Boeing stock rose Friday despite two reports about fresh problems with the MAX jet. It’s curious stock market action. But the rise, despite seemingly bad news, demonstrates two things: airlines still want the MAX and the MAX is close to a return to service.
For starters, The Wall Street Journal reported American Airlines (ticker: AAL) was considering canceling some if its 737 MAX orders. A large cancellation from a U.S. air carrier would seem to be a blow to the troubled jet program. Still, the stock rose 3% Friday. The Dow Jones Industrial Average and S&P 500, for comparison, rose 1.4% and 1.1%, respectively.
Reuters reported separately Friday Boeing (BA) was “scrambling to shore up 737 MAX financing.” The financing, in this case, isn’t for Boeing itself, it’s to help airlines, including American, finance planes in the midst of viral pandemic. Scrambling for money doesn’t sound good either.
Taken together, the stories might indicate that what is really going on is some hard-nosed negotiations between an airline and aircraft market with American pressing Boeing for better terms. It’s sensible for American to preserved cash and try to capitalize on the current demand and interest-rate environment.
American declined to comment Friday. Boeing told Barron’s in an emailed comment: “Our focus continues to be on working with global regulators on the rigorous process they have put in place to safely return the 737 MAX to commercial service,” adding “we continue to work closely with our customers to support their operations, while balancing supply and demand with the realities of the market.”
Airlines can use the support. American, for instance, burned through $1 billion in cash during the first quarter. Another $4.8 billion cash is expected to go out the door during the second and third quarters of 2020. The industry is hemorrhaging cash.
Preserving, and generating, cash is a priority for airlines. One way an airline can do both is with planes. Owned aircraft can be sold and leased back. Facilitating that kind of transaction is what Boeing is “scrambling” to do.
Buying a plane is a little like buying a car. Airlines can buy a plane outright with available cash on hand, borrow money from a bank or lease it from an aircraft lessor. Those are, essentially, the same options for car buyers.
And the decision for an airline is based on similar factors influencing car buyers including available cash, interest rates, and whether buyers want to be responsible for maintenance and aircraft disposition.
Leasing aircraft is a relatively popular option. About 40% of the global airline fleet—in a pre-Covid world—was owned by aircraft lessors. In 2019, Boeing expected very roughly 26% of planes to be purchased with available cash, 34% to be financed by aircraft borrowing and 30% to be financed, essentially, by lessors. (The final 10% are from other sources such as export banks.)
Boeing hasn’t done a 2020 market outlook for one obvious reason: Covid-19. The virus will likely shift the numbers. Lessors will likely do more of less business. That is to say, lessors share will increase even though the total amount of business is falling because people aren’t getting on planes.
Commercial air travel in the U.S. dropped about 74% year over year over the past week. The coronavirus has hit travel demand hard.
And when a lessor buys a plane from an airline, in today’s reduced demand environment, they don’t need to order a new plane from Airbus (AIR.France) or Boeing. That dynamic is driving some of the recent MAX cancellations.
But the willingness of lessors to buy MAX jets demonstrates that MAX jets are still desirable. MAX jets are cheaper to operate and the industry remains confident MAX issues can and will be fixed. That confidence is positive for Boeing stock.
The actions of American—lining up financing—can also be interpreted as another sign the process of recertifying the jet for commercial flight is almost complete. American is getting ready to take jets. That’s another positive for the stock.
It isn’t really surprising that American or Boeing won’t comment on details of what’s going on. No one likes to negotiate in public.
While the stock rose on the reports, Covid-19 remains a much bigger deal for Boeing than even the troubled MAX. Boeing stock dropped more than 20% from mid-March 2019, following the second deadly MAX crash, to year-end. Boeing stock is down more than 45% year to date in 2020. What’s more, the entire aerospace value chain, from suppliers to airlines, is down roughly 40% to 60% year to date.
The MAX wiped out tens of billions of market value in 2019. Covid-19 has wiped out hundreds of billions of aerospace market value in 2020.
Write to Al Root at allen.root@dowjones.com
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Boeing Stock Rose On Bad 737 MAX News. Why It Makes Perfect Sense. - Barron's
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