Boeing (NYSE: BA) stock has bounced back from its 52 week low of $89 as the market regains faith in its ability to stave off bankruptcy amid the coronavirus pandemic. But are investors being too optimistic? The embattled planemaker faces a spate of order cancellations , a mountain of debt on its balance sheet, and long-term industry challenges that it’s ill-equipped to handle.
Bailout or not, Boeing will have a hard time competing over the long-term. And this may create an opportunity for rivals like Airbus, and COMAC to steal its market share when the crisis is over.
The coronavirus pandemic has now infected over 2 million people around the world and sent many of the world’s biggest economies screeching to a halt. The global airline industry is among the hardest-hit sectors, with analysts predicting that many of the world’s airlines will be bankrupt by May .
Boeing may join them in Chapter 11 court if things continue moving at their current trajectory.
With Boeing’s customers fighting for survival, they simply don’t have the money to pay for additional planes. And several are already canceling orders. Boeing reported 150 MAX cancellations in March. This includes 75 from Irish leasing company Avolon and 34 from Brazil’s GOL Airlines.
In the United States, the picture is slightly prettier. The Treasury Department recently agreed to a corporate welfare package for the nation’s largest airlines giving them billions in cash to help weather the storm. But this money probably won’t be going to Boeing.
As part of the agreement, U.S. airlines won’t be allowed to lay off their workers, which means most of the cash will go towards maintaining their massive personnel costs. American Airlines, for example, paid over $12.6 billion in salaries wages and benefits in 2019. But it only received $5.8 billion from the bailout. So it won’t have much cash left over to purchase new planes.
By the end of 2019, Boeing had already reported a staggering $20.298 billion in long-term debt. This is because the 737 MAX crisis was a significant drain on cash flow for the year. Some predict the situation will get even worse in 2020 with Berenburg analyst Andrew Gollan expecting net debt to hit $31 billion by the third quarter.
This high debt load is problematic because Boeing will have a hard time funding its CAPEX while also returning value to shareholders through its dividend. The dividend is currently suspended and probably won’t come back . But the bigger problem will come from CAPEX, which is a driver of future growth.
Costs for the 737 MAX fiasco are estimated to top $18.7 billion. This is money that could have gone toward developing other programs.
Boeing has some major competition on the horizon, not just from its traditional rival Airbus, but from new competitors, including Chinese COMAC and Japan’s Mitsubishi. These companies will take advantage of Boeing’s weakness to expand their footprints in commercial aviation.
Boeing qualifies for up to $17 billion in bailout funds, but they don’t want the money. CEO David Calhoun says that he isn’t willing to give the government equity in return for funds. But if order cancellations keep piling up, he may have no other choice.
Boeing stock declined 8% to end the day at $134 at the close of trading on Thursday. This is the latest move in a three-month decline that has sent its shares down 58% compared to a 14% decline in the S&P 500 over the same period.