Few companies have lost more than the $32 billion that Boeing has lost in the last five years. And fewer companies could lose that kind of money and not be facing bankruptcy — or worse.
That’s because the company is part of a unique duopoly, one of only two manufacturers of full-size passenger jets in high demand by airlines. That means it can continue to sell, build and deliver planes for many years to come, even with massive and well-documented problems.
“Given the dynamics of their place in the industry and the industry itself, they have the luxury of time,” said Richard Aboulafia, managing director at AeroDynamic Advisory, an aerospace and defense industry consultant. “It’s an industry with the highest possible barriers to entry and very strong demand for its products. But they’ve wasted a lot of that time.”
Boeing (BA), despite its many woes, has a backlog of orders for more 5,600 commercial jets, worth $529 billion. That’s years’ worth of orders. The problem is that Boeing has reduced its pace so much to address quality issues, it can’t make enough planes a year to turn a profit.
“Can the current situation go on forever? No, it can’t,” said Ron Epstein, aerospace analyst for Bank of America. “That being said, they have some leeway. They’re not going to be in trouble tomorrow.”
Soaring debt levels, plunging to junk
Boeing management says it is focused on fixing its well-documented safety and quality issues — like the missing bolts that led to an in-air fuselage blowout in January — rather than projecting when it will return to profitability.
But management says the financial situation is not as dire as it might appear.
“It is important that our people and our stakeholders understand how promising Boeing’s future looks,” CEO Dave Calhoun told investors last month. “Demand across our portfolio remains incredibly strong. Our people are world-class. There’s a lot of work in front of us, but I’m proud of our team and remain fully confident in our future.”
It’s not that Boeing’s problems aren’t serious. Quality and safety questions have rattled some flyers’ confidence in its planes, sparked multiple federal probes and caused huge problems for airline customers. Even before the latest Alaska Air incident caused another plunge in orders, and after one of its best sales years on record last year, Boeing has fallen far behind rival Airbus in orders for new jets and for deliveries.
From the second quarter of 2019, just after a second fatal crash of a 737 Max led to a 20-month grounding of its best-selling plane, through the first quarter of this year, which included the incident on an Alaska Airlines Boeing 737 Max jet that lost a door plug minutes into a flight, Boeing reported core operating losses totaling $31.9 billion. Net losses in the same period came to $27 billion.
No other company in the S&P has lost that much money over the past five years, according to FactSet, which tracks financial results. Only two — Uber and cruise line operator Carnival Corp. — have even come close.
And the massive losses have resulted in the company’s debt level soaring, from $13 billion at the end of 2018 to $48 billion now.
Further losses could plunge company’s debt into junk bond status for the first time. Moody’s Ratings has said that even with improved financial performance, Boeing’s cash flow will not be enough to cover $4.3 billion of debt coming due in 2025 and $8 billion due in 2026. Boeing likely will have to issue new debt to fund those shortfalls, according to Moody’s.
Asked about its financial issues, Boeing pointed to comments from CFO Brian West on a recent investors’ call.
“We’re committed to managing the balance sheet in a prudent manner with two main objectives,” he said then. “One, prioritize the investment grade rating; and two, allow the factory and supply chain to stabilize for a stronger trajectory as we exit this year.”
Built-in advantages
But Boeing has two advantages other companies don’t have.
First, even if all of Boeing’s customers decide to shift from Boeing to Airbus, Airbus has a backlog of more than 8,000 commercial jet orders of its own and is projected to deliver only about 800 planes this year. That years-long wait for plane orders placed today, perhaps as much as 10 years, means that airlines that have placed orders with Boeing aren’t likely to cancel.
If a new manufacturer tried to enter the field, it would take years and billions of dollars to come up with a competing model that would be certified to carry passengers worldwide.
Even if customers could get their hands on Airbus jets right away, there are huge costs for Boeing customers to operate both their existing Boeing jets and a fleet of comparable Airbus planes at the same time.
Airline pilots can only fly the jet on which they are certified; they can’t just switch between competing models. And airlines also have to keep an expensive supply of spare parts on hand to service the planes they do own. So once an airline has chosen a plane, like the 737 Max, it’s very expensive to add a rival’s version of that jet.
So after Alaska Air purchased Virgin America in 2016, it got rid of the Airbus jets Virgin was flying and became an all-Boeing airline.
“The reason we went single fleet is we had two aircraft types performing the same mission in the Lower 48,” said CEO Ben Minicucci in January, speaking to investors. “It [was] costing us $75 million to $100 million a year operating these dual fleet between pilot training and reserves and maintenance and parts and all that stuff.”
But even with those built-in advantages, Boeing can’t trail Airbus forever.
That’s one reason the question of who will lead Boeing next is such an important one. Calhoun, who has led the company since 2020, has announced his intention to retire by year’s end. He said he has an internal candidate whom he would like to succeed him, but whom he has not identified. Others think it’s crucial to the company’s future that it goes outside the company to bring in a fresh perspective.
“It’s a long road back, it’s a decade-long process. But changing management is a very good first off ramp [to current problems],” said Aboulafia. “It’s a question of what the board is thinking.”
Without a turnaround, the lead that Airbus has established in the wake of Boeing’s problems the last five years could become permanent. Then the advantages of a duopoly won’t be enough to save Boeing from long-term decline.
“I think you could draw an analogy to (automaker) GM, and the dominant force they once were, and how it’s not that any longer,” said Epstein. “Could they become a much smaller slice of the pie if they don’t do something different? Absolutely. It’s already happening.”
