Dennis Muilenburg’s sacking as CEO of Boeing might have looked like an anticipated Christmas present for Boeing employees and shareholders, but the company’s illness has passed the stage where a single corporate surgeon can save the patient. For those who bothered to watch (and that obviously didn’t include the US Federal Aviation Administration), Boeing’s growing degeneration has been evident for decades, even as the share price has continued to rise. increase, accordingly unusual accounting practices which masked the deterioration of the company’s cash position.
If the 737 Max 8 is killed for good, it will create a huge existential risk for Boeing’s future as a viable civil aviation manufacturer, as the company had forecast the revenue from its 737-related sales in its plans to build. ‘business for many years to come (needless to say, the Pentagon will keep the company afloat, with Boeing effectively functioning as a military subdivision of the Department of Defense).
The 737 Max 8 is not the first example where Boeing has violated the main gun of aviation: namely, to make an aircraft that flies in the easiest and safest way possible. While this principle was most blatantly flouted in the case of Boeing’s latest iteration of the ‘Next Generation’ 737 series of aircraft, the Max 8, the 787 Dreamliner also remained. a permanent puzzle for the company.
During their economic lifespan, all successful commercial airliners do two things: they get bigger, first, by creating new models that carry more passengers. Second, they adopt new technologies that reduce the cost per seat-mile (this becomes more and more relevant when considering fuel economy in the cost, given recent decisions of the US Environmental Protection Agency that aircraft emissions contribute to climate change, paving the way for further regulation of the industry).
One wonders whether Boeing – crippled by its self-inflicted mistakes, including the degradation of its historic flight engineering capabilities – will remain robust enough to allow it to continue to capitalize, for example, in the growing all-electric market (who could well become a major feature of future regional air transport). The two are not strictly related, but it is clear that the longer the 737 problems persist, the more Boeing’s ability to innovate in other areas and take advantage of this growing trend towards “green aviation” (while compensating for increasing regulatory headwinds) is altered.
In any event, there is plenty of evidence to suggest that the company will continue to lose global market share, in particular to Airbus, in large part because of decisions made early in the life of the 737. Max 8 problems are largely the byproducts of poor material design, not faulty computer software. The aircraft is too close to the ground to handle the increasing size of the engines or to provide adequate take-off and landing clearance when lying down.
Instead of recognizing the need to build a better airframe that would have corrected structural flaws (i.e. longer landing gear and more upward curvature of the wing), Boeing relied on on a software patch called a “shunting characteristics increase system”, or MCAS to shorten it. (The issues plaguing the Max 8 are not an issue for its competitor, the Airbus A320neo, where manual pilot controls are built into the system, preventing the types of accidents that characterized the infamous Boeing 737 Max 8 from Ethiopian Airlines. Air travel.)
The MCAS changes ostensibly saved Boeing money in the short term, but it was another example of an over-financialized company that was foolish and insane, given the current challenges associated with the 737 Max 8. Despite the oft-cited “improvements” made to the 737 Max 8’s computer software, the aircraft still has not received its safety certification from any world aviation authority.
In other words, the “solution” still threatens Boeing’s future cash flow and further undermines its credibility.
We can understand why Boeing is so keen to re-certify as soon as possible: At the end of the third quarter of 2019, the company had negative operating cash flow of US $ 2.4 billion. The company is currently burning money at a rate of $ 1.5-2 billion per month, largely due to ongoing payments to vendors, such as Spirit AeroSystems (the company that builds the 737’s fuselages), lest the supply chain collapse. Barron is also reported, “About 275 [737 Max 8] planes were built and parked. Inventories consumed nearly $ 10 billion in cash in 2019. â
Boeing continued to cover its cash shortage by issuing more corporate bonds, which explains the sharp rise in debt. But the failure to bring the 737 Max back to flight means the company can no longer credibly record revenue from the expected future sales of the aircraft. In fact, if the plane is not recertified by the spring of 2020, Boeing’s cash flow could become perilous, as almost all airlines will have the ability to cancel their orders and collect their deposits in cash. which represents up to 70% of the value of the aircraft before delivery.
Boeing continued to cover its cash shortage by issuing more corporate bonds, which explains the sharp rise in debt. But the failure to get the 737 Max back in the air means the company can no longer credibly reserve revenue from the aircraft’s planned future sales.
Cash pressures are already intensifying for Boeing: Ryanair has revealed he stopped making deposits last November, and is also looking for additional price discounts on its existing Max orders. Other airlines are doing the same, as Boeing acknowledged in a recent conference call with investors, reported by Barron’s. At the same time, United Airlines recently placed a $ 7 billion order from Airbus to replace its aging Boeing 757 fleet. While not directly related to the 737’s problems, the purchase should be seen as an overall vote of no confidence on the part of a company long regarded as one of the customers the most loyal of Boeing.
Boeing’s new CEO David Calhoun is unlikely to solve these multiple issues. After spending 26 years at General Electric, knocking out aviation talent and replacing actual engineering with financial engineering, Calhoun eventually became director of Boeing in 2009. In 2014, he joined the Blackstone Group, a company of private equity which, as Matt Stoller points out, âIs a vehicle for the financialization of companiesâ as well as a well-established company with creative accounting schemes that allow companies like Boeing to hide their significant cash flow problems.
During his tenure as a board member of Boeing, Calhoun was party to a series of decisions whereby the financial machinations of the company’s ruling class have took precedence over safety culture. Despite many years of affiliation with the aviation industry, Calhoun himself is therefore just another financier “Master of the universeâ, Representative of a caste specializing in the outsourcing and stripping of talents, while defending practices such as the preparation of the balance sheet in a legal manner, but distorted the underlying earnings position of the company.
Unfortunately, Boeing may soon have nothing left to outsource. At the end of December, Spirit AeroSystems indicated that it would “suspend the production of the 737 MAX fuselages on January 1”, according to a Seattle Times report.
So far, Boeing’s relationship with Wall Street, while unraveling, remains intact. This allowed the company to continue to borrow (and also explains the board’s decision to continue paying regular dividends, as a reduction or suspension of these payments would likely alert the markets to the extent of the crisis. of Boeing’s cash flow, thus limiting their ability to contract additional financing).
But as a viable civilian manufacturing company, Boeing’s future remains precarious. David Calhoun’s appointment as CEO is likely to be a stopgap, although his financial engineering expertise will likely prove useful if and when the civil aviation business is detached from the military division and bankrupted or collapsed. reorganization, after the legal dismantling of assets. took place. In this regard, Boeing’s trajectory will represent the perfect apotheosis of all that has gone wrong with American capitalism for the past half century.
At this point, no one can credibly promise anything to anyone, be it Boeing, the FAA, or the overall system itself. There is no empathy in the system, and no empathy results in total entropy. Wall Street doesn’t understand this because Wall Street doesn’t understand how to quantify empathy and trust other than in the raw human instrument of goodwill.
Therefore, Boeing’s share price is likely to remain unchanged until disaster strikes even the bravest analyst. Much like the flawed early warning systems that failed to prevent the tragic 737 Max crashes, at this point it may well be too late to save Boeing.
This article was produced by The economy for all, a project from the Independent Media Institute, which provided it to Asia Times.