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2019: Boeing's Annus Horribilis, or the Dangers of Fair-Weather Thinking

It should be no secret to anyone that the past year has been a very trying time for both shareholders and management of Boeing Co. (NYSE:BA). Between the grounding of the 737-MAX, troubling reports about the construction of the 767 Dreamliner and ongoing concerns over the design process that led to the MAX being certified for flight, Boeing has had to deal with a lot of (arguably self-inflicted) problems.


Incredibly, the stock is actually up year over year and is currently trading at $330 a share, compared with $313 a share on Dec. 20, 2018. Shares of Boeing peaked at $440 in early 2019 due to an aggressive share buyback campagin initiated by management. This plan now looks like it might come back to bite Boeing, as the aircraft manufacturer had to cancel it in the wake of the MAX grounding.

The dangers of fair-weather thinking

The irony of all of this is that one of the main reasons why Boeing's management decided to embark on their ambitious buyback program in the first place was that it had saved so much money making the MAX. The aircraft was on track to become one of the all-time best sellers, right up until Ethipoian Airlines Flight 302 crashed in March.

This illustrates the problem with planning for the best-case scenario and not allowing any margin for error. I call this (though did not invent the term) "fair-weather thinking." Boeing's strategy of cost-cutting in the construction of the MAX and the explosive profits that the company enjoyed while the plane was flying certainly generated a lot of cash that could be returned to shareholders, but now that the plane has been grounded, Boeing has begun haemorrhaging cash. In the third quarter alone, Boeing had a cash burn of $4.1 billion, and it has gotten so bad that production on the MAX has been halted.

Boeing's investors also seem to be suffering from a case of chronic fair-weather thinking. Ever since the March crash, Boeing's party line has been that everything will be fine and that the MAX's problems would be resolved in the very near future. For now, investors seem content to believe this and have not lost faith in the company's management.

One has to wonder how much of this is the "frog in the kettle" phenomenon, where investors are happy to accept a moving deadline for the MAX's return that keeps inching away from them. If you had told Boeing investors in late March that by year-end, the MAX would not only still be grounded, but that production would be ceased, the reaction would probably not have been nearly so calm.

Conclusion

To add insult to injury, Boeing's Starliner - a test spacecraft that NASA hopes will someday soon carry human crews into space - failed to rendezvous with the International Space Station on Friday, instead getting stranded in orbit. Currently, the only way to send manned missions into space is to use the Russian Soyuz; and while the relationship between NASA and Roscosmos (the Russian state space agency) has been warm and cordial, the U.S. would clearly prefer to not have to rely on Russia. As such, the Starliner's failure to rendezvous represents a stumble for Boeing, which must compete for government contracts in the space industry. In some ways, it was a fitting way for Boeing to close out 2019.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.