It's been a nightmare 2020 for investors in Boeing (BA -5.67%), with shares down nearly 50% since the start of the year on manufacturing woes and pandemic-related issues.
The story took another turn for the worse this week with fresh questions being raised about Boeing's 787 Dreamliner manufacturing quality. For investors betting on a quick turnaround, it's getting a lot harder to see how Boeing shares get airborne anytime soon.
First the Max, now the Dreamliner?
Boeing's reputation for quality took a hit in March 2019 when regulators worldwide grounded the 737 Max after a pair of fatal accidents. The company is still working to win recertification for the Max and get it airborne again, and the investigation into what went wrong raised a lot of questions about the safety culture at Boeing.
Now a second plane, the Dreamliner, is under scrutiny. Boeing late last month instructed customers to ground a handful of 787 airplanes after discovering "two distinct manufacturing issues" that, when combined, could leave the plane unable to withstand in-flight stress.
Boeing believes the problem is isolated to a small number of planes, but it admitted that a larger number of aircraft have one of the two issues. The Federal Aviation Administration (FAA) is now investigating, which could lead to an inspection of all 900 Dreamliners currently in service worldwide.
Also on Tuesday, Boeing said it has discovered another manufacturing issue involving the 787's horizontal stabilizer. The company says the FAA doesn't see the problem as a safety issue, and that it is correcting the planes that are affected, but the revelation is a fresh black eye for a manufacturer that is already fighting to restore credibility.
So far it doesn't appear that the Dreamliner issues will lead to a fleetwide grounding of the aircraft, or be nearly as expensive for Boeing as the 737 Max debacle has been. But the issues could still take their toll.
A Bank of America survey late last year found that nearly 75% of respondents would try to switch flights if booked on a 737 Max. The fear now is that the lack of consumer confidence in that one airplane might evolve into a lack of confidence in Boeing.
Boeing, as one half of a duopoly with Airbus (EADSY -2.02%), will continue to get orders. But lingering bad publicity can influence airline purchase decisions, and cost the company orders.
Given that aircraft manufacturers typically record the highest margins on later deliveries, if even a handful of purchase decisions go Airbus' way instead of Boeing's, it could impact the overall profitability of an airframe. Five years ago, the 737 Max and Dreamliner were expected to be among the best-selling aircraft of all time, but that is no longer a given.
These two planes are the order book
Boeing bulls like to point out the company's still-impressive 4,000-plus book of new-plane orders as a sign the company will be fine in the long run. But that order book has been under pressure for most of this year. Airlines are pushing back delivery schedules due to COVID-19, and I expect the industry that emerges post-pandemic to be much smaller, more focused, and potentially in need of fewer planes.
Net orders at Boeing are down 932 planes so far in 2020, which includes 410 net cancellations for the 737 Max. Variants of the 737 make up 78% of Boeing's total backlog, and orders for the 787 make up another 10%. Put simply, those two planes are the bulk of Boeing's order book. A one-two punch of consumer sentiment turning against both the 737 and the Dreamliner would cause real issues for Boeing's future cash flow.
As a matter of comparison, Airbus' 737 rival, the A320, has outperformed the 737 with 262 net orders so far in 2020.
The bad publicity could also cause Boeing to accelerate the development of replacements, which would both add to expenses and decrease lifetime earnings from the 737 Max and the 787.
Avoid Boeing shares
I had no desire to buy Boeing even before these Dreamliner issues came to light, given the uncertainty surrounding the Max and the prospects for a prolonged commercial aviation slump due to COVID-19. The new problems make the bull case even harder to justify.
The timetable for an airline recovery is still measured in years, not quarters, with carriers preparing to get significantly smaller in the months ahead. And the risk in buying Boeing and waiting out the downturn is increasing with each new manufacturing flaw discovered.
I certainly hope these latest revelations about the Dreamliner are the last we hear about manufacturing problems at Boeing, but it seems there is enough evidence to conclude the company needs a major overhaul of its culture and processes to identify and remove the rot that has afflicted the business in recent years.
Until there are concrete signs of improvement, I would avoid holding Boeing shares.