Boeing Co. is flexing its financial muscle even in light of a crippling labor strike and a disgraceful period of execution that resulted in two deadly plane crashes, the near-disaster of a midair door-panel blowout and whistleblowers who have detailed a culture of putting profit over quality.
The planemaker announced it will raise as much as $25 billion in debt and the sale of new shares even though its recent performance has been awful. In reaction to the news, Boeing’s shares edged up. Huh? How is this possible?
Well, the company has about 5,500 aircraft that it has already sold and only needs to assemble and deliver. Investors see a mountain of cash locked up in that backlog. All the company has to do is settle a nasty strike of 33,000 machinists, revamp its work culture to put quality above all, stabilize its supply chain, finish work on the new 777X aircraft and crank out planes. In fewer words, Boeing needs to execute.
This is a daunting task, and most investors believe the company has finally chosen the right person to pull off this historic turnaround after Kelly Ortberg was hired as chief executive officer in August. The thermometer for investor sentiment around Boeing’s ability to right the ship will be reflected in the price of the new shares, which could raise $10 billion or more to help shore up its finances.
Shares have sunk 43% this year through Monday as the company has been buffeted with wave after wave of bad news, the latest being the strike that began Sept. 13 and shut down plane production in the Seattle area. The company is still delivering some planes from inventory and production of the 787 wide-body aircraft in North Carolina continues. Still, the strike is estimated to cost the company more than $1 billion a month, according to S&P Global Ratings.
Boeing’s bonds have dropped 4% this year in the in the ICE BofA US Corporate Bond Index. Of the 50 biggest issuers on that index, only Intel Corp. and Warner Bros. Discovery Inc. have fared worse.
The company paved the way to raise debt and sell shares after cleaning house with an Oct. 11 announcement that it will take $5 billion of charges at its defense and commercial aircraft units. The company said it had an operating loss of $1.3 billion in the third quarter, which was less than some analysts had expected. (Keep in mind that Boeing uses program accounting, which averages the expected costs and sales of an aircraft over 10 years. This smooths out the high initial costs of developing new aircraft but also makes it more difficult to understand all the moving parts in the company’s cash-flow calculations.)
It’s worth repeating that Boeing is the only maker of large airliners in North America, and it’s in the US’ strategic interest that the company stay in business. Essentially, it’s too important to fail. Under normal circumstances, a buyout suitor might be circling, but no company exists with the wherewithal to pull off a deal or pass regulatory muster. So it’s up to Ortberg to pull off this turnaround, and investors who buy new shares at a price near where the company is now trading could make a lot of money.
This comes with a lot of risk. Boeing is still burning cash, and the company can’t begin its turnaround until it settles the strike. Are investors willing to buy new shares while Boeing’s strike is unresolved? If Boeing raises this liquidity during the strike, will the company harden its position and try to wait out the union for better terms? Are we at the bottom of Boeing’s woes, or is there another shoe to drop?
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