Odds and Ends: Boeing stock buyback; Charging suppliers for doing business; AA+US

Boeing Stock Buyback: Boeing announced a stock buyback of #3.6bn for next year. Wells Fargo has this to say in a research note issued today:

Boeing had more than $11B of cash on the balance sheet at the end of September, and after free cash flow of $5.7B in 2013 and more than $7B in 2014 (i.e., almost $10/share in free cash), we believe Boeing could have over $20B in cash available to return to shareholders over the next few years. This is why we see about a $130MM increase in dividends and a $1.5-2.0B buyback in 2013 as small steps in returning cash to shareholders.

We’re not a fan of buybacks, which serve to prop up stock prices. We believe stock should rise on its own merits, not because of some artificial prop-up. More to the point, however, is that Boeing has a hard time telling SPEEA it needs to cut costs when it is spending billions on buybacks that benefit (among others) Boeing’s largest shareholders–the McDonnell family, Harry Stonecipher and Jim McNerney.

SPEEA is preparing for a strike February 1. Talks resume January 9, but the gulf between the two sides is so great, SPEEA expects them to break down almost immediately.

With Wells Fargo estimating that Boeing might return $20bn to shareholders in the next few years, we somehow think this will be an issue when IAM contract negotiations come up in 2016 and Boeing pleads poverty again (as it inevitably will).

We’d much rather see the money invested in new airplane programs rather than derivatives like the 737 MAX and 777X.

Boeing charges royalties to suppliers: Mary Kirby has this interesting story about Boeing charging suppliers for the price of doing business with the company.

American and US Airways: The Ft. Worth Star-Telegram has this column discussing the case for a merger between American Airlines and US Airways.

Pegasus Buys Airbus: Turkey’s Pegasus Airlines ordered 75 A320neo family and optioned 25 more. The carrier was previously a Boeing 737 operator. Deliveries are from 2015, which means the Pratt & Whitney GTF has to be the engine choice, which is as yet unannounced. CFM’s LEAP-1A won’t be ready until later in 2016.

Before this order, Airbus had a 61% market share of the re-engine order race vs the 737 MAX (firm orders only).

Photo Montage: The Everett Herald has this photo montage of the Flying Heritage Museum’s aircraft. The Museum is owned by Microsoft co-founder Paul Allen.

Freighter Market Softens: Cargo Facts has this analysis of the freighter market.

31 Comments on “Odds and Ends: Boeing stock buyback; Charging suppliers for doing business; AA+US

  1. Thank you Scott
    Did you note that Leahy wasn’t on the stage for this “largest order in turkish civil aviation” 75 firm orders ?
    So where’s Leahy ?
    Have a good day

  2. I absolutely agree on the “stock buyback” thing. There is NO reason why Boeing should buy their stock back. If Boeing accomplishes what they need to, the stock will rise and the shareholders would do well.

    Now sometimes stock does need to be bought back due to stock-based compensation for employees/management. I don’t know what the number is so I cannot say.

    Usually its upper management which does well on stock buybacks.

    I am usually not really pro-union but I think the SPEEA might have a legitimate gripe here.

  3. ……”More to the point, however, is that Boeing has a hard time telling SPEEA it needs to cut costs when it is spending billions on buybacks that benefit (among others) Boeing’s largest shareholders–the McDonnell family, Harry Stonecipher and Jim McNerney.””

    Yep BA sure has to watch the nickels and dimes .. they make Scrooge look like a paragon of generosity..
    The SPEEA site has a great example

    Youth’s in-home care continues through January,
    but SPEEA family still faces cutoff by Boeing

    SEATTLE – The family of a 15-year old girl now has until the end of January to secure necessary in-home nursing care after the family’s attorney and SPEEA pushed for an extension to prevent the loss of funding just days before the holidays.

    Funding was scheduled to end Saturday (Dec. 22) after The Boeing Company unilaterally amended its medical plans with SPEEA. The amendment was not negotiated with the union, said Ray Goforth, SPEEA executive director. Boeing originally gave the family just 10 days notice that the plan had been amended and funding for their in-home care was ending.

    “This small victory gets the family through the holidays,” Goforth said. “However, the issue of Boeing trying to cut funding for this youth’s care remains.”

    The extension continues funding through Jan. 31, said Ele Hamburger, attorney for the family.

    The youth, who suffers cerebral palsy and other disabilities, requires assistance with breathing, feeding, medication, repositioning and daily living tasks. ****Since Boeing self funds its employee medical plans, every penny the company does not pay out for medical services is another penny of corporate profit. *****

    And wait till folks figure out that by adding extra tax free $$ to the pension plans, they can be converted via legal accounting games into ‘ vapor profits ‘ by including the ‘excess” into OPERATING earnings. Which of course helps the bonus games and stock prices for the top tiers. Of course its just a paperwork transfer- but works just as well as the real thing.

  4. Boeing going RyanAir:

    What keeps suppliers from just folding that levy back into Boeing’s bills?

    • They’ll fold it back into the plane customer’s bills. So it’s a hidden extra cost of the plane purchase. It’s common in supermarket supply, where suppliers buy shelf-space. If you have a desirable product that others want to participate in, you can charge them for it. Shrug.

      • Slept a night.

        My expectation is that Boeing will try to draw that levy for all products a supplier makes. Ala “Microsoft Tax”
        i.e. they will try to participate in sales to Airbus ( and the other airframers ). compare to Microsoft wrangling its way into the Android revenue stream based on weak patents but a stronger position to litigate.

  5. As much as I’m a fan of Boeing’s engineering, why can’t I escape the feeling that its boardroom shenanigans are toxic? For goodness sakes, the ages-old adversarial relationship dynamic with SPEEA has to change. These are among the most skilled laborers in the world are are NOT easily replaceable.

  6. If one single event could have amplified the chances of a SPEEA strike, it is this. How do you tell the engineers and techs that saved the company from the 787 outsourcing disaster that the shareholders who pushed for it, and the executives who cooked up the scheme will be rewarded….but your compensation will be cut?

    Oh yeah. You develop corporate amnesia.

    “It is an urban legend that outsourcing caused problems on the 787 program.” – Mike Delaney, vice president of Engineering for Boeing Commercial Airplanes.

    SPEEA initially proposed simply extending their existing collective bargaining agreement. Instead of accepting this offer and locking in labor peace, Boeing embarked upon this aggressive approach to SPEEA. 96% of SPEEA members rejected the last company offer and the union is now in full preparations for a strike.

    Who bungled this and why aren’t they being held accountable?

    • What would one do if one needed a scapegoat fast?
      Announce some financial shenanigans that instantly lead the workforce into strike.

      A string of provocations.

  7. So that’s another Boeing territory that Airbus has encroached into with the Pegasus order

  8. If the unions always get their way Boeing will be ruined.
    On the other hand Boeing considers unionised workforce mostly as liability and would’ve already moved all production and design to the non-unionised areas of the country had the company had such an opportunity.
    Every strike strengthens long term animosity between the parties and Boeing’s desire to get rid of unions all together, though technically it’s supposed to be a mechasnism for getting fair value contract and nothing more.

  9. I am sorry but Boeing management must be the most tone deaf management team in the history of history. Combine the fees charged for IP with this buyback thing and the SPEEA guys have a dead bang case for holding their ground, and getting Boeing to meet their demands. I mean, all Boeing management has to do is shut their mouths until after the contract is negotiated, and then do all this as a matter of running their business. Instead they inject it into the negotiation cycle. Just stupid, plain stupid. If I were a fund manager I would be pulling my money out of BA as fast as I can just on the general principle that Boeing is being managed by a crew of dummies.

  10. Matt B :
    Seems a pretty scarce resource. I wonder if they were available for Pegasus [or] Lion, whoever bit first.

    Timing, political background ( US focus shifting to Asia ) ….

  11. Money spent on company stock buyback or dividends should be becuase there is absolutely nowhere for the company to spend the money productively. This tells the stock owners we have nowhere to spend the cash so here is your money back and then some.

    For the future viability of this or any cash rich company this is not where fundamental value is realized. It belongs in new value added products for future customers orders for products and services that keep customers coming back for more.

    The buy back is pure foolishness.

    • “The buy back is pure foolishness.”

      QED:

      “We, lemming-like, over the last 15 years extended our supply chains a little too far globally in the name of low cost,” said Jim McNerney, chief executive of world No. 2 planemaker Boeing. “We lost control in some cases over quality and service when we did that, we underestimated in some cases the value of our workers back here.”

  12. If Boeing has less income, they pay no tax income. Mngt has enormous stock options.

  13. “we believe Boeing could have over $20B in cash available to return to shareholders over the next few years”
    Would that be the same $20B that have stockpiled in the deferred production cost section of the Boeing balance sheet? 😉

    • Those deferred costs will hit profits in future years — but they will not affect cash flow as the money has already been spent.

    • KDX125 :
      “we believe Boeing could have over $20B in cash available to return to shareholders over the next few years”
      Would that be the same $20B that have stockpiled in the deferred production cost section of the Boeing balance sheet?

      No, that’s the same USD20bn they won’t spend on a new aircraft programme.

  14. Don Shuper :
    “The buy back is pure foolishness.”
    QED:
    “We, lemming-like, over the last 15 years extended our supply chains a little too far globally in the name of low cost,” said Jim McNerney, chief executive of world No. 2 planemaker Boeing. “We lost control in some cases over quality and service when we did that, we underestimated in some cases the value of our workers back here.”

    In the light of this wisdom, one has to ask why the lemmings are still blindly pursuing their race to the bottom. It will be a great day in history when real leaders (re)assume control, oust the MBAs, and relegate financial controlling to what it is supposed to be: a support function.

  15. Freighter conversions:
    What is the status of http://www.lcfconversions.com ‘s product ( main deck pallet lift ) ?
    Do they have ( sufficiently interested potential ) customers ?
    Imho potential for even more parked 747 freighters.

  16. Creative accounting is a wonderful creation, but surely at some stage there has to be a brick wall.
    The 747-8 is a loser, the Dreamliner has a very questionable economic future in the near term.
    Cash flow may look OK, but at some stage questions need to be asked/answered.
    Take the current scenario to your bank and see what they say, if you were the corporate entity!

    • That Brick Wall has been set on rollers some time ago.
      Everytime you bump it it moves a bit further down the road.

    • Actually you can be very creative with your accounting to make balance sheets and profit reports look good, but cash flow is a reality check. When payroll checks start to bounce then there is no escaping there is a problem. You have to pay your employee’s with cash the week they work, so the fact that there is a positive cash flow indicates that overall the company is performing OK at least at present. And the banks are happy if you are making more deposits than withdrawls.

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