As a former Boeing employee—I left in early 2022—I have found the evolving saga of the company fascinating. My original piece on Boeing came in January 2024, on the heels of the Alaska Airlines door debacle in which corporate reputations were—thankfully—the only casualties.
Given the company’s reemergence in the news the past few weeks, I was intrigued, especially when it appeared that food for thought would end up on the menu.
Four key developments for us to discuss, in chronological order.
- March 2024: Boeing CEO Dave Calhoun announced he would step down by year-end. In August, he was replaced by Kelly Ortberg, formerly CEO of Rockwell Collins.
- July 2024: Boeing acquired Spirit AeroSystems, one of their largest suppliers.
- September 2024: Over 30,000 unionized Boeing employees on the factory floor voted overwhelmingly to go on strike rather than accept Boeing’s offered labor deal.
- October 2024: Morningstar and others reported Boeing is likely to raise $10-15 billion in new equity.
The most significant of these events to me is the battle with the unions. But we’ll cover each briefly in turn.
Note: Stocks can both soar at 30,000 feet and crash without warning. Nothing in this article is intended as investment advice.
Task of a Lifetime
My gut reaction when Dave Calhoun announced he was leaving Boeing was mixed. On one hand, the circumstances of his appointment in the first place were difficult—at the time, the 737 MAX was still a year away from being cleared to fly. In his first few months on the job, Calhoun had to deal with the COVID-19 crisis. Through no fault of Calhoun’s, Boeing was in crisis mode for virtually all of his tenure.
I’ll remember two key aspects of the Calhoun tenure:
- Much to his credit, he introduced a sober and self-aware narrative that the previous CEO failed to provide. His interactions with employees and investors were more open about the problems Boeing was facing. Had he not adopted this posture, the crises of the last few years would likely have done even more to undermine Boeing’s credibility.
- Under Calhoun, major decisions at the company appeared driven by myopic disregard for long-term consequences. Not all the blame for this can be put on Calhoun—COVID-19 and the MAX regulatory snafus were not his doing. But decisions about right-sizing the workforce and returning to the office full-time were constantly vacillated on. Boeing went from layoffs in 2020 and expecting more of the same in 2021 to doubling the hiring referral incentive paid to employees by the end of 2021—a shocking about-face especially considering how much debt the company piled on during that period.
It’s also important to bear in mind that Calhoun’s time in the top job was always going to be short. Prior to being CEO, he was Chairman of the Board, and by the time he became CEO he was already above the company’s mandatory retirement age. He was, so to speak, an interim coach; he would try to lead the company through a difficult time without making sweeping changes to long-term strategy.
Understandable as this approach is, it seems to imply the Board’s lack of confidence in the leadership bench. One wonders if the younger members of the executive ranks were more vocal in their demands for a clearer vision of Boeing’s post-COVID, post-MAX future, and how Calhoun might have responded to such calls for a long-term focus. We can only speculate about this, but it speaks to my concern that Boeing may be lacking a true 20-year strategy; for instance, not taking Comac seriously as a future competitor. That Boeing did not take Airbus seriously enough 50 years ago should by now be self-evident. But we can’t lay too much blame at Calhoun’s feet for this: he needed to keep the company afloat 20 days at a time—forget 20 years.
I ultimately don’t think Calhoun did a bad job. He navigated Boeing through a very difficult period. Sure, the company is in a structurally worse position now than it was five years ago—but at least there’s still a company.
Now for the new guy: Kelly Ortberg. Other than his origin (University of Iowa to Rockwell Collins), I don’t know much. Hawkeye alums were quick to point out that the CEO before Calhoun, Dennis Muilenburg, was an Iowa State University grad—and a U-of-Iowa chief will surely fix all the ISU crank’s mistakes. This is good for a laugh, but ultimately I don’t think Ortberg will be in much of a position to improve things.
Let’s review some basic facts: Ortberg is inheriting a once-proud American industrial champion, now saddled with a mountain of debt, quality control problems, a byzantine supply chain, and a European competitor chipping away at more and more of the market. Investor expectations will likely be too high—just like they were in 2018—and therefore Wall Street analysts will likely be underwhelmed and critical even if Boeing does right the ship. At heart, I see Boeing’s problems as corporate culture and overcomplicated supply chains—these have to be fixed if the company is to keep level with Airbus, and fixing either of them could take a decade or more. Unfortunately, the balance sheet will ensure that Ortberg will not have the privilege of taking his time.
If Kelly Ortberg is able to leave Boeing in a resilient and competitive position, I’m sure he’ll have a Harvard Business School case written in his honor. He is facing long odds.
Supply Chain Pendulum?
Spirit AeroSystems used to be a Boeing-owned subsidiary. The company spun it off in the early 2000s, around the same time that the in-development 787 Dreamliner would mark Boeing’s shift from manufacturer to “assembler”, relying on a complex supply chain featuring companies all across the world.
I’ll start by saying that the Spirit AeroSystems model does not strike me as a good business on its own. They are a “captive supplier”—the majority of their revenue was derived from work on Boeing airplane programs, with some Airbus work as a sort of hedge. The key advantage is that they make products no one else makes: the fuselage of a 737, for instance. But in the long run they do so only at the pleasure of Boeing. Spirit was a monopoly regulated by their largest customer, a customer with sufficient resources to replace Spirit should they desire to. None of this suggests a return greater than the cost of capital.
In July, Spirit was in trouble for many of the same reasons Boeing is in trouble still: quality control problems, a balance sheet levered to the hilt, and lower-than-desirable aircraft production rates. Under circumstances of financial distress at key suppliers, Boeing’s first goal is to ensure supply of the parts they need. In some cases, that means a “work-out”—literally moving the work out to a new supplier. To replace a supplier as large and critical as Spirit would take years, and Spirit’s doctors—ahem, creditors—did not give it that long to live. Boeing was able to buy the company in an all-stock deal, which dilutes the share count of Boeing, but doesn’t require the company to pay cash.
I think a more consolidated supply chain for Boeing probably makes sense: it will be easier for Boeing to manage quality in the Wichita factory when it’s staffed by Boeing employees instead of Spirit ones. What I’ll be curious to see, especially in light of increasing geopolitical and trade tensions, is whether this is part of a trend for Boeing to simplify its supply chain and bring a greater share of manufacturing in-house. This will probably play out over years, though—and Boeing’s flexibility in shaking up their supplier base will be limited as long as their balance sheet is this compromised.
Going Down and Taking You with Me
The union representing ~33,000 of Boeing’s factory workers voted overwhelmingly to go on strike on September 12th. Workers had demanded a 40% pay increase over four years and the return of defined benefit pensions. Boeing’s offer was 25% pay raises over four years and higher 401k contributions. The union also demanded that Boeing commit to making its next-generation airplane (whatever that is) in the Pacific Northwest, and not bolting for South Carolina where employees aren’t unionized (which they did for the 787 a few years ago).
This is an evolving story. The Wall Street Journal has some excellent reporting on this issue as it unfolds. For my purposes here, I’m going to focus on my observations rather than a strict reiteration of facts.
I’m highly sympathetic to the arguments the union is making. Inflation has been tough, Seattle has gotten expensive, and the standard of living that comes from a job on Boeing’s assembly line isn’t what it was two generations ago. The union hasn’t negotiated a pay increase since the mid-2000s. If Boeing wants to demand virtually perfect quality from their workforce, they’d better be prepared to pay up for it.
But despite all that…read the freaking room.
Have you looked around Boeing lately? There is no magical pile of cash with which to fund these pay increases. We’ve already covered the balance sheet problems, and every quality problem that delays shipment of finished jets is putting off the company’s return to generating strong free cash flow. This is a company going through leadership turnover and grappling with lingering effects of COVID-19 on the industry.
Boeing’s management has already signaled their displeasure with the unions—why else would they shift production of the 787 away from Seattle? The unions see this writing on the wall and decide that the best way to generate a better relationship with Boeing is to…hold the company hostage and demand higher pay. Now? Are you kidding?
The strike will cost Boeing $1 billion a month in lost revenue and sunk costs. Boeing has already implemented rolling unpaid leave for thousands of white-collar workers across the company. On October 11th, Boeing announced a layoff of 10% of their workforce, 17,000 in all—more than double those who were involuntarily let go during 2020. How do these non-union folks feel that their colleagues on the factory floor are willing to jeopardize the future of the company for a few extra bucks in their pocket?
If the union wants to repair the relationship with Boeing, let them agree to a three-year deal that offers, say, 20% pay increases. This won’t make up for inflation since the last deal, but it will be a start—halfway to the union’s 40% demand. Maybe throw in some stock compensation for good measure: that doesn’t just need to be for executives, and Boeing will likely need to issue more shares anyway, so you can live with the share count dilution. The best part? The union could renegotiate as soon as 2027, by which point hopefully production has normalized, Boeing is generating cash, and then there will actually be some profits to jockey for. In the meantime, the union will have shown itself a willing partner in the long-term future of aerospace in Seattle and of Boeing.
Again, the union is entitled to demand as much as they want. And it’s a tall order to ask anyone to take less money than they think they’re worth. But it’s all about time horizon—just like in individual careers. You can hop companies and roles all you want in pursuit of the highest compensation—many of my early peers at Boeing did just that. Ultimately, your career is a marathon; you need to take each step in the context of what skills and relationships you want to build. In this case, time will tell whether the union is Boeing’s long-term partner—or just another vulture waiting for it to die.
“Admission of Overvaluation”
For most corporations, the owners and the managers are two different groups of people. Corporate executives are therefore stewards of other peoples’ money, and their ultimate goals should be to maximize the long-term value for investors and ultimately return cash income to those investors. As we’ll see, these goals are sometimes in tension.
At some point, companies will earn more profits than they are able to profitably re-invest in the business, and they will begin to return the cash either through direct payments to shareholders (dividends) or offering to buy back some number of shares held by the investing public.
Stock buybacks deserve some further examination. They are generally more flexible than dividends from perspective of both company and investor. Once investors get ahold of dividends, they expect them to either remain stable or grow, whereas buybacks can be more ad-hoc. Further, buybacks are voluntary from the standpoint of investors—only some will choose to sell their shares, and the others will still benefit through a higher ownership stake. This way, buybacks will not saddle investors with unwanted reinvest risks in the same way that dividends might.
Buybacks also offer a signal: if a company is to spend money to buy its shares in the open market, it implies that company’s management—who is in a position to know—thinks the shares are a good buy. This ignores the fact that it’s easy to send such a signal when the money you’re using belongs to investors, but still, it’s a strong signal.
Boeing engaged heavily in buybacks under the pre-Calhoun CEO, Dennis Muilenburg. From the early 2010s to 2018, the company bought back nearly one third of its outstanding shares. The stock price reacted accordingly—it went up. The value of the business, which in theory doesn’t change as a result of buybacks (after all, this is “excess cash”), was being divided by a smaller share count, therefore “number go up”.
We can argue, however, that this behavior ultimately created a bubble in Boeing’s own stock. I remember sitting at the Bloomberg terminal in 2018, having accepted my summer internship offer at Boeing, and trying to value the company based on its own stated long-term targets. I couldn’t seem to come up with any justifiable number higher than ~$200 a share—all while the stock was soaring to ~$350.
Now we fast forward to October 2024, when reports began surfacing that Boeing may consider issuing new stock to raise funds. This is the opposite of a buyback: the company sell new shares, diluting the share count and generally irritating investors. Increasing the number of shares out there means a larger denominator to get to the stock price, pushing the price down.
Frankly, issuing stock is the right move. Boeing is caught between a union strike and a credit rating teetering on the edge of “junk bond” status (anything below BBB rating is considered “junk”). This would be a major blow to the company’s ability to access capital markets and service their existing debt, which is, as we’ve noted, substantial. In cases like this, when the company is in mortal peril, raising new equity can provide the cash infusion so desperately needed. As of October 10th, Boeing’s stock traded around $147 per share.
If it’s necessary, what’s the big deal? The problem is that over the last ten years Boeing’s management proved themselves incredibly poor traders in their own stock. They bought high and sold low. They never paused to question the market’s valuation of the stock and act accordingly. They issued irresponsible signals that Boeing was undervalued when the stock reached a peak likely unsustainable based on their own long-term guidance. Now, with picket lines replacing production lines, the company is willing to sell its own shares at a much lower price.
Look at 2021: the 737 MAX had only just been cleared by the FAA, airlines were still reeling from long COVID, and yet Boeing’s stock traded at over $200 for practically the entire year, peaking at $270 in March of that year. To be fair, nobody else foresaw the subsequent inflation either, but maybe Boeing should have, given that suppliers were starting to raise concerns of untenable cost inflation? Why not issue shares then, at a price 80% higher? In fairness, it’s probably best that Boeing took advantage of borrowing when rates were low in 2020, but still—the stock offered an opportunity for Boeing to raise more funds.
In December 2023, the stock jumped again and reached $260. At this point, rates had been high for two years and inflation could no longer be a surprise to anyone. Further, Boeing knows when the union deals expire—it’s written in the collective bargaining agreements for heaven’s sake. Unions tend to set member dues aside to build a war chest in case of a prolonged dispute—this would have afforded Boeing an opportunity to do the same. How could they not have seen this coming? Why wait until the stock falls to $150?
Dilution is not fun, especially for mature companies that are in the habit of giving money back to investors. It’s tough to shake off the necessity of going back to those investors with hat in hand. In this case, the goal of returning cash to shareholders and protecting them against short-term loss through dilution won out in the Boeing boardroom against the goal of creating long-term shareholder value.
I’ve seen plenty of companies that make a habit of raising new shares whenever they’d like some extra cash. This is a problem, but that’s not what this is. Boeing is facing labor disputes, a balance sheet from hell, a once-in-a-century disruption to their airline customers, and a culture still grasping for adequate manufacturing quality. Dilute the shares. It’s fine.
As an investor it can be tough to get a sense for “quality of management”. I’m always on the lookout for little nuggets that impress me: things like issuing substantial 30-year fixed-rate bonds in January of 2022, right before the Fed starts hiking rates, even though the company has never before borrowed over such a long term. This is smart. It shows awareness of the financial markets and a willingness to incorporate such things into business and financing decisions. Buying your own stock at its peak and selling it at its trough is the opposite of this.
I’ll acknowledge it takes incredible courage to pop your own bubble—investors surely would have called for Muilenburg’s head if he had tried to raise stock in 2018. But here we are: the heads have rolled, the stock issue is at hand, and it will be at terms far worse for everyone than they would have been six years ago, or even at the end of last year. If Boeing raises $10 billion, the new stockholders will hold roughly 10% of the company—this is essentially what the current shareholders are giving up when the stock is issued. To raise $10 billion in 2018 would have required giving up only 5% of the company.
Whether Boeing raises new stock or not, this isn’t a company that’s going to win any popularity contests anytime soon—with the public or with investors. The conventional thinking that’s gotten them where they are is not working. For Boeing to right this ship, they will need to take more initiative. Instead, they were caught flying blind—again.