Morningstar's Nicolas Owens talks to Dave Briggs on what's happening at Boeing and what the strike means for the company's future. Watch!
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00:00Nonstop turbulence continues for Boeing this week as more than 30,000 workers are now on
00:20strike as the aerospace giant tries to turn the page from a pair of deadly crashes in
00:272018-2019, a door blowout earlier this year, a string of mistakes and mishaps in between,
00:34and of course the ensuing stock plunge.
00:38Nicholas Owens is an aerospace and defense analyst at Morningstar, and he joins us now.
00:42Nicholas, good to see you, sir.
00:43So Boeing has more than 150,000 employees, so this is only about 20% roughly.
00:49How impactful might this strike be?
00:53Thanks for having me, Dave.
00:55It's fairly impactful.
00:56I'm assuming that their productivity for the 737, 767, and 777 assembly lines will be practically
01:06zero for the rest of the year, and that's going to cost them essentially billions of
01:13dollars.
01:14Excuse me.
01:15The trick is they've been losing billions of dollars every quarter for the last couple
01:19of years.
01:20That being said, they've been trying to turn a page.
01:24This will delay that, but I think they will actually pull it through eventually.
01:31It's been reported they were offered 25% pay raises.
01:35Is that accurate, and how can they resolve this one?
01:38Yeah, so the deal that's on the table is a four-year contract with the sum of the increases
01:44was 25%.
01:46It would sort of add up to 33% over time, and the number that I think was floating around
01:52that folks were expecting was something closer to 40% total, and that might be part of the
01:58reason why folks voted against it.
02:02In retrospect, I think the strike might have been inevitable in that the sentiment was
02:07pretty resentful within the union, given some of the history, the way Boeing has treated
02:15with this union in the past.
02:17This is really unfortunate.
02:19Sounds like just going from bad to worse.
02:22So new CEO Kelly Ordberg didn't have to wait long for a big test.
02:27What can you tell us about Kelly and the massive turnaround task ahead?
02:32Yeah, he's been in the job for a couple of weeks, and I think it's fair to say that a
02:41lot of the crises and problems that Boeing is working through are the result of decisions
02:47made many years ago, even decades ago, in terms of whether or not to design a new plane
02:53versus tweak the 737, issues about the software that led to those crashes, et cetera.
03:01The other moment that I think is important in what Boeing is trying to work through is
03:06in 2018, before those crashes, they had trouble ramping up the production of the 737 with
03:14their, at one time it was part of Boeing, but the Spirit Aerosystems team, they accepted
03:22fuselages from them that weren't inspected or passing the quality test.
03:27And they said, look, you just send them to us anyway and keep working on them.
03:32That's really the thing that they're unwinding here, and that has bogged down the 737 assembly line.
03:40Boy, it is just a Herculean task.
03:42So let's talk about the stock that's price has been more than cut in half since it's
03:46pre-COVID high.
03:47It's down almost 40% year to date, so many issues to fix.
03:54But it's amazing when you pull back a little bit, 30,000 feet, if you will, pun intended,
03:58this is a duopoly in an industry with sky high demand for travel, for airplanes.
04:06At some point, is this a goodbye or is this just a business that's not investable?
04:13I think it's a great question.
04:14And even with all these calamities, you could say, the impact to my valuation of Boeing
04:22from the strike is, you could say, only a $3 reduction in my fair value estimate, went
04:28from 219 to 216.
04:30And it's trading in the 150s now.
04:33So it's at a discount, and for all the reasons that we've been saying.
04:37But there is, like you said, a long runway of demand for the planes in an industry that
04:45is served by only two manufacturers.
04:47Airbus can't make them fast enough, so it's not like they could just come in and take
04:51market share and airlines order these planes years in advance.
04:56So it's not like just buying a different box of cereal, right?
05:02That is what underpins the long-term story of Boeing, is that they have a very strong
05:08industry position, an in-demand product that is incredibly, as they are proving, difficult
05:13to make, technically complex with lots of unique stuff.
05:18And so my valuation, which is based on the long-term and the assumption that they will
05:27eventually return to a steady state of producing more of their planes, there's some value there.
05:34The question is, are there more bad headlines to come, say, in the next six months, a year,
05:39before the good headlines start really hitting?
05:41When they clear their back inventory and send all the rest of their planes back to China
05:45that are in order, all these things could add up to nice cash flows and so forth.
05:50But in the meantime, you have bad headlines like all the machines are on strike.
05:57Yeah, certainly a bad headline.
06:00Another bad headline related to their space program, because their Starliner space capsule
06:06returned without the precious cargo being the two astronauts who are stuck in space
06:12for what looks like several more months into next year.
06:16What does this mean?
06:17Why can't they abandon that business altogether and leave it to Elon Musk?
06:22Yeah, it's an interesting question.
06:28One aspect of what's going on with Boeing right now is they might make some decisions
06:32because of their cash flow that they might not otherwise have made, right?
06:36So they're going to need to preserve cash.
06:38And so selling their launch business has already been essentially confirmed that they have
06:44a joint venture with Lockheed that is the launch business that Elon Musk has disrupted
06:50quite thoroughly with SpaceX.
06:54The capsule piece, I mean, the Boeing defense business made a handful of bad bets on what
07:06are called fixed price development contracts.
07:08And so that thing went over budget and was delayed, which is sort of normal for these
07:15types of complex things.
07:17But usually a contractor like Boeing would have some protection, let's say, in those
07:23cost overruns, which are usually justified by some engineering problem or other new thing
07:28that they had to figure out.
07:30But this was fixed price.
07:31So Boeing's been losing money on that capsule for years.
07:34And NASA, because it's so late, has essentially moved on.
07:38And I think they gave Boeing a shot at doing this test flight only to sort of follow through
07:44on what they originally agreed.
07:47But NASA is not making plans to use that capsule in the future, as far as I know.
07:53Could be good news, of course, for Elon's SpaceX.
07:57Speaking of Elon, Starlink may be the best part of that business.
08:02United made a deal with them, free Wi-Fi on its airplanes.
08:07How big a deal is that for United, and do you expect others in the category to follow?
08:13I don't think it's a huge deal.
08:14I mean, like financially for United, I think it's one of those kind of passenger perks
08:20that has almost become an expected norm, you know, for folks flying on a plane of any sort
08:28of length.
08:31And the technology is probably more reliable than some of the services that have been on
08:38there before.
08:42That type of service is not a huge cost item for the airlines, but it might give them kind
08:48of a marketing perk, you know, in terms of passenger being attracted to that.
08:54And it's likely that others might copy it if it's a superior service.
08:59Yeah, I got a couple of teenagers in my house who think, hey, we're flying United now, or
09:04JetBlue, who already offers it.
09:06But that, of course, doesn't impact the stock.
09:09Nicholas Owens, an aerospace and defense analyst at Morningstar, appreciate you coming on with
09:13us, sir.
09:15Thanks for having me.