whole. The U.S. government is a key client. It's just, you know, even though they are taking a bath on several fixed price contracts, you know, they are going to continue with those contracts. You know, Kelly Ortberg said walking away is not an option.

12:14The space business specifically, it has been rumored for a long time that maybe that would be a thing that could be sold. They had a really embarrassing situation over the summer where their Starliner spacecraft, which is charged with ferrying astronauts to the International Space Station, it took two astronauts to the space station. And then there became a question about whether or not it was safe to bring the astronauts back to Earth on that. And so NASA ended up making the decision in August that they are going to use SpaceX to bring those astronauts back instead. Wow, that's humiliating. It's not great.

13:00It's not great. NASA is making this decision out of, you know, a history of having failed to listen to some of their own staffers with catastrophic deadly results. So they're certainly coming from a place of like erring on the side of... Extreme caution. Extreme caution. but it's still a prestige blow for Boeing. And, you know, that particular program, the Starland Board, like that's never making money. The space station's being decommissioned in 2030. So it's like there is no time left to do like their contracted runs and still make money on this. I guess it's sort of a two-sided thing. On the one side, just thinking as investor, you might think if they got rid of space, you'd be like, phew, they need to focus on making commercial planes, which is what makes the money, and they need all their attention on that.

13:49On the other hand, being in the space business sort of speaks to your corporate aspirations, your cutting-edge technology, your ability to innovate, and all that stuff. So it's actually, from an investor point of view, it's kind of a hard call what you would want the company to do there. And it might not even be their call in the end because in order to have a sale, you need to have a buyer, and they're not making money on some of their space programs. Yes. Come to unhedged for your cutting edge economic commentary. In order to sell something, someone has to buy it. Yes, indeed. Let's conclude this conversation with a very broad question, Claire.

14:33Is Boeing too big to fail? I think there's a general feeling among the analyst community for what that is or is not worth that eventually this company has to be back up and running and strong again because the world needs two plane companies. It's simply not enough just to have Airbus have a monopoly. And America needs Boeing to work. So is Boeing too big to fail? I certainly think it is. And for the reasons that you bring up, there is no airline in the world that only wants to have one supplier of aircraft. And while there are other plane makers, Embraer is focused on regional jets that don't have the— The big daddies.

15:28Yeah. Thank you. And so customers need it for purposes of maintaining the duopoly. And then the U.S. government needs them for providing weaponry, weaponry, aircraft, satellites, all sorts of things that you need in order to run a military. And Boeing is a key player in that. So is it fair to say the question facing investors, it's not will Boeing recover? It's how long do I have to wait until this company is strong and generating adequate free cash flow for a good return? I think so. Boeing was known under the CEOs who, you know, their tenure is now being reexamined. It was known for throwing off cash.

16:13Yes. And I think analysts were taken by surprise when they were told on last week's call that 2025 is going to be another use of cash year. And so it's just going to take time. I mean, they did not get in this position overnight. They are not going to get out of it overnight. On that timeless piece of wisdom, Claire, we will be back after a short break for Long and Short.

16:48Listeners, welcome back. This is Long and Short. That portion of our show where we go long things we like and short things we don't like. Claire, do you have a long or a short for us? I do I am very long on the sitcom superstore which I have finally started watching per a friend's recommendation she she bothered me for years about it I love it it's a great show yeah it's fantastic it shows the lives of like normal working people and um it makes them the the central characters and it's like that's not something you see a lot and they're funny and quirky and I had to get my nephew on that show because he had his job was at Target for a while And I was like, do you know about Superstore, which is basically about your life?

17:34And he was like, what are you talking about? It just shows you that young people don't appreciate the good things in life. Speaking for myself, I am, and this is a big change of opinion for me, I'm long Halloween. That's a change? That's a change. You know, I'm a parent, and when my kids were small and I had to, like, deal with all the Halloween and having children who were full of candy for a week straight and all that, I was like, grumble, grumble, grouchy dad. Halloween. And now my kids are big and don't care about Halloween. And I'm sad. The little monsters really grow up fast. And it's a terrible thing.

18:10Well, can I say something that I'm short on that's related to Halloween? Please. I am so like upset and against people who are trying to suck the eeriness and spookiness and the spirit of anarchy out of Halloween because they want to do trick-or-treating on the weekend during daylight hours. Yeah. Can't stand it. Yeah. It has to be outlawed. Yes. On that spooky and otherworldly note, we will be back in your feed, listeners, later this week. Unhedged is produced by Jake Harper and edited by Bryant Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio.

18:53Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

19:24We'll be right back.