BA Bull Case DD - Classic American Company in Recovery, Air Travel Demand Increasing

I apologize in advance, this is gonna be a long one. If you read it all, thank you.

Boeing has always had a place in my heart. My father is an aerospace engineer and worked for Garrett/Allied Signal/Honeywell for 38 years, so I grew up around the industry. I majored in aeronautical engineering in college with the intention of working for Boeing, but ended up going in a different direction. When Covid restrictions tanked the market in March 2020, I scooped up $10k worth of Boeing shares on Robinhood and made my first good profit from investing. I haven’t played the ticker at all since then, but I have decided to get back in for a few reasons.

Here’s a little background on the company over the last few years. They used to be a popular blue chip stock on Wall Street and the company became more focused on sucking shareholder dick than engineering a decent plane. They then slowly turned into a giant dumpster fire chock full of hot shit, beginning in October 2018 with the crash of Lion Air Flight 610. I won’t go into technical specifics of why the plane crashed, but here is layman’s terms. In order to keep pace with Airbus’ new more fuel efficient A320neo, Boeing redesigned their 737 narrow body with new more fuel efficient engines and dubbed it the 737 MAX. Due to the larger, more efficient engines placement on the wings, the planes tended to nose up unexpectedly, which could cause an aerodynamic stall. Rather than spend a ton of money redesigning the rest of the plane to fix this problem, Boeing tried to solve it with software called MCAS (maneuvering characteristics augmentation system). MCAS computers would take over control and automatically push the nose down if the AOA (angle of attack) sensor was showing too great an angle. In the case of Lion Air Flight 610, shortly after takeoff and at full engine thrust, the AOA sensor malfunctioned and sent incorrect data to the MCAS computers, causing the plane to believe that it was in a severe nose up attitude when it actually wasn’t. The MCAS computers forced the nose downward, and due to the lack of training on the new system, the pilots were not able to rectify the issue before the plane hit ground. All 189 passengers and crew on board were killed. As if that isn’t bad enough, less than 6 months later in March 2019, the exact same thing happened to Ethiopian Airlines Flight 302, another 737 MAX, again shortly after takeoff. All 157 passengers and crew on board were killed.

Both crashes and the subsequent NTSB investigation led to the worldwide grounding of the entire 737 MAX fleet from March 2019 until December 2020. During the investigation Boeing was found to have purposely suppressed information about the MCAS system, and to have not released training materials to pilots, even after the first Lion Air crash. They did this in order to sell more planes, because a big selling point was that no additional training was needed for pilots to switch to the new MAX from the older 737s. In other words, Boeing management was a bunch of dickheads.

As you all well know, the Covid pandemic and subsequent restrictions destroyed air travel demand, and Boeing’s new orders essentially went to zero for a long time. They also had quality control issues with parts manufacturers for their 787 Dreamliner wide body aircraft as well, which led to a halt of deliveries. All of these issues, scandals and controversies have been mirrored in the company’s share price, which fell from a high of roughly $450 in February 2019, to about $130 just over a year later in April 2020. It has since regained to $227 as of close today 11/18.

As for the present, things are beginning to look up for the company, although there is still a long way to go. Boeing suspended their dividend and took on a lot of debt to get through the worst of it, but they are beginning to pay the debt back down. 737 MAX issues have been resolved and both production and deliveries have resumed. Ryanair, Alaska Air Group, United Airlines, and Southwest Airlines have all placed orders for 737s. Just this week Akasa Air in India bought 72 MAXs, a $9 billion dollar deal. Boeing’s defense business is trending positively, and they have had many orders from foreign militaries, mostly for the P-8 marine reconnaissance aircraft, which is essentially a militarized 737. Boeing also produces both the F-18 Super Hornet and F-15 Strike Eagle fighters for both the US Air Force and foreign militaries. They also have a 3.9 billion dollar contract to produce new Air Force One aircraft.

There are several upcoming catalysts that could drive the share price.

  1. The 737 MAX is expected to be re-certified by the Chinese civil aviation authority. During the Q2 earnings call, BA CEO David Calhoun said that based on the feedback he has received from China, he expects the recertification to happen before the year’s end. Test flights for the process began in early August of this year. Air travel demand continues to grow in China, and there are roughly 100 MAX aircraft still grounded in country that are needed to satisfy it. It is in China’s best interest to complete the recertification sooner than later.
  2. In late 2020 Boeing discovered manufacturing defects in titanium parts for the 787 wide body. The parts were made by an aerospace manufacturer called Leonardo in Italy. Because of this, Boeing has halted deliveries while the issues are smoothed out. Rumor is that deliveries will begin in the first half of 2022, although there is no concrete proof of this. When 787 deliveries resume, it will be a big boost for the stock.
  3. Boeing’s Starliner spacecraft was set to fly to and dock with the ISS in an uncrewed test mission in August, but a last minute check revealed a technical issue that scrubbed the launch. The issue is expected to be resolved and the test flight launched in the first half of 2022.
  4. The overall demand for air travel is steadily increasing and it is projected (by some) to reach pre-pandemic levels in 2022, and surpass them in 2023. If this happens it will obviously bode well for Boeing.
  5. In April 2020 Boeing’s CEO stated that he expected cash flow to turn positive in the near to medium term future. BA should ramp up production of the 737 MAX early next year as the order backlog increases, and deliveries should also increase, bringing the cash.
  6. Although this may not happen at all, Ryanair and Boeing were in negotiations for a sale of up 250 737s, but negotiations were called off because Boeing would not budge on price. I take this to mean that Boeing is confident it will get the orders it needs going forward, and refuses to be bullied into selling at a discount. If that is the case, I suspect that Ryanair will be back and will pay the asking price.

In conclusion, BA is obviously a company that has been dragged through the mud and stomped repeatedly over the last few years, but I believe they are on their way to a strong recovery over the next year. Several analysts have recently increased their price targets, and the average as of now is $265. There are many problems yet to resolve and they will not be resolved immediately, but the stock is still trading at a discount in my opinion. I’m playing this strictly long term with shares as all of the recovery points I mentioned have no specific timetable. If anyone wants to argue a bear case I’d love to hear from you.


Quick update.

Couple pieces of bad news today:

  1. 787 production is slowed even further while Boeing seeks outside help from others in the aerospace industry regarding fixing a defect in the aircraft’s cargo door. This is likely to last a few weeks.
  2. A group of bipartisan lawmakers in the House Transportation Committee requested government review of the FAA oversight of the 787. The congress members cited all the defects and delays as the reason for the action.

This news wiped out everything the stock had gained from the last two weeks, and honestly it provided a perfect dip opportunity to buy into. I pulled the trigger today on shares at $215 each, and I will be holding them for at least the next year, assuming there is no extreme event or circumstance that forces a sale.

For those with interest, I will continue to update you as things develop.

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Well here we are with another round of COVID scares. Shares are down another 7% this morning to under $200. This is a long term play however and I’m going to take advantage of the dip and move down my average cost.

I got into Boeing a little too early but I still believe we will see a significant recovery in 2022.

Good news today. China’s civil aviation authority issued an airworthiness directive (AD) for the 737 MAX. An AD is sort of like a recall campaign on your car, but it is required to be completed before the affected plane can reenter service.This is a big step toward certification and signals and that it will be happening soon. BA shares are up 5% PM as of 8:20am EST.

We’ve hit the first of my predicted catalysts, the Chinese recertification. Todays news will likely be the biggest surge, even though technically the plane isn’t recertified yet. Customers in China make up the largest bulk of 737 orders, so this is huge news. BA’s CEO expect China deliveries to begin in Q1 2022, hopefully driving cash flow back positive.

Next up we hope to see resumption of 787 deliveries, as well as an increase in production!

Good luck!