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The Non-Functioning Jetliner Market

I received Richard Aboulafia’s newsletter last week. This is a terrific read!

March 2020
Dear Fellow Former Airport Frequenters,

The worst thing a company can possibly put on its board, or on its executive leadership team, is an ex-politician. Politicians can be pompous, of course, and they also apply a one-size-fits-all ideology to problems that call for creative solutions. They’re also hard to get rid of – firing expoliticians
can have repercussions.

Nikki Haley, who just resigned from Boeing’s board after earning $256,000 for a few meetings last year, was guilty of ideological rigidity, but obviously wasn’t hard to get rid of. The reason she gave for resigning was that she opposed any kind of government aid package for Boeing (her
South Carolina government support for the 787 line excluded, of course), saying, “I have long held strong convictions that this is not the role of the government.”

Let’s talk about that. Since my last letter, a few days ago, the economic situation has gotten much worse. By the time you read this, things may have gotten worse still. The world has never seen anything like this. I’m a free market fan myself, but there are very few markets left functioning. Are you going to a restaurant this week, or buying a car, or flying in a plane? I suspect not. Those are non-functioning markets. Depending on the length of the pandemic, they may stay non-functioning for some time.

The commercial airlines that buy jets are one of those non-functioning markets. Shock surprise analysis from one of your top 100 favorite aviation market analysts: nobody wants a jetliner right now. So, let’s consider the economic reality of building jetliners today.

The jetliner business has enormous variable costs. For Boeing, around 70% of the value of a jet goes to suppliers and the suppliers’ workforces and another 10-15% goes to Boeing’s workforce. Boeing has access to around $25 billion in liquidity. There’s no imminent danger of bankruptcy. Yet if they keep building jets, they’ll keep burning through $5 billion or so each month, and with a non-functioning market, nobody will give them money for those jets. For Boeing to survive, all they need to do is stop building jets, close their factories, lay off most of their workers, and stop ordering stuff from their suppliers, who will also lay off most of their workers (where most of the jobs are in the industry) and close their factories too. Boeing can
then coast for a year (or two), and then worry about high line re-start costs. Meantime, there’d be scores of plant closings and tens or hundreds of thousands of layoffs.

Now, repeat this in every other non-functioning market, which, again, is most of them. Assume this pandemic persists for another few months, or even through the year. Assume Nikki Haley’s philosophy prevails, and nobody gets government help. The accumulated layoffs
(millions) and plant closings could easily induce a depression. As a New York Times headline put it, “Boeing Mirrors the Economy. It Doesn’t Look Good.”

In this context, support for the jetliner business isn’t a Boeing bailout. The only choice for the US government (and for European governments with Airbus) is whether or not the industry keeps building aircraft and employing people. With some kind of support package (loans, loan
guarantees, direct aid, whatever) Airbus and Boeing can keep people and companies building jets through the dark months ahead, in preparation for the recovery we all hope is coming. Any government aid provided to Boeing (or any company) should come with plenty of terms and
conditions (executive pay restrictions, no buybacks or dividends, an emphasis on retaining design capabilities, etc.). Yes, Boeing deserves heaps of criticism for quite a lot over the past few decades (read many of my monthly letters for this, particularly during the wretched McNerney years). But again, the purpose of government support is to save jobs, and indeed the economy. And, as with GM, there are ways of structuring support packages that benefit the government in the long run, perhaps with stock warrants.

Meanwhile, Airbus, and every other commercial aviation company in the world, is now in exactly the same place as Boeing. Like Boeing, they have cash, but only a fool would choose to go bankrupt building jets for a non-functioning market.

Is the commercial aviation business special? I think so, since most of the defense industrial base consists of suppliers who have some (or a lot of) commercial market exposure, and perhaps a real problem accessing capital. Many wouldn’t agree; after all, the restaurant business has a
much bigger payroll, and again, almost all major industries need help. The US economy is roughly $20 trillion annually, and much of it has ceased to function. In that context, the $2 trillion rescue package now being negotiated in Congress covers just 10% of that, making it like
a Band-Aid on a harpoon wound. Or, as another New York Times headline put it, “That $2 Trillion Lifeline Will Only Last a Few Months.”

As Nikki Haley shows, it takes a very special politician to watch all of this imminent economic carnage and say, in effect, “this is the time for government to do exactly nothing. Let’s maintain our rigid ideology as millions of workers are fired and the economy falls apart.” Thankfully, most politicians see it the other way. Just as $2 trillion is just a first step in rescuing a $20 trillion economy, the $17 billion reportedly reserved for Boeing jetliner production (with much going to supplier companies) is likely just the first step in rescuing a $50+ billion jetliner market position. Airbus, again, will likely get a similar support package. Yet it isn’t clear how
much more ammunition governments have. Debt levels are already high, and interest rates are already very low.

As for Nikki Haley, she is now available for company board duty. It needs to be a company that is somehow thriving through this catastrophe, with no need of government assistance, one that will emerge from this crisis with a 100% Tea Party approval rating. Good luck with that.

Yours, ‘Til I Can Again Enjoy The Ultimate Luxury…A Glass Of Draft Beer,
Richard Aboulafia