Stock in Focus: Boeing - a turbulent investment

I am not a great flier, so news that a door blew off an Alaska Airlines flight soon after takeoff last Friday prompted a bit of a grim fascination - a bit like driving past a car crash, when you know you should stop looking, but you just can’t help yourself.

Adding to that interest was the fact that last weekend one of the most viewed public StockReports on our website was that of French company Lisi - which is a specialist manufacturer of fastenings for the aerospace industry. That could well be a coincidence - Lisi does supply fastenings to both Boeing and Spirit AeroSystems (the company responsible for the door issues at Alaska Airlines), but hasn’t been named as a guilty party in this particular issue - but it does seem like strange timing.

For those who haven’t followed the Alaska Airlines story, a brief recap. On Friday, the plane (a Boeing 737 Max 9 model) took off from Portland and had reached 16,300 feet when when part of the fuselage fell away. The 737 Max 9 planes are designed with spaces for either four or six doors, dependent on how many seats the airline choses to put in the plane, with unused spaces filled by what are known as door plugs. The door plugs (manufactured by Spirit AeroSystems) are bolted into the exterior shell of the plane and shouldn’t ever need to be removed. It was one of these door plugs which blew off over Orgeon and has now been found in a resident’s back garden.

In the aftermath of the incident, Alaska Airlines has checked its entire fleet of 737 Max 9s and found ‘loose hardware’ on several of its planes. United Airlines (one of the biggest carriers in the US) has followed suit and found similar issues. The US has now grounded all 737 Max 9 planes.

This isn’t the first time Boeing’s Max fleet has faced issues. In April last year, the aerospace giant halted the deliveries of the model after Spirit AeroSystems warned of quality issues in its supply chain. At the time, the company admitted that these quality problems could date back to 2019. In March of that year, a 737 Max fell out of the sky shortly after take-off from Addis Ababa. That followed a similar incident in October 2018 when a Lion Air flight (also a 737 Max model) disappeared in the Indonesian Ocean. Both accidents were found to have been caused by a faulty bit of software, written into the automation system of the plane which forced the nose down. Three days after the crash in Ethiopia, Boeing’s global fleet of 737 Max planes were grounded. Pilots who were asked to fly the planes to storage facilities were understandably hesitant.

In the last few years, the problems with the 737 Max have been costly for Boeing - which is ironic considering the plane was originally designed as a cheap way of competing with the growing popularity of the Airbus A320. In the mid 2000s, Airbus launched the A320 (a single aisle commercial plane), to much fanfare. Boeing - under immense pressure to compete with the fuel-efficient A320 - accelerated the development of its new plane by using the fuselage of old 737s and adding new engines and software enhancements. In addition to lower design and manufacturing costs, this also meant Boeing didn’t need to invest in additional pilot training.

But Boeing’s accelerated design programme coincided with poor quality control, leading to a plane which has been battered by safety issues. Critics have called this a prime example of ‘normalisation of deviance’ - when poor or unsafe practices which ‘deviate’ from the correct way of operating become normalised. At Boeing there have been accusations of a ‘culture of silence’ where poor manufacturing practices haven’t been called out.

And the company has paid the price. Despite being Boeing’s highest volume plane, the 737 Max generates low profits and negative cash flow. Cash costs have mounted as the company attempts to rectify quality errors and claw back the mistakes made in the plane’s early days.

A turbulent investment

In the 40 years that Boeing has been listed on the New York Stock Exchange, the share price has risen by almost 3500%, or a compound annual growth rate of 9.5%. But it’s an investment that has needed a strong stomach. Half of the trading week’s in Boeing’s history have seen the company’s share price close down at least 20% below previous peaks. By contrast only 9% of trading weeks have closed at new highs.

More significant is the level of drawdown experienced by investors throughout the company’s history. The longest Boeing has gone without its shares plummeting more than 40% from previous highs was four years between 2011 and 2015. The worst drawdown was 78%, experienced in the wake of the national Covid lockdowns.

Safety issues also tend to cause prolonged periods of share price weakness. In June 2001, Boeing’s share price was trading near previous highs. Following the September terrorist attacks the price hit record lows and didn’t climb back close to previous peaks again until 2005.

There was a similar pattern of events following the 2018/19 accidents, although these were compounded by the impact of lockdowns. Boeing’s share price hit an all time high of $440 on 1 March 2019 (while it was busy fighting a PR campaign claiming the Lion Air crash of a few months previously was not a manufacturing fault). On 10 March, the second 737 Max jet crashed, and by the end of that week (with the entire fleet of 737s grounded), the share price had fallen 14%. Now at $227 (down another 5% this week following the Alaska Airlines incident) it’s still a long way from those pre-Covid highs.

But Boeing’s planes remain in high demand. International carriers are still adding their names to the large backlog of 737 Max planes which have already been ordered. Such is the power of a product which comes with a high cost of change. Replacing a fleet of planes is an enormous expense for an airline. Not just in the physical cost of replacing the vehicles, but the cost of training new pilots and updating safety procedures.

When a chunk of the product can fall out of the sky, but the customers still want to buy more, that’s a sign of a pretty impressive protective moat.