Reviving the Classic Boeing: Profit Alone Is Not Enough

Boeing's stock has decreased by 0.54%.

Investors are paying close attention to when the company will become profitable again in 2023 after a difficult period. However, they should also consider a more fundamental query: When will this aircraft manufacturer start producing planes again?

At the beginning of this month, Boeing's Everett, Washington facility completed the assembly of its last 747, the jumbo jet that revolutionized luxury air travel when it was first introduced in 1970. When the retirement of the 747 was first announced in 2016, it seemed as if Boeing was not relinquishing its engineering and commercial superiority. Its 777 had demonstrated since the mid-1990s that two-engine jets were the way of the future. The 787 Dreamliner, its last original model, had been in operation since 2011.

The absence of the 747 is more noticeable now. In November, Boeing Chief Executive David Calhoun surprised investors by announcing that no new commercial designs would be seen in the air until at least the mid-2030s.

Since 2019, Boeing has faced a number of challenges, including the grounding of its 737 MAX, the effects of Covid-19, the suspension of 787 deliveries, supply-chain issues, and uncertainty in China. The task of increasing production of existing models and delivering the 400 jets stored up is a complex one, and CEO Dave Calhoun has also had to contend with issues in the defense arm and a certification dispute in Washington D.C. Fortunately, the latter was resolved in Boeing's favor last week.

When investing in a new aircraft, aerospace stocks tend to suffer, especially around the time of the first flight due to potential issues and cost increases. This could mean spending $30 billion, which is almost all of the free cash flow that Boeing is projected to make between 2023 and 2026 as it regains profitability.

Investors are looking for a reprieve, and Boeing stocks have been a great option for value investors. Over the past three months, the company's shares have outperformed the S&P 500 index. Furthermore, orders for Boeing's current products have been surging; United Airlines recently announced that they would be purchasing an additional 100 MAXs and 100 Dreamliners.

It can be dangerous to lose sight of the distant view.

Airbus, based in Europe, has surpassed its American counterpart in both orders and deliveries. The 737 MAX, which is close in market share to the A320 family, is mainly used for higher-volume routes. However, if Airbus were to retrofit the A320 with a new composite wing, the 737, which is a design from the 1960s, would become obsolete. If Boeing's engineers have not designed a product from scratch in over two decades, they may have difficulty responding quickly.

It is possible that executives have taken the wrong lessons away from the 737 MAX crisis and the issues with the Dreamliner. Boeing's product design was never a weak point; the 787 was a wise decision as Airbus was investing heavily in the A380 jumbo. Despite criticism in hindsight, the upgrade of the 737 was a successful venture. This allowed resources to be freed up to invest in a mid-range jet that could have surpassed the A321 and been a platform for new digital design tools - an idea that was proposed seven years ago.

In recent years, the company has made some missteps by allowing financial personnel to have too much influence over the production process, resulting in convoluted supply chains and inadequate quality assurance.

Financialization has taken on a different shape recently, according to Mr. Calhoun. He stated that any new jet must offer airlines cost savings of 20-30%. The majority of these savings must come from the creation of a new type of turbofan engine by CFM and Pratt & Whitney. Hydrogen or hybrid-electric propulsion is not yet ready for use.

The goals set by the aviation industry appear to be too ambitious when compared to historical standards. Airlines would be more than satisfied with a plane that could deliver half of the proposed gains, as they are eager to reduce their environmental impact. According to the International Council on Clean Transportation, without new models, aircraft efficiency gains will be cut in half by 2035, resulting in the industry not meeting its green promises. Advances made in CFM's and Pratt's latest engines, combined with some airframe improvements, could make a new jet a viable option.

Wall Street may be longing for the Boeing of the past, but it is important to remember that the company was not only a source of revenue, but also a provider of innovative products. The fate of McDonnell Douglas serves as a reminder of what can happen to an aircraft manufacturer without such advancements; it was acquired by Boeing in 1997.