Fear of flying is not as irrational as we have long thought. Travelling in a Boeing 737 Max is akin to Russian roulette, it seems. You may land safely, or you may not. After fatal crashes in 2018 and 2019 due to design flaws and numerous cases of engine parts dropping to earth in mid-flight, Boeing did it again.
Last month, on an Alaska Airlines flight from Portland, Oregon, at an altitude of 4,500 metres, one of the emergency doors blew out. The gaping hole sucked out the passengers’ laptops and mobile phones and stripped some of them naked. Wearing a seatbelt was life-saving.
In the days that followed the grounding of all of Air Alaska’s Max planes, other airlines found to their dismay badly tightened bolts and lose screws too.
For many years, clever financial engineering had taken precedence over quality design and manufacturing excellence. Boeing focused on share buybacks and shortcuts to boost dividends and share prices while engineers and qualified workers left in scores. The competition to unseat competitor Airbus is now over. Nobody can seriously consider a plane manufactured by Boeing to be comparable.
For me, the latest Boeing debacle is the final nail in the coffin of my ill-guided Boeing investment. I have long argued that the ‒ often ridiculous ‒ trade disputes between Boeing and Airbus will always be won by the former, as the US is hard to counter. Fought at WTO courts, the wrangling lasted for 17 years until Biden and Von der Leyen suspended them in an attempt to improve cooperation on security issues.
Both companies have violated fair trade rules continuously and equally egregiously, to then sue each other as if blameless themselves. The US government had long shouldered Boeing’s research and development costs and showered the company with tax exemptions, while Europe at the same time extended corporate credit akin to gifts. In the ensuing trade battles both Europe and the US levied punitive tariffs on each other worth billions of dollars, based on successful WTO judgments.
Then came the fatal crashes, for a while blamed on incompetent pilots, when in truth the hapless steersmen were overwhelmed by badly designed, overriding software and malfunctioning sensors. I thought that a company producing defence hardware and satellites cannot possibly be pulled under by a badly run civil aviation department. I bought shares a year after the second 737 Max crash, for $324.45. What I thought of as a bargain dropped during Covid lockdowns to $95. At the time of writing, Boeing shares are hovering around $213 – a loss of 34%.
This is, in truth, still a very generous price, considering that Boeing has not turned in an annual profit since 2018. Its total debt amounts to $45 billion. These precarious levels of indebtedness are not caused by fines and the cost of grounded planes alone, although the $2.5 billion imposed by the US Department of Justice as a consequence of the crashes was sizable.
In the last 10 years Boeing has spent $41 billion on share buybacks and $22 on dividends, leaving no money on the table to invest in a better aircraft.
For comparison, Airbus has a total debt of €11 billion (which includes state support) and net cash of eight billion. It has spent on dividends and buybacks miserly €10 billion in the same period. Even more crucial: Airbus has organised its manufacturing mostly inhouse, while Boeing has sold off classic inhouse divisions like the manufacturing of the fuselage to private equity and treats now its former inhouse division with a programme of stupendous price cuts.
No matter how much Boeing’s reputation is in tatters, Airbus is already producing as many planes as it can and cannot take more business from Boeing- Andreas Weitzer
Both companies have similar revenue, around $65 billion, and a similar market capitalisation, approximately $130 billion. Both have an order backlog well into the next decade.
The difference is that Airbus manufactures aeroplanes that can fly without mishaps and turns in a tightly calculated, but steady profit margin, slightly smaller than Boeing’s loss margin. Airbus, which has a price earnings ratio of 29, has returned 30 per cent year to date. I don’t think its shares will go up much further.
The crux is that no matter how much Boeing’s reputation is in tatters, Airbus is already producing as many planes as it can and cannot take more business from Boeing. Also, many customers will be reluctant to drop Boeing as bidder.
Airlines want cheap, new planes, which is only guaranteed by fierce competition among the duopoly.
Ryanair owner Michael O’Leary, for instance, is profiting from Boeing’s travails. Future and existing Max aircraft are grounded once more and wait to be cleared by civil aviation authorities (that will think carefully before letting faulty planes in the air again, revoking “self-certification” privileges).
Hence, seat capacity in a high-demand aviation market is throttled.
Ticket prices will go up. Additional, new orders for 737 Max will demand hefty discounts and even existing orders will be renegotiated.
It is hard to tell how this will play out. As a passenger, I would like to know if I am seated in a reliable, safe plane, or in a Boeing Max 9. For the time being, it is very unlikely that any of the Maxes will take to the air soon. In future, can we possibly trust Boeing to manufacture planes that don’t fall apart, and can we trust the US FAA, which certifies planes and other jurisdictions usually follow suit, to take their certification and flight safety responsibilities serious this time around?
As an investor I still hope against better knowledge that Boeing will survive the onslaught.
I can already smell geopolitics here. Very soon, Chinese manufacturers will enter the market with reliable products, as they already do with electrical vehicles.
The US has already labelled the Commercial Aircraft Corporation of China as “owned or controlled by the PLA” and prohibits US investors to put money into the 2008 upstart. I am not sure countries in the global south, in Asia and the Middle East can be prevented from buying Chinese planes for long. A competitor is in the making.
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.