Boeing: Damned If They Do, Damned If They Don't
The math was already difficult. It is only going to get worse
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We discussed Boeing and the striking union again on this week’s Investing Power Hour Podcast (links above).
Ryan believes — and I agree — that Boeing may be on the road to bankruptucy and a government bailout regardless of how this deal plays out.
Here is what the machinists union rejected from Boeing:
Boeing is apparently burning $500 million a week on this strike. Scenario #1 for bankruptucy/restructuring/government bailout is this just continuing until the coffers run dry.
Assuming the cash balance of $12.6 billion at the end of last quarter didn’t go down before the strike began (which, lol), Boeing has 25 weeks to get a deal done, or around six months. That gives them until the February, probably sooner.
They already have $57.9 billion in debt and used to generate $10 billion in free cash flow in a good year, so they have minimal room to add more to the balance sheet.
Scenario #2 — much more likely, I don’t think the strike goes on for six months — is the union accpeting the above or better terms.
If they accept the deal, Boeing will be structurally bankrupt at its current unit volume/selling price level.
Here is the definition of Boeing’s cost of sales from the latest annual report:
“Cost of sales, for both products and services, consists primarily of raw materials, parts, sub-assemblies, labor, overhead and subcontracting costs. Our BCA segment predominantly uses program accounting to account for cost of sales.”
Cost of sales ran at 90.1% of revenue in 2023. Gross margins were below 10%. Let’s assume the union can get an altogther 40% raise over four years from this new contract. This wouldn’t add 40% to the “cost of sales as a % of revenues line” as the company has huge factories, raw materials, and other labor besides this machinists union.
Maybe it would increase cost of sales as a % of revenue by 10%? That feels conservative, but let’s go with it. That brings the figure to 100% of sales.
So…a 0% gross margin. And you still have to pay corproate overhead, research and development, and interest payments on the debt. Boeing would be structurally bankrupt under the current contracts it is selling planes for.
Yes, increasing volume output would help, but you really think the FAA will let Boeing pump out planes as quick as possible given its safety issues? That ain’t happening.
Well, there is one way salvage these labor cost increases: sell your planes at a much higher price. The problem is, airlines are already locked in to long-term contracts with Boeing. It brags about a $500 billion backlog. Well, if your input costs increase but the contracted value on the backlog stays the same, that backlog becomes a liability, not an asset.
Perhaps the U.S. government could help “nudge” the airlines to accept higher prices from Boeing, but there isn’t a single airline CEO who would revise its deal out of generosity to its supplier.
You think Michael O’leary from RyanAir would suddenly want to increase his input costs and ruin his cost advantage? Zero chance.
The only way Boeing is worth anything is if the U.S. government intervenes and tells the airlines to take price hikes for each plane delivery. We pay as a society here through higher plane tickets (which might be the best thing to do). Or, Boeing just gets another government bailout and kicks the can down the road.
Good luck to anyone who owns Boeing shares. This seems like an impossible situation. What is the rational for owning the stock today? It will take a miracle sent down from the U.S. government to make this equity worth more than zero.
-Brett
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