Boeing (NYSE:BA) has endured two awful years in a row. In 2019, the 737 MAX grounding disrupted the company's growth trajectory and caused it to start burning cash. The situation has gone from bad to worse in 2020, with the COVID-19 pandemic absolutely crushing aircraft demand.
However, Boeing has gotten some good news this month. First, the Federal Aviation Administration reportedly plans to recertify the 737 MAX for commercial service as soon as Nov. 18. Regulators in Europe could lift the grounding order there by the end of November, too. Second, positive news on the vaccine front has raised investors' hopes that air travel demand will recover steadily next year. As a result, Boeing stock jumped 30% during the first seven trading days of November.
This rally is an understandable reaction to these positive events. Investors may be underestimating the near- and long-term headwinds Boeing faces, though. That makes the surge in Boeing stock a chance to sell the shares and reallocate capital to more promising opportunities.
Cash burn will continue
Late last month, Boeing reported that it burned more than $5 billion in cash for a second straight quarter. Perhaps more importantly, management finally acknowledged that the company is likely to continue burning cash throughout 2021.
Indeed, Boeing ended last quarter with $6 billion of unpaid customer compensation related to the 737 MAX grounding on its balance sheet. Much of that $6 billion will be paid out over the next couple of years. Additionally, the company must find buyers for 100 "white-tail" 737 MAX jets that have lost their original buyers, which will only happen at depressed prices. Meanwhile, it faces unknown liabilities for civil or criminal penalties related to the 737 MAX's design flaws and settlements with the families of 737 MAX crash victims. Boeing could also incur penalties for shoddy engineering and production practices related to other aircraft models. All of this also comes against the backdrop of reduced aircraft production.
Boeing issued another $4.9 billion of debt earlier this month, adding to a recent string of financing moves. (It ended the third quarter with $61 billion of debt, up from $11.9 billion just two years earlier.) It will take years to dig out of that hole, even after Boeing starts generating free cash flow again.
Moribund aircraft demand and a subpar backlog
Bulls seem to believe that Boeing stock is bound to keep moving higher once the 737 MAX is recertified and the pandemic is in the rearview mirror. But while quick vaccine progress could enable a meaningful recovery in air travel starting next year, airlines have numerous jets in storage. They can also tap into used jets surrendered by struggling carriers that have permanently shrunk or gone out of business. Airlines thus won't have to take delivery of many new aircraft in the near future.
Once air travel demand starts to approach 2019 levels -- a milestone that could easily be three years away -- demand for new aircraft should rebound. Yet most airlines have plenty of orders on the books to fill this need -- just not necessarily with Boeing. Airbus (OTC:EADSY) ended October with a backlog of 7,377 commercial jet orders, 73% higher than Boeing's backlog of 4,275 firm orders.
This is a testament to Airbus' stronger product portfolio, particularly for narrow-body jets. It also reflects the chilling effect of the 737 MAX grounding on Boeing's order activity. Airbus is likely to retain a substantial market share advantage over its U.S. rival during the next decade, limiting the recovery in Boeing's revenue and cash flow.
Don't be fooled by Boeing stock's recent surge
Despite ceding market share to Airbus, Boeing should generate enough free cash flow over the next five years or so to clean up its balance sheet. It will then have to invest heavily during the second half of the decade to update its product portfolio, starting with the 737 MAX.
If all goes well, Boeing could return to full health -- in the 2030s. That's a long way away. Boeing could face a more competitive market by then, as China seems committed to building up state-owned Comac as a third major global aircraft manufacturer.
This makes Boeing stock way too risky relative to the potential rewards, which are smaller and more distant than most bulls seem to believe. While it's possible that Boeing stock will pop even higher in the short term, any such gains are likely to fade as investors reckon with the aerospace giant's long and rocky road back to being a cash cow.