It’s been a tough few years for Boeing, impacted first by the grounding of the MAX and then by the pandemic and its effects on air travel. But the aerospace stock has been bouncing back in recent months on an uptick in travel demand. On this clip from Motley Fool Live, recorded on June 29, Fool.com contributors Lou Whiteman and John Bromels discuss what the big United order means for Boeing and how investors should think about Boeing shares right now.
Lou Whiteman: United Airlines this morning is announcing a massive order, 270 planes at list price over $30 billion. That’s the largest order in United’s storied history. Little-known fact: A lot of this is going to United’s former parent company. If you go back far enough, Boeing actually owned United. Two hundred of the 270 are going to be Boeing 737 MAX planes. They’re also doing a small number of Airbus (OTC:EADSY) A321neos, this is all bleeding-edge new technology.
This is a really important deal for Boeing. They’ve been trying to reestablish the 737 MAX after 18 months grounded due to the issues that we don’t need to get into right now. Boeing manufactured more than 400 of these planes during the grounding. And they are now scrambling to find homes for them. The initial fear was with COVID, it would be really hard to find anyone to take a plane. So far, they’ve done a pretty good job. They’re working through that inventory. Airlines are bouncing back faster than feared. United is taking advantage of a buyer’s market. I wouldn’t be surprised, honest to God, John, if they almost didn’t get a BOGO deal, buy one get one free of this. [laughs] But it’s not public, [laughs] so we’ll see. But that is what we’re talking about. Broader context, this is so important for Boeing. A year ago, we were wondering when it would come back. United is pretty clear indication the market is back. That’s good news, but of course this is Boeing, so we can never just settle for good news, it has to be bad news, too. Reuters reported over the weekend, the Federal Aviation Administration has told Boeing that the new 777X, this is their new top-of-the-line. travel-the-world plane, wide-body, will, “realistically, not be certified until mid to late 2023 at the best.” Now, to give context there, the 777X was supposed to be flying by now. Boeing pushed it back to 2022 due to a combination of engineering setbacks, testing issues, COVID got in the way of some testing, and also a lack of demand for international planes since not many of us can fly internationally right now. But the few customers this plane has are getting antsy. Emirates, which represents about a third of the 777X order book, so that would be a really important customer. They’re considering swapping out for different planes. They’re not sure, a) they need this capacity, b) they want to wait for it. Behind the scenes, we mentioned the 737 MAX before, the FAA took an egg to its face on that. They did not pass regulatory muster in getting the plane out the door. I don’t think you need to really be a conspiracy theorist to say that going forward for the foreseeable future, all the paperwork will be in triplicate. I think that’s weighing on the 777X. And I think that is a risk for Boeing. Just this added scrutiny, which is good, we want the regulator to do its job.
In a weird way, these two stories summarize what’s going on with Boeing right now. The narrow bodies, the 737 MAX, primarily domestic planes, they’ve made a strong comeback, while the wide-body planes, this market is a mess. The 737 MAX is great. Boeing still has an inventory to clear, and like I say, I’m not really sure they’re getting pricing power on it. But we are talking Boeing will not get to the pre-grounding production levels, 50-something planes a month, until maybe 2023 or later. And the Dreamliners, the 777 MAX, all these planes that were supposed to carry the day while the MAX got back to speed, this has been a struggle. The big takeaway is be careful. We’re in a period where the headlines are going to be great. United announcing a $30 billion order is great news. But given the dynamics of the industry, given the issues Boeing has, I think a lot of this is priced into the stock, and I don’t think we’re ready for that next big up-cycle. And so just be careful when you’re looking at these headlines saying, “Wow, the time to buy Boeing is now.” I’m still skeptical it’s straight up from here. I don’t know, what’s the last time you were on a plane, John?
John Bromels: Oh, my gosh, I can’t even remember. Talking about this reminds me, we have to update our driver’s licenses here in Ohio to comply with FAA regulations, and that was supposed to happen, and my goodness, I think I had intended to do that prior to the pandemic and then didn’t so I think I’m going to have to figure out all that stuff before I even get on a plane. I think that was a great summing up, Lou. I have to fault Boeing. This is their own fault. This is a crisis of their own making because what Boeing should have done is redesign the 737-size plane from the ground up, but Boeing wanted to save money. In their defense, at the time, it seemed like the economics of redesigning that size of plane from the ground up probably wasn’t going to pay off in a reasonable amount of time. In their defense, yes, there were definite cost concerns there and demand concerns there. But, oh boy, they tried to take the existing design and reconfigure it and do all of these different things to it.
Whiteman: With much bigger engines.
Bromels: With much bigger engines and the LEAP engine and all of these things. It just was trying to put a square peg into a round hole. I saw a fun tweet the other day that had bad language that I’m not going to use, but it was like, “Me reaping. Heck yeah, this is awesome. Me sowing. Well, this freaking sucks. What the …”
Whiteman: That’s it.
Bromels: I think Boeing is now in that phase of it because the all of this could have been avoided, all of this was preventable, and all of this would have cost Boeing a lot less money if they had from the get-go said, you know what? We’re redesigning this entire plane from the ground up.
Whiteman: Yeah. It’s funny because it was money, but also it was Southwest Airlines that really pushed them not to do, they call it, a blank sheet or a clean sheet design.
Bromels: This I did not know about.
Whiteman: Southwest wanted the plane sooner rather than later and yet, Southwest is such an important customer to Boeing.
Whiteman: They tend to listen, but you were right. It’s a weird moment now.
Bromels: It is a weird moment. Someone just told me I’m right.
Whiteman: Well, there you go. [laughs] Also for Boeing now, because it’s very common and I think as a rule of thumb for all companies, companies don’t tend to make the same mistakes twice, they tend to, if anything, overcompensate. We’re in a period now where it doesn’t make a lot of economic sense to clean sheet. We are maybe a decade or a little less than a decade from a real revolution in green, whether or not that’s an improvement of the LEAP engine, whether or not Airbus is way ahead of Boeing right now on hydrogen fuel-cell planes. We have on the small end, these air taxes, the eVTOL companies where electric. Designing a new plane using existing technology right now, is a 5 to 10-year window and that’s a really tough sell for these [laughs] planes where you [unintelligible]. Yet, Boeing’s portfolio is very poorly positioned to compete. We mentioned that about 70 of those 270 orders are going to Airbus. Those are the NIOs that can get over the Atlantic Ocean. That’s what JetBlue is going to take over the ocean. That’s the old  that they’ve discontinued and they don’t have a product there. On the low end, Airbus bought the Bombardier operations, which is now the A200. Boeing was supposed to buy or partner with Embraer, which would give them a similar product. That fell through during COVID. They don’t have a product in that either. Boeing has this weird portfolio, was in desperate need of a refresh on both the top and the bottom end of the narrow bodies. Yet, it would be economic disaster, given what’s on the horizon, for them to really invest the billions each. It’s a weird moment for them and it’s not going to be easy.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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