Chit Chat Stocks - Is Boeing Stock Finally a Buy? (Ticker: BA)

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Starting point is 00:00:54 be found in the podcast description. High-yield cash accounts are available for U.S. members only. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right. Welcome in, everyone. Today on Chit Chat Stocks, we have, I think, either second or third time guest. It's the Motley Fool's Lou Whiteman, someone who's been covering the aerospace market for a long time we're talking boeing today and we're also going to talk the

Starting point is 00:01:55 broader aerospace market but i want to lead in lieu with one question that i think some analysts could go on for a full hour on what went wrong at boeing oh this is i mean i'll go real short on this what didn't go wrong on boeing is the answer right um if you want more so i think it's been said before, but I think GE is a helpful comparison here. And the great irony, the Shakespearean nature of it here is that it's a company that got so focused on earnings and near-term profits and the shareholder over everything else. And of course, what it has done is cost shareholders dearly. A lot of people like to go back to the 1997 McDonald-Douglas merger, which is kind of the argument there is the St. Louis bean counters overran the Seattle engineers. I think there's

Starting point is 00:02:44 some truth to that, but I think I'd argue the rot was forming at Boeing even before then, which is partially why McDonnell Douglas was so necessary and so appealing. They needed the engineering talent there. Where would Boeing be the last 15 years without the F-18, for example? You know, they bought a lot into there. It all, of course, just exploded with the 737 MAX, but you know, look, there's been issues all over the company. Boeing hasn't won a fighter competition basically in my lifetime, definitely in you guys' lifetime.

Starting point is 00:03:19 That's an embarrassment for Boeing. And it also builds upon itself because there's billions in R&D that the companies get from each of these programs. Every time Lockheed Martin won a contract, there's years of development, years of government-funded R&D, years of this intellectual advantage built into that. So when you keep losing, it does compound. Boeing's marquee military platform right now is the KC-46, which is a fuel tanker. It's not glamorous. It is important. But note, the competition resulted in Boeing execs going to jail.

Starting point is 00:03:53 And by the way, the plane came in at billions over budget. When it finally was delivered, the Air Force had to take them out of service on Monday immediately because debris was left inside from the construction process. This is a company that just hasn't done things well in a long time. Even on commercials, 787 Dreamliner has had quality issues. The 777X, the new version of the 777, is years behind schedule. Boeing has been distracted, unfocused, and has become less good at its core reason to exist over a multi-decade period. That's just kind of, that's hard, that's, to use an airline phrase, that's a hard tailspin to pull out of. right and i guess that's good context for someone who hasn't been following the story which

Starting point is 00:04:40 it became a national news story you know with the two tragic crashes i think it's five years ago now but and people might say hey you know this is one issue why can't you guys get your act together but you're saying it's been similar to ge a multi-decade period and i think maybe before we get into the specific what the company's dealing with right now and how they're trying to deal with it. Why would you, what makes Lockheed and Boeing different? Like why is Lockheed more successful in certain aspects, Warren, maybe a lot of aspects in winning these projects versus someone like Boeing? Well, I mean, there's an argument that Boeing has always spread itself too thin. I mean, it's a massive organization, but it is a commercial and defense company. Lockheed is the

Starting point is 00:05:26 largest pure play defense contractor, but they're a smaller company than Boeing, you know, so they are more focused as i said i think these things i mean the original contest they won if you go back to like the f-22 raptor that was a a close contest so it wasn't like boeing didn't have a chance i do think these things build on each other uh i do think that you know the the the the top secret organization the the the skunk work skunk works that uh lockheed has it's a very very good research shop, which that helps. But to some extent, it makes you wonder if you try and be a master of all and you end up not an expert on anything. That sort of has been the Boeing story for the last couple of decades here, unfortunately. It makes sense. Okay. I'm going to let Ryan jump

Starting point is 00:06:15 in with another question after this one, but let's hit their Q4 earnings. We don't need to specifically talk the numbers they had a decent report and that's because it was before these issues popped up again but what i guess for anyone that doesn't follow the company closely what is their plan for addressing these issues i know i read a few headlines and it seemed to say we're going to get our act together and that's all they said so i i wonder if they're like what their plan is to fix the 737 max and all the manufacturing stuff they've had problems with across the country. Yeah. If there's ever an argument for the value of long-term investing, if you just traded off the headlines that generated out of this earnings, you would

Starting point is 00:06:59 think this was the best company in the world. It was a great earnings report. In a vacuum, cheers, guys. You're doing great. Keep going. We'll talk to you in three months. But as you say, there's a lot more going on there. The plan to address it is pretty simple. It is, we need to get our act together. It's a little more nuanced. They need to do so in coordination with regulators instead of almost, I don't want to say in spite of them, but there's been sort of a adversarial relationship where the FAA is just keeping innovation back. Those days are over.

Starting point is 00:07:27 Their credibility is gone. They also talk a lot about being transparent, which is somewhat related to regulators. It's somewhat related to their airline customers who, I mean, look, Boeing and United were part of the same company way back, if you go back all the way out in history. The United Airline Group was formed by William Boeing. That's how close their relationship has been.

Starting point is 00:07:47 And so when the CEO of United is saying, I don't know if we can buy Boeing planes anymore, it is time to be more transparent. The good news is, you know, the original 737 MAX problem was an engineering issue. That's why it took so long. Everything that's happened since, these are mostly workmanship issues. These are shop issues. I don't think there needs to be a big paradigm shift or a new, you know, McKenzie plan to come in.

Starting point is 00:08:10 They just need to do as they say. They just need to do their jobs better, which in theory is easy, right? A couple of things. So first off, you mentioned the GE comparison. If I'm not mistaken, the current CEO was a GE guy, right? That's where his background was. Yeah, that sounds right. Okay, so I guess there's so many ways to go about this conversation.

Starting point is 00:08:39 So for starters, how much – people have talked about the FAA or Federal Aviation Authority, I believe is what the acronym stands for, slowing things down. The administration, yeah. The administration. Yeah. Do you think that's true? No. I mean, this is so hard to say because you can always point to instance. So you have to take the bigger picture.

Starting point is 00:09:04 I would argue that they had basically the FAA inspectors as a captive in-house unit leading up to the MAX, where, I mean, it was literally they were doing some of the work and just turning in their homework to the FAA. And I believe hindsight has shown us that that was not a great way to go. You know, you mentioned the CEO, Dave Calhoun, and, you know, it's worth mentioning that he was brought in as the fixer when the 737 MAX happened. He was also the chairman of the board for the 10 years prior to that, who officially, if you're old-fashioned like me and you think the board is supposed to have oversight, it wasn't exactly cleaning house to bring in the person who was the head of the oversight of all of this disaster as the fixer. But yeah, no, it's always been a weird – Boeing is America's champion. And in a world where the US doesn't export as much as we used to, especially on the industrial side, Boeing has always been a shining star and a source of US pride. I do think that that led to what they call regulatory capture where, you know, and no, I don't think, I'd be hard pressed to blame what has happened to this company on the FAA. You mentioned the quote from the United CEO. How much do you think that is maybe like a negotiating tactic for new orders from the airlines? Or it's like, ah, I don't know if we can. It's like, well, if the price comes down a bit, I guess we could. Probably 70%. I think your instinct is right then, but I do think it's still telling how

Starting point is 00:10:43 public it has become, not just with them. Emirates is the big one. Emirates is basically half of the 777X order book. They can single-handedly make or break that plane, and they have shifted orders and are really considering it. Look, I don't know how much they have to negotiate in public right now. Boeing has been so desperate to move metal. Some of these massive deals, like the one they signed with United since the Max incident, they weren't paying list price on that. I don't necessarily think – I mean, I think reality puts them in a good bargaining position. I think that, yes, Scott Kirby is willing to do business with them, the United CEO, but I also think there was genuine frustration of, oh. Like with GE, every time you stomp out a cockroach, another one is running one three months later.

Starting point is 00:11:32 Yeah. And I think there's a couple of variables at play where you got the giant backlog on one hand. I think it's 10 years, say roughly 10 years, could be even 12 at this point. They have such a large fixed cost base and they need to get to that. I don't have the exact number in front of me. It's, I think maybe 50 737s a month or maybe even higher to kind of get to positive profitability. But the issue is, and what has been in the news, I think the Wall Street Journal has been reporting on this a lot, is that the FAA is purposefully slowing them down because of the quality issues. So how do you see this playing out? I know it's really hard to predict. And if we could all predict it with 100% certainty, we can make a lot of money owning one of these stocks or shorting them. But with, you know, can they make progress on this over the next few years? Or given the quality issues, is it just going to be a slower pace? The airlines are going to get fewer planes. More and more planes might go to Airbus. How do you see it, you know, maybe over the next three to five years?

Starting point is 00:12:41 So quick context here to kind of back up what you're saying. Deliveries were down 30% year over year in January. And this was heading into the year going to be the year of recovery. We don't want to see deliveries down. We're supposed to see them ramp. They can deliver. Most of the current problems are short-term. We've already seen things slowly start.

Starting point is 00:13:01 But to your point, the rate of growth is going to be questioned, and how many planes they end up delivering and how much cash that generates. Prior to the 2018 Original Max incident, this was going to be the best-selling plane of all time. It was going to be running at 60 to 70 frames per month. They are hoping to get to the high 30s this year. Why does this matter? This is kind of the crux of kind of what you look at in earnings right now.

Starting point is 00:13:31 Don't really look at earnings, but let's look at the balance sheet because that's where this company has made or break itself as far as an investment. For context, go back to 2017 before the original max issues. Boeing had $8 billion in debt. Today, it's $46.9 billion. That's down from, I think, $60 billion or so in 2020. They rightly, between the pandemic and what was going on with the lack of cash coming in with the max, they mortgaged every stapler in the building, basically. They took on all of the debt they could to make sure they lived to see another day. The cost of that is that now you have to pay down that debt.

Starting point is 00:14:14 They generated $6 billion in operating cash flow in 2023. That's probably the highlight of the earning. They still expect to generate cash this year, but they suspended 2024 guidance because of all this. I'd note they said that our plan to bring down debt by 2026 is still on track. Given their history, the fact that they can't see 2024 but still see 2026, I'm a little skeptical. If you don't know what you're eating for lunch tomorrow, it's really hard to say what you're going to eat for lunch in a month, right? But the idea of it is, is that these are speed bumps and not blockades, and that they should, in theory, that ramp that they were talking about going into this year, it should eventually happen. And over time, it will be those deliveries, the cash from actually getting airplanes to customers, that they will use to bring down that debt back to a range where it was prior to all the issues.

Starting point is 00:15:10 And that's when this can become a profitable, functioning, healthy business again. So that's kind of the bogey. When you see a quarterly earnings report, look at where the debt is. Look at what they're saying about their plans to pay down the debt based on what they're saying about the cash flow they see coming in. Those are the numbers to watch as an investor. All right. This might be skipping ahead. But let's say when I hear the bull case for Boeing and I hear ramping up production, my gut reaction is that there could be some quality lapses, that you are potentially compromising safety for production targets, and it gets me worried maybe as a civilian.

Starting point is 00:15:58 Is there any world in which the debt is so insurmountable that this is a nationalized business? Because it seems like it's a critical need for America and it's really hard to start a competitor just given the capital intensity. Could you see any world where this is just owned by the government? Yes, but we're nowhere near there. I mean, it's a very – I feel like Charlie Brown with the football. Assuming this is it, we're fine. And I don't want to say that with them, and that's probably why I don't own the stock. But I think – I mean, they are still going to deliver a lot of airplanes. They are still going to generate cash. They are still going to be able to manage the debt. things we would need to see a repeat of one of the real massive shocks to the system and maybe you know to exit either what happened with the pandemic or with an 18-month grounding of something as important as the max it would take that sort of an event or more i think to get there

Starting point is 00:17:06 but there's a huge vast in between there between everything's fine and nationalization which is kind of that muddy, murky middle. As an investor, that's not really that exciting. And I think somewhere in there is probably the most accurate until we see proof that they can do better. Yeah. I was going to ask about, we don't maybe get to the nationalization part, but given your concerns about the balance sheet and the lack of cashflow and the lack of predictability on the cashflow if they can't get the manufacturing up, what's the timeline on when things can get Harrier for this stock? Is it one year, three years, five years? What do you see as someone who's followed this for a while? It's funny because the latest incident

Starting point is 00:17:52 moved the stock a little, but it didn't. And I think this is a shareholder base that is so beaten down. I think that works against you on a recovery. I think very, very justifiably if the three of us are sitting on the sideline looking at Boeing, we probably need a little more time than we would for another company to build credibility. So I don't think you're going to see a rush in. But at the same time, I feel like all of these death by little cuts, that is priced in. I think, again, to kind of answer similar to what I just said to Ryan, I think it would take some sort of a catastrophic thing to really, really fall. I mean, Boeing shares at the heart of the pandemic, that crazy, was it late March or so? I believe they were down 70% from

Starting point is 00:18:38 where they had been pre-max they've recovered some of that i mean that looks like a bottom i mean i think they were down below 100 100 at the heart of it um so we could get there again but i think it would take that sort of event not just two or three more oopsies even because we're kind of i hate to say it numb to the oopsies right okay this is a fun one oh all right you do you want me to ask the ceo one or no no but well i do want you to ask that but let me just intervene the are you at all surprised that the stock has i don't want to say held up because it's gotten crushed but are you surprised by its multiple today yeah but i think again it kind of talks to the natural advantages it has i mean brett mentioned the 10-year backlog the and i

Starting point is 00:19:33 I mean, we can talk about the relationship to Airbus in a minute, but just the fact that, you know, it's almost a utility-like business. You have no choice. And in theory, again, these are not major engineering problems. These are just do-your-job problems. So it's, I think, enticing. But, I mean, if you factor in the debt, the stock's down, I think it's basically cut in half from where it was before the first max crash. On an enterprise value basis, it's only down 30% or so from there. So, you know, I mean, it really is. I mean, I think it speaks to the potential of this business and the inherent advantages they have and the so-called moats they should have. But, you know, again, I think we're kind of stuck in the mud in a way because at the same time, are you going to believe it the first month?

Starting point is 00:20:22 I mean, it's going to take a lot more than one or two months of, hey, guys, nothing fell off a plane this month, right? I don't think that's the burden of proof here. So we're kind of stuck in this weird middle where it should work, but it doesn't. Yeah, I totally get that. I think it would take, as a civilian, people are probably going to be talking about the 737 MAX. I wouldn't be surprised if some people were making jokes about it 15, 20 years from now. The reputational damage just seems strong. Before we move on, we want to talk about our friends at FinChat.io.

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Starting point is 00:22:03 So if you want to get 25% off any paid plan, use our link, finchat.io slash chitchat. That is finchat.io slash chitchat. The link will also be in our show notes. Okay, next question. And this one's going to be a fun one, but I want to make it a two-parter because I think Boeing maybe is less interesting as a potential investment right now, but more important or more fascinating as a case study for how to avoid creeping companies that could lose their touch and stuff like that.

Starting point is 00:22:38 So first one, Lou, if you were CEO, what is the first thing you would do to help fix Boeing's issues? I know that's a very hard one. And second, what signs did investors miss in the 2000s and early 2010s that they could have seen if they looked at Boeing with a fresher pair of eyes? So, I mean, I've already sort of given my thoughts on the current CEO. So if I was him, I think the first thing I'd do is I'd fire myself and beg Alan Mulally to take over. You might remember Alan from Ford. Ford stole him from Boeing.

Starting point is 00:23:15 uh and there was rumors that at the time dave calhoun the current ceo came in that malawi was if if called would have answered but um you know we've already said this isn't like it doesn't need a great big think it just need there isn't a secret sauce here there's no like you know business school cheat code they just have to execute and malawi well deserved reputation for what he did at ford and what he did with boeing of actually just executing getting the house in order, cleaning up the terrible self-inflicted mistakes. I don't think, if I'm the current CEO, I've done a very good job of that. I don't know if Malali would come back, but someone in that ilk, that's who I, you know, I think that's what they need. They just need

Starting point is 00:23:59 someone who will roll up their sleeves and be the adult in the house and get it done. As for signs, that's a great question because it did play out over generations. I do think, though i mean i gave you kind of just a quick rattled off some of the failures over time i do think it was staring at us in plain sight that maybe quality was not job one there to borrow i think that's ford so i think i'm really being cute now but um but that i i do think you know this is a story of death by a thousand cuts until all of a sudden the big one happened with the max and everyone was looking at it. I do think that maybe we were lulled into it's Boeing.

Starting point is 00:24:42 They have all these competitive advantages. It'll all work out, you know, but I do think that if there's a lesson here, it's, and this might be very obvious or very silly, but look at the reality and not just the perception of what you think it should be. Because the reality at Boeing, it's been a weird story for a long time.

Starting point is 00:25:02 A lot of pressure from customers, A lot of maybe short-sighted decision because of that pressure. A lot of just sort of running to stand still, even at their best. And then with all of these little problems that indicated maybe a deeper culture. wrong i want to uh highlight some notes that brett had on i'm not trying to pour gasoline on the fire here when it comes to knocking dave calhoun but the in 2022 uh it says i'm going to read this note from brett says the annual bonuses are a bit complicated but generally go down to each of its segments and are based on earnings power and free cash flow combined the company hit its free cashflow targets. Keep in mind, they had a bunch of planes sitting on the side and were just waiting to deliver them and waiting to receive the payment for those. So cashflow was

Starting point is 00:25:59 going to be elevated because of the inventory. But they missed their earnings target and still got paid 100% of their annual payouts. What do you think the odds are, Lou, that boeing hits 100 of their annual targets for 2023 for executive compensation i'm guessing they feel pretty good about it yeah here's that leads to this the cult you know the people talk about the executive team culture and you mentioned that the current ceo was the chairman of the board during the deadly crashes that were much worse than these current ones can an activist step in here could that it seems like maybe too big of a company but bezos yeah i was saying bezos should do it but is that why you're selling the amazon shares that's

Starting point is 00:26:48 that's we have a scoop here folks uh yeah that's my that's my conspiracy theory yeah i'm connecting all the dots here i i mean so i i do think that given what i said that all it really needs is a good execution guy that may, or, you know, person that maybe that it's ripe for just an activist to put in, you know, to kind of get involved. The problem is, as you say, it's still a massive company, even with the haircut. So I don't know. And, and it's not really, I mean, look again, it is, even if all goes well, it takes time to pay down billions and billions of debt. So it's not going to be, this isn't a stock, you know, you're not going to be in today out by year's end if you're an activist and i mean not all of them are focused on that but they it does feel

Starting point is 00:27:34 like there's probably easier targets to go after right yeah that that is for sure all right we're gonna focus on the broader aerospace market and how boeing and all its troubles can affect them but the first one that they can affect is the second competitor it's called the duopoly although we'll talk about how china is growing their influence here very slowly but growing it you know with their their national backing airbus i think the stat is and correct me if i'm wrong is two-thirds of new single-body jets and boeing is one-third and that market share was actually flipped around 10 years ago so could airbus pull farther and farther ahead here could they take even more market share over the next decade and what could be the implications of that so i mean

Starting point is 00:28:26 the bulls would tell you that a lot of that is current events and if anything it's more likely to be some sort of a bounce back towards even maybe maybe not back to the crown um but you know the answer is kind of uh you know it's important to remember that cultures are always evolving and it's fun to kind of look at airbus kind of you know this is a period one of the weird things about this is airbus has almost had a positive cultural overhaul at the same time boeing has struggled, which has kind of exasperated the troubles or kind of highlighted the difference. Airbus's origin story, you guys probably know this, it's a collection of government efforts to counter Boeing. It was led by the British, French, and German governments,

Starting point is 00:29:09 and they made a decent plane, but they got a lot of state support, very much hampered by political demands. This was a company that couldn't close a factory in Britain unless they closed one in France and Germany at the same time. A lot of non-economic decisions were being made. Over time, Airbus has become a lot more nimble than it used to be. It is still kind of tied to its sponsor governments, but the government sort of got religion on why that didn't work. Airbus has, over time, evolved into a more rational market participant to their benefit. There's some luck involved here, too.

Starting point is 00:29:46 Airbus bought the A200 from Bombardier, gave them a great fuel-efficient small jet option. Boeing tried to counter that by buying the commercial business of Embraer out of Brazil. That fell through during the pandemic. That's probably good in terms of retaining the cash, and Boeing certainly doesn't need another distraction. But there's a huge hole in Boeing's product portfolio at a time when airlines are looking for total solutions or looking to buy in packages. So there's a lot of, like, little things compounding here. Airbus has turned itself into a really, really good company. And we can kind of talk later. I mean, they have other advantages going from here. I don't think I think there's limits to their domination. And that's just capacity is the big thing and demand outstripping capacity. And if Boeing can get back to just making a good product, they are going to do just fine. But the world where it's everybody chasing Boeing, that's over.

Starting point is 00:30:44 yeah that is certainly the case now you're someone that covers a lot of different aerospace companies we've talked trans dime we've talked hyco you covered a lot of the defense focus companies i want to imagine a scenario where boeing is still say 2028 2030 they may not you know regardless how much cash they're generating that's fine but they're still bragging about a 15-year backlog but they can't really seem to get it fulfilled you know they keep struggling to get planes out the door who benefits from this and who struggles from that going forward do the transdimes of the world benefit do you know the airlines benefit from reduced capacity what what are your thoughts there any any direction you want to go private hangar companies maybe that

Starting point is 00:31:39 Are they storing these? They're going to be storing it on an i5 by then, right? You can just stack them up there. This is an interesting question because there are obvious answers, but I kind of have questions about all of them. I mean, the easy answer is Airbus, right? We just talked about it. Airbus is the primary beneficiary as the other half of the A and B duopoly. but you know i'm not sure how much they benefit given there are no holes in their order books

Starting point is 00:32:08 for years i mean again they are not going to build another factory because boeing can't get their lug nuts on tight okay um if anything what we're seeing right now is airbus is scrambling to create opportunities airbus sees this as maybe oh we have a once in a generation opportunity to steel united, but we need to get to planes sooner than we have spaces, we are going to buy off places on our delivery list. So if anything, you know, I mean, I'm not arguing it. I mean, I think it might be a great move for them. But if anything, their margins may decline in the near term if this is successful, because they are literally, you know, both enticing United and buying off existing customers to just defer to later. So, you know, absent Airbus saying we need

Starting point is 00:32:55 to build three more factories, which I don't see happening, how do they take share in that environment? I do think you mentioned TransDiamond HICO. We call it the aftermarket, the spare parts business. And yes, if the supply of new planes onto the market doesn't increase as fast as we thought, it should mean that older planes remain in service, correct? Which should be good for spare parts salesman. But honestly, if you look at what's going on in the global market, you know, we are, it is a glowing global aviation market. A lot of the story here is not fleet replacement. Some of it is, especially on the less fuel, you know, the older ones, you know, trying to fuel economy. But, you know, a lot of this is about growth and not fleet replacement. A lot of those

Starting point is 00:33:41 planes aren't going to be taken out of service right now anyway, especially when we culled our fleets with the pandemic. So does it really move the needle for spare parts? Maybe a little, but not to the extent that maybe it should. What companies struggle? The obvious one is Boeing's little cousin, Spirit Aerosystems, based out of the Midwest, which used to be part of Boeing. This was part of the economic engineering that they kind of basically decided to outsource their manufacturing. So they took all of these huge factories in the Midwest and Wichita mostly that were actually building the fuselages that were building a lot of the big parts of the airplanes, sold it off to private equity. It became a public company. Spirit has been a really lousy

Starting point is 00:34:31 public company over the years. You know, when 70% of your sales come from your former parent, you're very reliant on that. It's a terrible relationship for both sides because Boeing can't make planes without Spirit. Spirit can't exist without Boeing. There's probably an argument to be made to buy them back in-house, but I don't think Boeing really wants to do that. They will continue to struggle as long as Boeing does, and they're not much of an investment even if Boeing goes well. Another one to look at, a kind of similar vein, Triumph Group, which is a supplier that has had a lot of trouble over the years. This isn't making their life industry easier. And again, excuse me, these companies will continue and make it because

Starting point is 00:35:15 they are the only ones making these key parts, but it involves a lot of Boeing forward payments to keep them afloat at times and limited profitability everywhere. This was Boeing trying to squeeze whatever they could out of their supply chain when times were good, and it's sort of biting everyone now. Do the flyers, like the end customers, ultimately lose here does this culminate in higher airplane ticket prices i i think we have permanently moved beyond irrational pricing in the industry i know that's that's scary to say it's probably stupid to say anything's permanent but um again on the margins perhaps but i don't we already had a problem the whole reason jet blue was trying to build by spirit or part of

Starting point is 00:36:05 the reason was to just get their hands on the Spirit order book. We already have a problem where airlines feel constrained with growth because of the number of airplanes. Again, if Boeing is making 28 planes instead of 35 in a given month, that is going to have some knock-on effect. I do think as far as beneficiary, the airlines themselves, we talked about it before, just even after the MAX came back, it was a great time to buy airplanes. And you saw a lot of deals where a commitment to buy 300 planes starting in 2024 or 2026 and they are basically buying in future future deliveries at at rock bottom prices coming right off the max crisis um to the extent that boeing is still having trouble down the line like brett in your scenario

Starting point is 00:36:59 where they are just they still have this order book but they aren't fulfilling them the way they hoped you are going to see a lot of reworking and a probably a very very good deals for the airlines which will just again further compound or further delay recovery for bowen that's yeah ryan michael o'leary said i want to pull up the quote here if he was referring to the other airlines he said if they don't want their max tents or otherwise we'll take them and it seems like every every crisis in the aerospace industry somehow leads to ryan air gaining market share i guess michael leary is very good at that yes yeah yeah exactly now i think that brings up an interesting point this is not something i necessarily believe in but i believe i talked

Starting point is 00:37:48 about it on one of our me and ryan uh shows that we do together one time and it's the thesis that I think Buffett may have had, and then now he disagrees with after he sold all his airline stocks, is the fact that the airlines were terrible businesses for a long, long time, similar to the railroads. But then the railroads 30 years ago ended up becoming great businesses because there was a change in the entire sector. Do you see that at all happening here? Are there similarities or would you be bearish on that take? Buffett's been all over the place. His His greatest quote was one of his annual meetings that if a capitalist was a kitty hawk, they would have shot the damn thing down, which is one of my favorite quotes of his. But look, I do believe I'm going to say yes or no here.

Starting point is 00:38:35 I do believe that the industry from the go-go days, from when I was first coming up, when, you know, gosh, TWA, Eastern, Braniff, all these, you know, every time you had an economic downturn, you had bankruptcies. Those days are over. Part of that is it's just cutthroat consolidation. We went from six majors to three, and Southwest bought AirTran. Southwest is now the biggest U.S. carrier, but those four companies, it's like 80-something percent of the market share. They are rational pricing, kind of the days of ego building and just pricing to fill planes are done. Delta has been a great leader on this. We would rather just not have your business than to fly an extra plane to get you there, and that is a pretty good business.

Starting point is 00:39:16 That said, it is still a high fixed cost cyclical business. I don't personally own any airlines anymore. I bought some during COVID and sold at the highs. But I am both bullish on long-term growth in aviation and also not a holder of airline stocks, just a nature of business. I'd point you to a company like AirCap, AER, if you want to play just a long-term investment where if you want to invest in the growth and importance of airplanes without having to tie your fortune to an individual airline stock. Okay, and maybe a quick follow-up. What are the airlines that are most exposed to Boeing? I think you mentioned United. And what are the ones that are most exposed to Airbus, which I believe, and correct me if I'm wrong, is Delta. Delta is very exposed. But, you know, they all have, all the big ones have some sort of a blend.

Starting point is 00:40:10 It's just where the blend is. Yeah, United is specifically exposed to some of the 737 MAXs that have gotten in trouble. The biggest airlines exposed to Boeing, you'd have to go down a layer to Southwest would be the obvious one. I mean, Southwest is kind of like what we said about Boeing and Spirit, the air systems, not the airline. but it's sort of Southwest and Boeing have this odd relationship. All Southwest flies famously are variations on the 737. However, they are so important of a customer to Boeing, they are the ones that demanded all of those shortcuts be taken on the MAX that ended up really with the MAX problem. So there's kind of a weird relationship there. They, Ryanair,

Starting point is 00:40:54 some of these big discounters all over the world that use them are the most reliant. And kind of on the other side, a lot of the pure Airbus fleets are mostly in the U.S., the smaller companies, the Frontiers, the Jet Blues, the Spirit. The big diversified airlines have a lot of planes from a lot of different companies. The shift varies. And, yeah, Delta has been a big Airbus buyer in recent years. But none of the big airlines are going to survive one of the companies falling off a cliff well, but it's also not going to put them out of business. All right. What are your thoughts on the new competitors hitting the market?

Starting point is 00:41:41 Now, I think there's two classes here. One, there's China with their national champion. I forget its name, but they just had their first maiden flight. And second are a lot of startups such as Boom and others who may be years and years away, but it seems to me there's been a resurgence in VC investment in the defense industry and aerospace industry. And that seeing Boeing's failures may be opening up a lot of people to saying, hey, there could be an opportunity in this industry that previously people thought, you know, why would we ever compete in this when it's just dominated by this one company that we're never going to be able to touch? Yeah, listeners, timestamp this and come back because I'm going to make some predictions that will probably age very poorly. So we can go back and I'll caveat with that. But first off with the Chinese, Comac is the company you're thinking of.

Starting point is 00:42:29 And they are a significant real competitor that needs to be watched. As you said, they are in the air. The C919, which is the 737 or A320 rival, it is in service in China. And we could spend an hour on some of the corporate espionage and stuff that got it there. but whatever it's it's there now and it is a real viable alternative to me it is hard to imagine western demand for this plane anytime soon right i i cannot imagine a world in the near future where delta united is flying the c1919 and i think that's true of western europe right now um and to some extent the order book is so big for these companies it could almost ease pressure

Starting point is 00:43:15 on them and be kind of a non-factor in the next few years. But that said, it's got to be an issue long-term, and it's got to at least be on your radar long-term. I mean, Boeing's own forecast is that Asia will account for about 40% of global demand for aircraft through, I think it's 2042, last time they updated this. China is a big part of that Asia total. The rest of Asia, especially around the rim, is a growing part of it. But look, China is the big market here. So if Comac is only a success in China, it at least dents the long-term growth plans of Boeing and Airbus. And that's giving them no credit for even reaching out to neighboring countries and

Starting point is 00:43:55 their sphere of influence, let alone spreading globally. It's not going to happen overnight. I don't think it's a reason to panic sell if you're still in those shares. But if you are going to be interested in Boeing and its whole ecosystem, its supply chain, you have to be aware of coma at least for me on the other side of it boom most of the startups we're talking about they're not just coming with the same product like this the c1919 is a 737 a320 clone competitor whatever it is most of them are focused the startups are on focused on supersonic are focused on something different i personally would be surprised if they move the

Starting point is 00:44:40 Nito anytime soon, especially on the commercial side of it. Supersonic, for one, is as much about proving the market for it as it is the tech. The tech is out there. It's kind of the old argument against Tesla, so it's going to fail. I don't know why I'm making it, but I do believe that a supersonic turns out to be a success and something that really is in demand at scale. I think Boeing and Airbus could pivot pretty easily to do a supersonic product. I don't want to dismiss it. As someone who loves to travel, I would love to see it. But I think the cost-benefit analysis of Supersonic isn't going to work out as well as maybe the PowerPoint slides would suggest. And I don't think the market is going to... I said Comac, I think, could dent the long-term

Starting point is 00:45:29 growth plans. I haven't seen anything more than a niche for these startups. And if anything, It's a general dynamics problem or a Bombardier problem on the smaller business jet side and not a replacement for the 777 or something like that. Is there anything that you think could either stop the growth or slow the growth of air travel over the next decade? That's a great question. I mean, because look at the last few years, right? We've seen a pandemic, which temporarily, but then, you know, the bounce back was pretty impressive. um we have a world at war you know and especially for us western focused um you know right in the heart of europe that is at war and we're still seeing demand uh i i really believe in long-term

Starting point is 00:46:23 air travel growth simply because the biggest mega trend out there is the emergence of the global middle class and the emergence of africa the bricks there's so much more of the world is just emerging and new consumer markets are coming. I'm optimistic in future growth. The question is pace, rate, things like that. And the big thing to me, geopolitics, macro concerns, things like that, that could cost us the pace of growth. But if you look at the way the world is evolving,

Starting point is 00:46:54 there's so much opportunity out there. It's such a big world. I do think the number of people that fly and the number of trips will increase over time. Yeah, I think I saw it. Maybe it's surprising because I'm in the United States, but it won't be surprising for our international listeners that I think it was maybe five, 10 years ago, only 3% of the globe had flown on an airplane, something like that. It could have been six or something like that. But either way, much smaller than, say, the United States, United Kingdom, Japan, places like that. So our last question here, I think this is a fun one. I'm going to take it wherever you want to go. What should investors have on their radars when looking at the aerospace industry, whether

Starting point is 00:47:38 it's airlines, whether it's the afterpart market, whether it's the suppliers such as Boeing, what innovations are there? Personally, it seems like nothing has changed from the standard commercial jets for the last 50 years, but curious what you think should be on the radars here for any investor who's listened to this full conversation. So we go a lot of directions here, and I don't know, but I like this one, so I'm going to say hydrogen. And to me, this is a real interesting uncertainty, okay?

Starting point is 00:48:09 Electric planes are just not going to happen unless we have significant battery innovation. Maybe if some of these solid states happen, maybe then we could talk about it, but it's a simple physics problem. It takes a lot of energy to get a plane to speed and keep it at speed. that requires a lot of batteries that's a lot of weight and then you have a downward spiral

Starting point is 00:48:30 add the weight you need even more energy and i mean short-term small things these uh sort of air taxis the evotels or whatever you call them they're coming they're real but those are those are what the jetsons promises with flying cars you are not going to see an electric plane take you over the atlantic or even across the country in anyone's lifetime unless we really get to work on the battery. Hydrogen, on the other hand, by definition, it weighs nothing. So you've solved the weight problem. It is a powerful energy source. And the reason I bring this up, and it's nice to close the circle on everything that's happened with Boeing and kind of the long-term ramification, one of these two companies have invested significantly in hydrogen, and that's

Starting point is 00:49:16 Airbus. Airbus believes they can bring commercial aircraft to market by 2035 using hydrogen. And these are, they're probably going to be the smaller end of the commercial scale. They're still not going to be the big triple sevens, but these are 737 type planes, or at least A220 type planes, big jets. They have demonstrated the technology. They think they're going to get there. A lot of people are skeptical, but I think we have to watch it. But Boeing, on the meantime, is saying it's not going to happen, and we need to devote our resources to making existing technology more efficient. All right?

Starting point is 00:49:54 It's the conservative bet, but one might say it's the bet they have to make, given everything we've talked about, their balance sheet, the issues they have, and all of that. I do think, to some extent, Boeing's thinking is driven by the last five, ten years of drama. if airbus can bring the zero e tech their hydrogen tech to market that's a huge hurdle for boeing i said supersonic i think they could sort of just replicate overnight lou it looks like you cut out there for a second but you were back now and you were talking about the potential of hydrogen uh and how boeing if this if airbus does succeed in this and bringing it to bringing flights commercially, what could happen with Boeing? There's a world where, like, fast forward to the late 2030s, when we look back on this

Starting point is 00:50:49 period in Boeing's history, and something that we weren't really even focused on at the time, but just these little things where Boeing did not invest because of its problems, they that is the big story of this crisis where boeing didn't invest in the future and airbus did and that was ultimately their downfall now who knows if we get there but that is sort of the one big thing out there that wow if this all works out that's a tough hill for boeing to climb yeah i think we can sum up this conversation one of the key long-term concerns for boeing is Unlike a Lockheed Martin, an Airbus, SpaceX, Rocket Lab, some of these other companies, they don't have the flexibility at the moment to be very proactive with their R&D, to be ambitious with skunkworks type stuff. And that, you know, even if they fix their manufacturing issues, could set them behind 10, 15 years from these other companies.

Starting point is 00:51:49 Yeah. I mean, Boeing has been in crisis mode for the better part of a half decade now. and there's very few examples in history where companies come out stronger from that or come out in a better position for the future. First of all, you've got to stop the bleeding, guys, but you also have to get back to normal as soon as you can to kind of start building again,

Starting point is 00:52:13 and we're talking the latter part of this decade, I think, before that happens. If the last five years occurred when companies rates weren't close to zero and Boeing wasn't able to create 2062 bonds at 4% or whatever it was, how much more difficult or how much worse of a place do you think they'd be in? It's a good question. I mean, I think arguably they took on more cash than they needed. And so maybe they would have had less cushion, but they still would have been all right.

Starting point is 00:52:49 But they were probably wise to take on the debt when they did, whether needed or not. And they're fortunate that they got relatively good rates. But, you know, again, it's a suboptimal time, you know, in the history of this business just because they're stuck with it now, regardless of the rates. That's a great way to wrap things up. Thank you, Lou, for joining. We had two technical snafus, but I don't think the listeners will even notice. So let me hit the disclosure. We are not financial advisors.

Starting point is 00:53:23 Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guest may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for listening to our Wednesday stock research episodes. Hope you got a lot out of this one. We'll see you next time. Thank you.

Chit Chat Stocks - Is Boeing Stock Finally a Buy? (Ticker: BA)

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