Yes, Go Ahead And 'Nationalize' Boeing With A Bailout
Up until the start of March, new Boeing CEO and President David Calhoun’s biggest challenge was getting the 737 MAX back in the air. Since then, the narrowbody’s grounding and production halt has become quaint as Wall Street and others subtly but increasingly wonder whether Boeing can survive the post-COVID-19 world.
Boeing triggered the new skepticism March 17 when it formally asked Washington for a $60 billion-plus bailout of the U.S. aerospace manufacturing sector, ostensibly to flow through the Chicago-based OEM. So dramatic was the turn of events that Nikki Haley, a former official in the administration of President Donald Trump, quit Boeing’s board in protest, asserting that companies should not receive federal handouts.
In response, Boeing thanked her for almost a year of directorship and removed her chair from the boardroom. Whether Haley has ulterior motives is a debate for another day, but it is clear why the manufacturer is seeking money. According to Jefferies analysts, Boeing Commercial Airplanes alone was burning through about $4.3 billion a month to fund its operations and support suppliers before the novel coronavirus outbreak.
Boeing has $15 billion in liquidity, Calhoun said March 24. But it ended 2019 with more than $27 billion in debt. By mid-March, it had fully drawn down a new credit line totaling nearly $14 billion. And by the time Calhoun spoke, Boeing had closed Puget Sound widebody manufacturing for health reasons, frozen hiring, suspended dividend payments—which on top of already frozen share buybacks is a doomsday for investors—and said Calhoun will forgo pay through 2020. Both S&P Global Ratings and Fitch Ratings have downgraded their rankings of Boeing’s debt worthiness.
But as fellow Chicagoan and former Chicago Mayor Rahm Emanuel once said, you never let a good crisis go to waste. If there was ever a time to socialize the risks facing Boeing, this pandemic is the hook. The question for U.S. leaders then becomes: Is it worth taking Boeing up on its bailout bid?
The answer likely is “yes,” but maybe not for obvious reasons—and probably not the way Boeing wants. Protecting Boeing’s workforce of more than 150,000 employees and tens of thousands of suppliers is statistically significant as Washington tries to fend off a prolonged recession, but maintaining Boeing’s payroll and supply chain could be accomplished other ways, such as direct payments to those employees or grants to suppliers.
Boeing will surely have to swallow some once-inconceivable conditions, starting with an ongoing lack of dividends and share buybacks. UBS analysts say there also likely will be executive pay regulation and incremental board governance oversight, including potential stress tests, minimum employment levels and/or labor controls. In turn, they say, Boeing’s stock will trade at a discount.
While these conditions are the most prominent “strings attached” being discussed for Boeing, they may not be the last—nor should they be. As one Wall Street icon said recently about government bailouts, it is time for a better return on investment for the country.
Mohamed El-Erian, Allianz chief economic advisor and the former CEO of fixed-income investing company Pimco, says: “The notion of governments in different companies, that’s going to be the case because a lot of companies are going to have to be bailed out. [It is] best to start with the technocratic approach, which is to define your objectives. Protecting jobs is one example; protecting national security is another. Then go through what it mean[s] for who you bail out and how you bail out, and importantly, how you get incentive alignment coming out of the bailouts.”
What do such incentive alignments with Boeing look like? It should go way beyond maintaining employment figures and shelving shareholder returns. Washington is desperate for U.S. aerospace and defense providers to innovate, but independent research and development (IRAD) spending has been emaciated over the last decade as public companies raced to reward shareholders. Getting Boeing to double or triple IRAD could be a good start.
At the same time, the Pentagon, NASA and Congress are exhausted with poor contractor performance on its major defense acquisition and space programs. Does anyone remember the Future Combat Systems or the recent Starliner failure? As government auditors have documented in countless reports, weapon programs are years late and often double-digit percentages over budget—assuming they ultimately deliver. With that in mind, Boeing could be “incentivized” to dramatically improve its results across the board.
Finally, there has been a lot of talk in the U.S. in recent years about a crisis of not producing enough science, technology, engineering and math (STEM) graduates. But as Aviation Week workforce studies have shown, industry acts as a poor pull on the demand for such graduates, with relatively few hired out of schools each year. Instead, companies have long preferred to poach talent from each other when needed. So make Boeing either more directly fund STEM education or hire an industry-leading ratio of cohorts each year.
There are likely many more ways to better align Boeing with U.S. interests, and they should be considered. After all, U.S. taxpayers already are being promised more bang for the buck—so let us get more Buck Rogers.
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