In this episode of Industry Focus: Energy, Nick Sciple chats with Motley Fool contributor Lou Whiteman about the latest headlines from Wall Street. They discuss the latest offering from a leading car manufacturer, and tell you all you need to know about the latest troubles at Boeing (NYSE:BA). And as their Sept. 30 deadline for payroll support ends, find out how the airlines are faring in the coronavirus recovery and much more.

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This video was recorded on Sept. 10, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. On today's show, we'll be taking a look at the latest bad news for Boeing, and how airlines are faring in the coronavirus recovery. Here to help me break it all down is Motley Fool contributor Lou Whiteman. Lou, welcome back on the podcast.

Lou Whiteman: Thank you, happy to be here.

Sciple: It's great to have you on the show, Lou. As I said, it's Thursday, but we're on this short week with Labor Day, so I'm still kind of out of whack a little bit. Did you do anything fun for the long weekend?

Whiteman: You know, I'm in Atlanta and we finally got that chamber of commerce weekend where the humidity disappeared. So, yeah, we were outside three straight days, went paddleboarding on the Chattahoochee, found out paddleboarding on rivers with rapids is a ton of fun. So, whenever you're all around Atlanta, come on out, I'll show you.

Sciple: Yeah. So, we kind of did the same thing, we went over to Harpers Ferry, West Virginia, and hiked around the historic town and all that kind of stuff, right around the intersection of the Potomac and some other rivers right there. So, it's very beautiful, great to get outside. And I did a fantasy football draft, maybe we'll talk a little bit about the NFL here at the end of the show.

As I said off the top, we're going to talk about Boeing and aerospace, but first, before we get into that main topic, I'd be remiss if we didn't talk at least a little bit about Tesla (NASDAQ:TSLA). It's been a wild a couple of weeks for the company. Last Monday, Aug. 31, completed a 5-for-1 stock split. Over the course of the week on Friday, completing a $5 billion issuance of stock. And then over the weekend, we got news that the company had not been added to the S&P 500 and that SoftBank had been building bullish options bets on Tesla as well as a number of other tech companies, that then sent the stock down over 20% on Tuesday when trading resumed, but it's since rallied back the past couple of days.

Lou, I mean, so much news all in one week. I know Tesla usually grabs headlines, but this has been a crazy couple of weeks even for Tesla.

Whiteman: Yeah. So, it's so hard to pick what to talk about here, because, yeah, you can do a show on any of those things, right? But if I could, let's focus on that $5 billion offering, because that's the thing that really stands out to me, both the size of it at just $5 billion, and the way it was done at the market. You know, whatever you think of Tesla, if you're a bull or a bear, it's up 300% for the year. This is a company with $15 billion in debt, $7 billion or $8 billion without the leases. They have a ton of projects they're working on, a lot of capex, why they only raised $5 billion, and the way they did it, I wonder -- that could really haunt them. They had a chance to really shut up the haters and get down to work, it seems like. And it just surprised me it was a pretty wimpy offering.

Sciple: It's one of those things, you expected them to issue some stock, just given how much the stock has run up. And you mentioned all of these projects, having access to capital certainly a big advantage for the company. We'll see where things go, but I'm sure Tesla will keep grabbing the headlines.

It's worth noting, they had that big sell-off on Tuesday. The stock is still up over 30% in the past month, and it's way back to where it was in the middle of August. And so, grabbing a lot of headlines where the stock is moving, but put in context with where it's gone over the past year, kind of, an insignificant move. Which is funny to say when the stock sells off 20%, right?

Whiteman: Oh, yeah. But I mean, the point was made, I forget who it was, maybe it was someone on the weekend show, that, you know, I mean this stock could lose half its value and still be up for the year. It's just, there's nothing like, you know... [laughs]

Sciple: Yeah, the volatility I think is pretty incredible for something of that market cap. A really exciting stock, I'll keep following it. But you know, there's not much more to say there than it's new news every day with this company.

Moving on to Boeing, kind of our main topic for today. We've discussed on the podcast in the past the issues that Boeing has faced with the 737 MAX and the grounding of that plane. In the past week, we've had new issues come out with regard to the Boeing 787 Dreamliner that's led to some of those airplanes being grounded.

Lou, what do investors need to know about the 787 Dreamliner story?

Whiteman: So, the 787 is Boeing's first carbon plane. It's a new way of making planes. And it was very controversial when it was first proposed, but it's been a good performer. This is the first time we've had issues with the way it's manufactured where it's actually threatening to ground planes. In this case, it's two separate issues, both in the rear part of the plane. Either one of them isn't considered to be dangerous, but combined, the two issues in the same part of the plane could lead to questions about the structural integrity of the plane under flying conditions.

As far as we know, it's less than 12 planes that are affected. It's kind of scary to think that a much larger number of planes have one of the two issues. But right now, we're still in the, I guess, fact-finding. We knew all this about a couple weeks ago, the news in the last week or so is the FAA has gotten involved, as we knew they would, and so now we're trying to figure out exactly what to do about this and to figure out how deep it runs.

Sciple: So, when you put this in context with how significant the 737 MAX story has been for Boeing, what's the relative importance to the business and the investment case for Boeing, the Dreamliner?

Whiteman: Well, just to give some perspective. You know, Boeing's backlog throughout this has remained more than 4,000 planes. Variants of the 737, largely the MAX, but also older generations, make up nearly 80% of that backlog. The 787 is another 10%. So, now we're talking about potential issues or reputational damage to 90% of that backlog. I don't think this is a repeat of the 737 MAX, it seems like it's not going to be that big. The real frightening thing for me as someone looking at Boeing stock is, you know, this is a little dated, but back in, I think it was December, Bank of America put out a survey where they, I think, found it was almost 75% of respondents would try and rebook if they found out they were on a 737 MAX.

Boeing really needs to make sure that this remains a 737 MAX issue and not a Boeing issue, because if it becomes a word association with Boeing, then you have real problems. So, I think it's more a reputational risk right now than it is a financial hit. The 737 MAX has been just devastating financially. It doesn't look like, as far as the numbers go, this is going to be a repeat of that, but this is a company that can ill-afford to take a reputation hit, and this doesn't look good.

Sciple: Yeah, I think in the past on the podcast, I maybe compared it to Wells Fargo, in that, you get this first bad news [that] comes out, you think it's clear, and if they can get this figured out, well, everything will be back to normal. And then the hits keep on coming and you find out that maybe it's more systemic. Or at least that perception is out there, and if even that perception is out there, it can affect sales.

I remember, I was looking at, you wrote an article about the effects of this 787 Dreamliner; you can go read it on Fool.com, it's 787 Dreamliner Grounding Raises New Headwinds for Boeing Stock. In there, you mention, when it comes to the backlog of Boeing, Boeing's net orders are down significantly this year. But if you look at Airbus, they may actually be taking share, because they've had an increase in net orders. Can you talk about how this maybe is changing the nature of the duopoly between Boeing and Airbus?

Whiteman: Yeah. So, I believe that was on 737 versus the 320, which is the comparable plane from Airbus. Yeah, neither of them are having a great year. It's about a negative 400, I think, for 737s for cancellations outweighing orders. Airbus has, it's about plus 200. I think, for me, the real danger here, if you're looking at Boeing stock is, people, bulls love to talk about the duopoly, and the fact that you really only have two choices. There's a lot of demand. So, whether you want to go with Boeing or not, you have to; Boeing will sell planes. And I agree with that. But this is an industry with a lot of fixed costs. This is an industry where it is the later prints of the plane that are really the most profitable, because all of the ... you know, so much R&D, so much tooling, so much to get into the initial batch, that those extra sales, these sales that take the model from a decent seller to a great seller, those are the ones driving profit. So even if Boeing continues to be able to sell airplanes, just a marginal few sales, just a few big customers saying, you know, we're going to go the other way, that can make a huge difference on profitability, which in turn can make a huge difference on future R&D spending, which can really set the business back for a long time.

And that I think -- it's much more subtle than "no one is going to buy a Boeing airplane." You know, Boeing is going to get sales, but it's those incremental sales that just a couple of people changing their mind because of all of this, it can have a profound lingering effect, and it's much harder to get out. We got to see it play out, but that, to me, is the fear right now.

Sciple: Yeah, so we'll continue watching how developments in Boeing affect their reputation and affect their sales to see how they perform.

Whiteman: Which is one more thing too, I want to say too, because I've gotten a lot of feedback on Twitter, people talking about how the cancellation numbers aren't that bad, we still have this backlog. And I'm going to borrow this from the Teal Group, this isn't my work, but in our last downturn from 2001 to 2003, Boeing saw a reduction in its backlog of only about 500 planes. And much of that can be accounted for by deliveries. So, in fact, there weren't a lot of cancellations, yet Boeing was forced to cut production by 30%. So looking at cancellations, with the way airlines have a real ability to defer orders, saying instead of taking them in 2021, we're going to take in 2023, 2024. That isn't a cancellation, it stays on the books, but it has a real effect on the manufacturing, the near-term profitability, cash flows. So, just be careful if you're looking at the order book and saying they're fine, because it's a lot harder to get at what's going on.

Sciple: Right. And so, we talked about this on the first part of the show, the Dreamliner, how that could affect reputational issues at the company as well as the 737 MAX, you got to get that plane approved before you can resume sales. But another important factor is just, what is the demand for air travel? Are passenger airplanes going to be in demand? Are airlines going to be adding to their fleets? That's been really up in the air this year with the global coronavirus pandemic.

When you look at the data so far this year, Lou, what is that telling us about the current demand situation for air travel and the extent to which that is recovering?

Whiteman: Well, is the glass half full or is the glass half empty? I think it's how you want to look at it. Now, the good news is that, if you use the TSA numbers, so these are the number of people being screened at an airport daily, which is a pretty good way of getting real-time information, we are up 9X over our April lows, which is a great improvement. However, we're also barely half of the daily volumes where we were last year. Almost all of what we've seen is leisure travel and not business. That can be an issue because, for one thing, it's seasonal. Now that Labor Day has come and gone, we're likely going to see that fall off considerably. It's also less lucrative. In fact, usually in a recession, the leisure traffic comes back first, because it's easier to stimulate with low fares. And in fact, that's what we've seen, you know, it's people traveling because it's really cheap.

So, we're both in a position where things are slowly coming off the bottom and the real panic is over, but we are a long way back from normal. And I don't see any reason to think... it's going to be 2022 at the earliest before we really see pre-pandemic levels.

Sciple: You said we're up 9X, kind of, from the bottom. So, do you think the bottom is in when it comes to air travel, is that fair to say? And then it's a question of the speed of recovery at this point?

Whiteman: I think so. I mean, we're talking about a pandemic here, so it's really hard to say what the future holds. You know, once your SEC football gets going and we have [laughs] you know, and everyone is back in the stadiums, who knows? But barring the unforeseen, it does seem like we're off our lows. You know, we have some semblance of normality coming back. However, absent a vaccine -- and I think even if you're an optimist, a widely distributed vaccine, we're talking maybe, hopefully, in time for the summer travel season next year. But we're definitely talking six months away before it is widely distributed. And there's just no way we're going to see a recovery. Business travel, it's likely going to be 2023 even before we see that coming back.

Sciple: And so, when you look at these companies, what we saw following the pandemic and travel being shut down, airlines really tapped into massive amounts of capital. I pulled a number from one of your articles, Lou, $50 billion in debt and equity financing coupled with a similar amount from the federal government. When it comes to needing to tap equity and debt markets, needing to continue to raise cash to keep the company afloat, any thoughts there as to whether the companies are out of the woods?

Whiteman: One of the really unappreciated points coming into this was, and this is an industry that every time there's been a downturn, we've seen bankruptcies. In some cases, multiple times, companies have gone bankrupt. I mean, think of the names just in my lifetime: Eastern Airways, TWA, [Trans World Airlines] Pan Am. There are so many historic names that just ceased to exist, because every time there's a downturn they get in trouble. People really, kind of, assumed that going into this, when in fact, the industry has never been more healthy coming into that.

And relatively speaking, they've held up really well. Yes, they've taken on a ton of debt and that's going to haunt the balance sheet for years, but the fact was, they were able to take it on. We're in a weird position now where most of the big airlines are burning through $25 million a day, yet United Airlines just gave an update, they're going to have $18 billion in liquidity at the end of the quarter. So, we're both in a really bad situation, but a situation they can handle. And I think that's the status quo.

It's been interesting, if you look at the stocks since April or May, it's almost been just a macro bet on what's going on with the vaccine and the economy. Regardless of what's going on with an individual company, on days when there's good news about a potential vaccine, the airlines all trade up in lockstep. On days where there's an economic indicator that indicates things aren't going well, the airlines have been trading down. And I think that's how it's going to continue for some time, because they can survive this, but they can't thrive in this, so it's kind of just chugging along till it's over.

Sciple: So, Lou, one question I had for you, and maybe this is maybe a little bit of a tangent from our core topic, but it's something I've thought about as I've been reading about some of the financing these airline companies have been able to do. So, both, American and United, over the summer, pledged their frequent flyer programs as collateral against about $5 billion in loans they each received from the government. So, you see these frequent flyer programs are an asset that airlines can tap into to get access to capital. You've seen some airlines in the past actually spin off their frequent flyer programs.

That raises a question for me, Lou. When I think about frequent flyer miles and what those programs are, I accumulate frequent flyer miles as a customer that those miles over time entitle me to exchange them for goods and services. And so, from my perspective, they kind of sound like a liability more so than an asset. So, I guess, why are these frequent flyer programs worth money that you can pledge them as collateral? What is the value for these programs, separate and apart from the value they hold for the airline companies themselves?

Whiteman: So, you have to separate out the miles from the programs. You're right, the miles on an individual basis are a liability, they are an IOU. The programs can be profitable because they allow the airlines to presell those miles to partners who are going to give them away, most notably the credit card companies that use them and give them to you when you use their credit card. So, the programs can be a generator of revenue even though you are selling something that becomes a liability on your balance sheet.

Airlines hate to talk about the details on this, but when Delta reached a new agreement with American Express, Delta said, by the end of that agreement, I believe it's the back end of this decade, it should be worth $7 billion a year for them in revenue. Now, in the case of AmEx, I think the Delta card is something like 10% of their total receivables. So, that is a very important relationship for AmEx too. But really what it is, it is a source of revenue for the miles, it's also a pretty good mailing list, it's a great loyalty program, because you know demographics. What the TSA requires you to [collect] -- the data you need on your customers, that is a marketer's dream. So in a way, it's just a very, very good affinity program or a loyalty program that has a lot of data that they can monetize, whether the customer wants it or not, I guess.

Sciple: Right. So, yeah, never underestimate the value of data, I guess. So, along that side, of the kind of relationship between airlines and customers, we've seen some other developments as well more recently. So, on Aug. 31, I believe, United announced that they were removing change fees on all domestic flights, which has resulted in other airlines, including American and Delta, quickly following suit. You see this eliminating change fees, how does that affect the aviation business moving forward?

Whiteman: So we've had a trend over the last decade or so of more a la carte pricing, where they're all competing on price, but especially these legacy airlines -- United, Delta, and American -- would claim, well, you know, we're giving you more with that ticket than some of these discounters are. That really wasn't, that wasn't an effective way to go in a world where people are just comparing prices online. So, the way the airlines made this work was they, both, lowered their ticket prices, but emphasized the fees or what they can charge you for after you have the ticket.

A big cog of that was these change fees, and that's one cog that's gone. I think it'll adjust, it's only one fee, but it's a great consumer thing. You know, everybody loves to talk about the way the airlines nickel-and-dime you. They're not wrong. And United -- you know, Scott Kirby just took over United, he has been with American and its predecessors all the way back to America West. He's about the smartest person in the industry, and frankly, he's the one thing I like about [laughs] United Airlines right now as a stock. And this is really smart. This is a way for them to get their name out and say "We did this." And marginally it's going to have an impact, but over the long haul, they need revenue right now. And you know, you can manage around this. This is a few hundred million dollars in fees total. And you know, they'll find a way around it. It's great news for the consumer.

Sciple: Right. So, I saw a number that United had brought in $600 million in fee income last year. So, clearly giving up some of that income in exchange for juicing demand in this time where air travel demand is much lower than it has been historically. So, one question I had is, prior to this end of change fees, Southwest had been, of the big four airlines, the only one that did not charge those fees. Does this affect Southwest in any meaningful way now that the rest of the market has matched Southwest's offering?

Whiteman: I'll answer this more as a consumer than anything else, but I think the one differentiating fee that Southwest still has is the bag fee, or the lack of a bag fee. I think that's the one that people really anchor to. And they still have that going for them. Southwest is a brand that's bigger than any one fee or any collection of fees. People like Southwest. So, I would be surprised if this really moves the needle for them.

Sciple: And I suppose Southwest has already built their business model around not having to have these fees, whereas the other airlines are going to have to absorb it in some way, as you mentioned earlier. So, the next thing we'll be watching coming up for airlines, and I believe it's the end of this month, restrictions expire on that federal loan that the major airlines received, and those restrictions prohibited the airlines from engaging in layoffs and that sort of thing before Sept. 31 (sic) [Sept. 30]. What do we know so far about what the airlines will do when those restrictions expire at the end of the month?

Whiteman: It's going to be ugly. And, yeah, as you say, so the CARES Act, the airlines got about $50 billion from the government, $25 billion of that was in payroll support, and it was conditioned on no involuntary separations through Sept. 30. And the idea at the time is, hopefully, this is a short-term blip, we'll buy the industry time before they make drastic decisions. We're coming up on Sept. 30, things aren't getting a lot better. These airlines are going to get smaller.

American, which is the largest employer, about 140,000 jobs, they've said they're going to lose 40,000 jobs total between involuntary and voluntary separation. United did reach a deal with its pilots, so they're going to avoid furloughs. We don't exactly know what that means yet, but it's probably some sort of givebacks elsewhere, fewer guaranteed hours, something like that. Southwest has a deal in place, a couple of the smaller ones do. But the onus is really now on, I'd say, Delta and American to work something out with their pilots, because otherwise there could be bad feelings. I mean, you don't want bad labor relations with your pilots.

Delta's only major union is their pilots. So, they have a little more flexibility here versus American. American has a lot of unions that are watching this. And you really worry, American is a company that was trying to get airborne anyway. This could get really ugly if they have to cut a third of their workforce and they aren't in harmony with their unions as they do it.

Sciple: Yeah, it's a difficult situation to be in. And, yeah, for our listeners, yeah, there aren't 31 days in September. So, yeah, Lou is right, Sept. 30 is the deadline. We'll be waiting a long time, if we're waiting for Sept. 31.

Whiteman: The airlines would probably be OK with that, if we could somehow make bills due then too, OK.

Sciple: [laughs] Right. So, kind of coming back to where we were earlier on the show. Back in March, the outcome for airlines was probably more uncertain than it's ever been, or at least it's been in a really long time. Now, we're six months removed from that. How much more clarity is there for investors or are we still really uncertain about the future for this industry?

Whiteman: So, I believe, and I don't think there is a lot of clarity as in, lock it in stone, but I believe there is significantly more clarity to the downside. The fear in March was that we were going to have a repeat of previous downturns and there were going to be multiple bankruptcies in the industry. We are through the worst of it, nobody has filed. I am optimistic. I don't know if I'd really bet on it, but I am optimistic that we can go without any U.S. airline filing for bankruptcy. Definitely there are a few names that I think have all but ensured they can make it through. So, we have a lot more clarity on the downside. We don't have a lot of clarity on when the upside will come.

I do believe, if you just look at the valuations, if you believe air traffic will return eventually, there is some real upside here. There's also an opportunity cost in maybe waiting years to see that. [laughs] But I do feel like, if it helps people sleep at night, I did not sell the airline stocks I own. I am down on them, but I do not worry that they are going to go to zero. And I was trying to figure that out desperately for my own portfolio back in March, I'll admit.

Sciple: Yes, it's a lot more certain than when Warren Buffett sold back in March. So, now we have a little more clarity and maybe a little more comfortable holding it today than maybe back then.

Whiteman: Uh-huh.

Sciple: So, it brings to the question of: Would you buy the stocks? What would you do? We talked about three different companies/industries today. We talked about Tesla, Boeing, and then the commercial airline industry. For those three categories, maybe pick your favorite airline stock for that first, third category, you have to buy one, sell one, hold one. Tell me which ones they are and why?

Whiteman: All right. I'm probably selling Boeing, just because I don't trust it. And I know it's a ways down. If you made me guess, I would probably think that absent some new disaster with the 737 MAX, that we're not going to retrace that bottom when they were down 70%. But even if you look at how long I just said it's going to take the airlines to come back, I think Boeing is going to take longer. They just have real issues and it's become a "show me" story. I want to see that they can do things right. I'm not going to take it for granted anymore.

Tesla, I don't have any desire to own, short, do anything with Tesla. Tesla, to me -- I mean, I'm an old industrial guy, they're trading at more than $1 million per vehicle delivered in the last year. Even if you ... I will concede the potential, [but] I can't get to that [laughs] number. That said, with the potential, I wouldn't bet on it going down either. So, I guess if I held Tesla today, I would probably keep holding it.

The airlines: I really do think Southwest is safe, I really think Delta is safe. But just for fun and be a little more speculative, I will buy Spirit Airlines, which is much smaller and much less likely to survive, I guess, if things go really bad. But Spirit has the lowest cost in the business. They have lower cost than Southwest. And if the next year goes the way I think it is, where we have mostly leisure travel and maybe it starts to come back for a big summer, we're going to see a lot of discounting, we're going to be seeing a lot of fare sales to try and get people to fly. Spirit is well set up for that battle. And it's got a lot of risk, but it's got a lot of upside. So, we'll go on a limb and say that.

Sciple: All right, folks, if you want to add Spirit to your watchlist, that ticker is SAVE. Really fun ticker, easy one to remember.

Before I let you go, Lou, sports are back, it's Thursday. We've got the defending champion, Kansas City Chiefs hosting the Houston Texans tonight, will you be watching the game?

Whiteman: You see, Nick, I had prepped for this. When you told me we were going to talk about the return of football, I assumed you meant my Watford playing Middlesboro tomorrow and the return of the League Championship, right?

Sciple: Well, tell me about that, I'd love to hear about it, yeah.

Whiteman: Oh, you know, it's going to be a big season. Watford was just relegated, and we need to get back, because -- you want to talk about dates, it's interesting. The one place where the Europeans have us on capitalism is sports. You know, you fall down, relegation is nasty. You see your revenue drop by 90%. So, yeah, that's a big deal. As for the NFL, all I really know is, to use the Gardner brothers' "winners win." So, I'm going to take Kansas City until they lose, and then I'll move on from there. [laughs]

Sciple: Yeah, I'm with you on Kansas City. I looked up what our friends out in the desert have for the lineout for the game. It's Chiefs -9.5. Maybe the Chiefs win. I think that 9.5 points is a lot, so maybe they don't cover, but we'll see. I'll be watching it, I'm excited to have the NFL back. And I'm always excited to have you on the podcast, as always, Lou.

Whiteman: Well, thank you. Sorry, for the audio issues, but hopefully it will all work out.

Sciple: Hey, we'll make it. Tim Sparks is a superstar, so we'll get it figured out.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for mixing the show. For Lou Whiteman, I'm Nick Sciple, thanks for listening, and Fool on!