Boeing (BA) Strike Ends, But Problems Still Abound...

Boeing (BA) is the world’s largest aircraft manufacturer and a major defense contractor.
Demand for air travel, for parts and maintenance services, and for defense and space is all strong, yet Boeing is going through a very rough patch.

That’s largely because a strike – the first in 16 years – broke out over allegations of coercive interrogations, illegal surveillance, and discrimination, and dragged on for 53 days, putting Boeing in a very difficult position. The strike hit just as the company was already struggling with quality issues.

The major crashes in 2018 and 2019, an engine fire in January 2024, emergency exit door plugs blowing out, wings tearing, tires coming off… A string of incidents like these has raised serious doubts about the design of Boeing aircraft.

Layered on top of the strike, these issues further disrupted production. Boeing has notified suppliers that key milestones for 737 MAX output will be pushed back by about six months. The original target of producing 42 jets per month by September 2024 has now been delayed to March 2025.

The strike that had put Boeing in a bind formally ended on November 5 with a deal for a 38% wage increase.
Yet on the 11th, Boeing announced it would lay off 17,000 employees, or about 10% of its total workforce.
The cuts will include managers and executives, and appear to be part of the “reset” that Kelly Ortberg is aiming for.

Kelly Ortberg is Boeing’s new CEO, who took office on August 8 with a mandate to restore trust in the company.
He stepped in to literally overhaul the company after former CEO Dave Calhoun promised in March, following the door plug blowout incident, that he would “step down by year-end” and then resigned.

With restructuring cutting costs and the strike now over, is it all uphill from here for Boeing?

Boeing is currently losing ground to its main rival, Airbus. Looking at market share between the Boeing 737 MAX and the Airbus A320, Airbus holds the upper hand at roughly 65:35.

There are people who insist this is all fine.
Ken Herbert at RBC Capital has a price target of $200 on Boeing, 29.37% above the current share price.
He argues that “airlines have built their operations around Boeing infrastructure, so switching costs are high and it’s not easy to move to Airbus. There are rumors about some potential customer defections, but so far there are no known cases of customers planning a large-scale shift from Boeing to Airbus.”

They’re basically saying there’s no risk of losing customers anyway, so they can just take their time and get production back up.
I have one thing to say to that: have they no shame?

On the other hand, there are people who are skeptical about Boeing. Matthew Akers at Wells Fargo cut his price target on Boeing from $185 to $119.
He explained, “Boeing’s defense segment continues to generate losses, and additional investment is needed for aircraft development, so there are many factors that could weigh on cash flow.”

Boeing’s situation is in fact quite bad. On the 8th, global credit rating agency Standard & Poor’s (S&P) said it was placing Boeing, which is rated BBB-, on “CreditWatch with negative implications” due to rising financial risks, including the possibility of a strike. BBB- is just one notch above non‑investment grade, or “junk.”

That same day, Boeing announced it would raise up to $25 billion through stock and bond issuance and another $10 billion through credit facilities.
If Boeing taps its remaining undrawn credit lines, it can raise a total of $55 billion. That should keep it from falling into junk territory, but for now the company is busy trying to get its house in order.

This latest defense-unit sale is the first clear signal that Boeing has begun restructuring.

On the 19th, the Wall Street Journal reported that Boeing had sold its defense company Digital Receiver Technology, Inc. to Thales Defense & Security.

Then, in a March 19 Bloomberg interview with insiders who requested anonymity:

Parts of that interview have now materialized. In other words, Argon ST, which was mentioned alongside it, could also be sold.
On top of that, Boeing has already announced plans to sell half of United Launch Alliance. All of these are defense-related businesses, and given the nature of defense contracting—where fixed-price contracts often lead to losses—it’s presumed that Boeing is pruning these operations for that reason.

As of 24Q2, Boeing’s defense segment accounts for 35.6% of total revenue, but the company has warned that its third-quarter results will include $2 billion in losses from its defense and space operations—an acknowledgment that losses from the defense segment are far from trivial.

After the recent resignation of former defense chief Ted Colbert, CEO Kelly Ortberg has stepped in to directly oversee Boeing’s defense business. If Boeing slashes the defense segment that Matthew Akers cited when he dramatically cut his price target, will that be enough?

Boeing’s CEO Kelly Ortberg clearly has the chops to reshape the company’s portfolio. After becoming CEO of Rockwell Collins in 2013, he spent six years acquiring firms such as aviation communications provider ARINC, nearly doubling Rockwell Collins’ revenue to about $9 billion. Rockwell Collins was later acquired by United Technologies for $23 billion—roughly four times the company’s value when Ortberg took the helm.
Boeing’s new CEO has a proven knack for buying and selling businesses and for lifting corporate value.

The root cause of the quality issues lies in its competition with Airbus.
In 2019, 157 people were killed in the crash of Ethiopian Airlines Flight 302, and 189 people died in the crash of Lion Air Flight 610. Both accidents involved Boeing 737 MAX aircraft.

After Airbus announced the A320 NEO with 15% better fuel efficiency, Boeing tried to respond by equipping the 737 with a new engine. Because of the 737’s structure, there wasn’t enough ground clearance for the engine, and Boeing solved this by moving the engine to the upper front of the wing.
However, when the engine is moved upward, the aircraft’s aerodynamic characteristics change, creating a tendency for the nose of the aircraft to pitch up excessively during takeoff. If the nose pitches up too much, the risk of a stall increases, so Boeing added an automatic control software called the MCAS system to address this.

The problem was that the MCAS system malfunctioned due to faulty sensor readings and forced the nose sharply downward, leaving pilots with too little time to properly recognize or control what was happening.
Boeing did not explain this sufficiently to pilots and only provided simple training using an iPad. The fact that both the captain and first officer failed to identify the cause of the crash in 2018 shows just how inadequate that training was.

In this sense, Boeing’s accidents can fundamentally be traced back to overly aggressive design changes driven by competitive pressure.
But is it really plausible that engineers at the world’s largest aircraft manufacturer were unaware of the risk of sensor failure? There is speculation that Boeing may have chosen to manage and control that risk instead. If the engine had not been modified in the first place, the MCAS system would never have been needed.

Boeing has repeatedly shown a pattern of heavy-handed control over internal whistleblowing.
If we look back at the causes of the recent strike, they include “coercive interrogations” and “illegal surveillance.” After the door plug blowout incident, whistleblowers also came forward saying they had been “pressured to use substandard parts on aircraft” and “retaliated against after reporting safety issues.”

Boeing’s real problem is not production delays or losses in its defense business. The real issue is that it conceals problems and restricts information. Hiding problems to stay competitive and burying the truth to make it look as if issues have been fixed will only come back as a much bigger problem.

Boeing is unlikely to be permanently pushed out of the market. If it cuts costs just enough to keep the business running and weathers the downturn, it will eventually recover. But this behavior makes one wonder, “What if Boeing is hiding even more technical flaws?” Even if it means temporarily giving up some competitive edge, these issues need to be acknowledged and resolved. Naturally, that will take a long time.

Now it is time to think about how far Boeing might fall behind its competitors while these problems are being resolved.