Leeham News and Analysis
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Leeham News and Analysis
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Before handing $60bn to Boeing, consider this
By Scott Hamilton
Commentary
March 20, 2020, © Leeham News: Before the Trump Administration hands $60bn over to Boeing for its own purposes and to serve as a conduit to aid the supply chain, there are just one or two issues to address.
Terms and conditions
- Eliminate dividends and stock buybacks. Boeing suspended buybacks when the 737 MAX was grounded, but dividends remain. These must be terminated unless associated with the government (taxpayer) support to Boeing. And these can’t be reinstated until the government support is repaid.
David Calhoun, CEO, The Boeing Co. Source: CNBC.
- The salary of CEO David Calhoun should be zeroed out, as should compensation for the Board of Directors. Compensation for every officer earning seven figures in salary or stock awards should be reduced. The CEOs of Alaska, Delta and United airlines zeroed out their salaries. The Board of Delta zeroed out their compensation for six months. Where is the sacrifice at Boeing?
- How does Boeing choose which suppliers get aid, and how much? Many suppliers are co-suppliers to Airbus. Will these be eligible, by Boeing rules? Money is fungible. There’s little doubt Boeing would not like to see money go to the Airbus operations. No doubt, members of Congress (except those from Alabama), would agree.
- If Congress demands the government receives an equity stake, whether through common stock, warrants or a convertible instrument, how will Lockheed Martin and Northrop Grumman view government ownership in a company seeking a government contract? How will the European Union view US government ownership of Boeing in the midst of sorting out the World Trade Organization trade and tariff war over Airbus?
Previous example
When Calhoun was named CEO, he was awarded a seven figure salary and a $7m bonus if certain goals were achieved. Calhoun later said he isn’t sure he would have taken the job as CEO without a salary.
Lee Iacocca took $1 to rescue Chrysler, with government support. Calhoun certainly is rich enough to provide a service to Boeing and the United States aerospace system for $1. If he succeeds, a later Board could always reward him handsomely.
But now: the greedy, good-old-boys club at the Board remains intact.
Calhoun is part of the problem: he’s been on the Board since 2009. Despite his incredible assertion that he was only in the front row watching a movie, he was an insider. He was the lead director. He was on the Compensation Committee. Suck it up and work for $1 and nothing, at this time, on the come. You owe it to the company, to the employees, to the shareholders, to the supply chain and to the USA to fix the problems you helped create.
The bailout still makes sense
The bailout of Boeing, the supply chain and, separately, the airlines still make sense for the reasons detailed here. For Boeing, it should come at a stiff price.
WTO mess should be dropped immediately. It’s now dropped down way below the level of a farce, there are much more important things for Boeing and everyone else to spend their money and time on.
Well it did get Washing State back some taxes, though collecting them now is?
And the latest is…………………………………………
https://www.forbes.com/sites/jeremybogaisky/2020/03/20/boeing-suspends-dividend-top-execs-give-up-pay-as-they-wait-for-bailout/#6db4bd0e27ad
Can these folks turn on a dime or what. Want a hand out, wooof wooof wooof.
Thanks. I totally agree.
Boeing couldn’t manage itself, they only managed the stock price so that management could earn massive.
How could Boeing manage to aid suppliers, Boeing is completely bastard. It’s like paying the virus not to infect people.
This could be seen as Trump is paying Boeing for killings on JT610 and ET302. Shouldn’t it be completely opposite? I never heard that the traumatized victims on JT043 got anything.
Of course the crashes are long forgotten.
I remember the New York Islanders (hockey) under Wang. Wang collected donations for his SmileTrain and most of the donations were used by Wang himself.
SmileTrain helped third world children with a cut in their upper lip, but was funded so poorly that some kids died during medical operation.
No united Board on this one, with Haley resigning over the request.
Also, I haven’t yet seen why it is Boeing making this request and claiming to be doing it ‘for the industry’ and as the agent that will choose and pay recipients, rather than the AIA (or perhaps the AIA and other bodies that impact on the manufacturers/suppliers) being in this role and Boeing being one of the recipients if needed.
Haley claims that Boeing acted with “humility and transparency” over the MAX crashes.
Is she heroic, or leaving the sinking ship using noble reasons to not endanger her further carreer?
The second one. One pundit theorized she now has a public position on “government aid” and could use that in an election in 2024.
Didnt have a major problem about ‘government aid ‘ to Boeing in South Carolina for the 787 plants. Haley had been in an elected position since 2004
Haley is Republican [edited], we are not going to be fooled by anything decent she might do!
Her argument chain is definitely interesting.
But she is leaving the ship before it sinks.
Does she have aspirations for “higher positions”?
She invariably has been a good loyal GOP soldier.
Presenting the US gov. lies to the UN in an artful way.
Much better than Powell at the time. One could smell his lie. ( in either case it does not take away from pushing lies.)
perfect case for “trickle down”, isn’t it ?
German proverb:
“Den Bock zum Gärtner machen.”
comparable:
put the fox in charge of the chickens
The median wage for American workers is around 50k/a. Boeing, according to Wikipedia, has about 153k employees. Let Boeing go belly up and give the Billions to the workers!
Supporting all employees with the median wage over a period of three years costs around $23bn. In these three years Boeing can be restructured with a sledge hammer rather than a scalpel. Part of the labor force will find work in the follow up company. For older workers the support period could be extended until retirement age. For those who won’t be needed at neo-Boeing, the Billions should be used for their education, training and certification.
The workers won’t use their money for dividends, bonuses and casino games at Wall Street, but invest it directly in their local economy.
I bet everyone happy to see Boeing go belly up would change their attitude if it effected their pension fund (which it will), the economy and cause massive unemployment for aerospace workers and towns.
The massive bailout after the last financial crisis hasn’t changed management and investment culture in the financial sector. I doubt it will be different in the aviation industry. Boeing had problems before this crisis, namely a lack of R&D investments, massive deficits in quality control, and no clear portfolio strategy. The investors didn’t care as long as dividends were flowing and the share value rose. As an investor, be it direct or indirect, one has a responsibility to look after the investments. The supervisory board failed miserably at that.
We have seen this pattern many times before: in good times corporations mostly care about share holder value, dividends, and bonuses, in bad times they call for government help (always in the interest of the people, of course). Bailouts have never had a lasting effect on management and investment culture, but the resulting debt and austerity programs as its cure do persist. At some point we have to quit this malicious practice, the sooner, the better.
I’d insist on equity. Let the shareholders take their part of the responsibility.
And it should be required that the existing board is replaced, incl. Calhoun. They were responsible for the mess.
The government should then dispose of their equity within a given amount of time (1 – 2 years), and possibly let the Fed or some other independent body “hold” the stake.
So the idea is to give 60 billion to Boeing that has a market cap of around 60 billion?
Do voters have a memory beyond 8 years? Or did everyone forget how livid they were about the bailouts last time?
yeah, but is a white guy doing it now, so it is ok.
sad but true.
How [edited] of you bilbo.
60 billion market cap?
how much will that be at the end of April when 1 figures will be released.??????
M.CALHOUN told us a few weeks ago that they are going to be dreadful…
real reason for Mrs Haley resignation is probably the shutdown of the second 787 assembly line.
WB sales have been going South for quite some time, including 787
, and deffered costs will have to be written off :20bn$?
floods of red ink everywhere…
as of this morning, AIRBUS market cap is 47 Bn €….
ANALYSTS should wake up and do their Homework, they do not need to wait for Q1 figures, most elements have been available for quite some time….in particular thanks to LEEHAM
It goes not to just Boeing but its supply chain and I suspect GE and maybe Lockmart and P&W.
To avoid favouring one American company over another with its own huge American supply base, the government is going to have to give a huge chunk of money to airbus as well.
If EU takes care of Airbus and US takes care of Boeing that solves the issue.
Its been floated (pun deeply intended) to bail out the Cruise ship Industry
Response is, those are foreign owned operations, they are registered in places like Trinidad to avoid taxes and regulations, they fight us tooth and nail over their operations and crime on board issues, crews are not US Nations, best know to spread Noro Virus and C-19, let the places they are owned take care of them or not.
They are not US economy critical or even important. Spend your bail out money in a US Park!!!!!
Yes, excellent point. The “cruise industry” is almost totally foreign owned. Most jobs are not living wages for US citizens. Because they skirt USCG regulations they are very adept at creating disease. But all that being said, there is a lot of “American Big Business” money tied up in them, and of course these people believe in socialism for the rich.
Always amusing to see the natives think that US regulations are much more functional than what other nations set up as regulations.
US regulations tend to be over the top, loading others with work without a chance for the declared objective to be achieved. How many guns found on US citizens abroad? Rather high rates of food poisoning, ..
having to soak chicken meat in hypochloric acid to make it save for consumption. ..
Uwe. Enough you are borderline trolling.
The idea has been put forward that European governments should buy up airbuses production and then sell it when things perk up. This makes even more sense for the US because of the crisis in confidence in the MAX and the fact that the US forces are so vast that they could usefully employ at least 50 airliners.Most European governments could easily employ at least a couple. Production cost prices should be demanded,there might be an opportunity to make a profit. Expect to be hearing something from O’leary.
“There’s little doubt Boeing would like to see money go to the Airbus operations.” Is that what you meant to say, Scott? “Little doubt” is equivalent to “pretty much everyone agrees/believes”. Methinks a “not” is missing.
Thx. Fixed.
Boeing asking for $60 billion for itseld (and presumably for the industry) is already a red flag, why isn’t there some industry body requesting it. With Boeing asking, where does one draw the line of actual help in the current corona situation and possible subsidies. This has the potential of blowing up in their faces and Airbus would have a valid argument at WTO of more government subsidies to Boeing.
WTO is so irrelevant right now. Like asking a drowning man if he wants steak or lobster for dinner. Uhhh, let me get back to you on that stuff.
Airbus is in the same boat (serious drags with the A380 and the A400 v s the MAX) and there will be action to support Airbus as well.
This is far different than routine handouts.
I do find it a hoot that Boeing gave up its Washington State hand out just in time to get smacked with this. I supposed the next step is to ask for it back.
Truly the gang that could not shoot straight.
Tax credits are no use if you are losing money
I can see the frustration in Scott’s article, with so many people, families, history included in the Boeing & MD brands.
In my opinion someone should redefine executive payment packages. A large fixed sum, not linked to stock price and goals linked to long term strategy, company health and value for the US society.
That is very possible. But it’s a culture shock for those raised & educated in a paradigm where greed and short term profit dominated, or you are a commi.
I wonder if there will be a provision in the Boeing bailout to exclude protecting the lavish executive pensions in recent years.
https://www.bizjournals.com/seattle/news/2015/06/26/retiring-boeing-ceo-to-get-3-9m-per-year-pension.html
Calhoun has been on the board for about 10 years. Let’s assume he had made about $300K per year in board compensation. That suggests he has made about $3 million. For him to describe himself as being in a front row seat watching a movie is truly bizarre. In my humble opinion, he does not have the “right stuff”. Alan Mulally would not have wasted his time directing blame at his predecessor.
Hes right about that.
With Boeing having the CEO who is also Chairman, the board only sees what the CEO wants them too and the operational side is left totally to the executives . Even after the crashes the Board was given a total snow job on what really happened.
As Muilenburg came up through the defence side of the business – even before the MDD merger- his personal knowledge of airliner business in Seattle would be very thin
Another idea is that they get zero tax breaks until they pay the $60 billion back. They should pay the full tax on the all EBITDA revenues.
With Boeing re-assessing the Embraer purchase due to this crisis, seems like in the end will only be left Boeing and Airbus in the market, since Embraer will certainly go out of business alone. EU achieved their intent.
There’s a simple fix for stock-based compensation – stock price should always be calculated based on the fully diluted shares outstanding at the time of the stock-based compensation grant.
So, if there were 100mm shares when the SBC was granted and now, five years later, there are only 80mm shares outstanding, the relevant price for the purposes of calculating the SBC would be 80% what the stock is actually trading for in the market. So executives get no benefit just from reducing the number of shares outstanding (and really, why should they? There’s nothing particularly difficult about exchanging cash for stock).
That would change the incentives substantially.
Not all US corporations feel compelled to hew to the “shareholder value” imperative.
Consider Apple, Apple knows the iPhone may wane and it will need to have cash on hand to fund the development and build production capability for a new product that can be sold at scale, 40million iPhones in 2019. They may need to two attempts to get it right. So Apple currently has about 250 billion in cash on hand to help it weather almost any crisis. Yup Apple could fund the development of 10 new aircraft out of cash on hand.
This is a choice, Apple could have pursued more aggressive share-buybacks or dividends, but it chose to keep sufficient resources on hand to handle the bad times, shareholder value be D…mmed. Boeing chose differently, Boeing chose to return funds to shareholders for the shareholders to invest as they saw fit. This was surely done knowing it would impact Boeing’s ability to make it though tough times. Perhaps even cynically knowing they are too big to fail and will be bailed out.
Any bailout must not protect shareholders from the consequences of the shareholder value fiscal management approach.
Personally I am not sure they should get a bailout. The way they tried to pass the max problems on everybody else. They knew that there was trouble a couple of years before, trying to hide it from the airlines and pilots. Also the trouble they had and have with the 787. All the trouble the Air Force is having with the tanker leads me to think first they need to get their house in order before the American tax payer has to bail them out. I would request getting rid of the existing board of directors and putting some type of committee to over see the company.
It’s not really a moral issue, its an economic one. If Boeing is split up, whole production lines and divisions are shutdown, people disappear forever and suppliers shutdown. That would be a case of cutting of the nose to spite the face. Boeing has done nothing wrong on the B787 or B777 program and the mess it created on the B737 MAX program came out of the uncharted problems that come from trying to update a 50 year old airframe.
I believe Boeing spent over $43 billion on stock buybacks, why are they entitled to $60 billion? So they want taxpayers to fund those buybacks? Ms. Haley you are my hero!
Leonardo could merge with Embraer. Airbus never was in the business of killing competitors, unlike Boeing.
https://www.thedailybeast.com/how-boeing-tried-to-kill-a-great-airplaneand-got-outplayed
And the A320NEO and trying to kill off BBD C series was what?
.. A deranged dream in a specific national domain.
CSeries was much more stepping on the NG product that already tailed the market: 737NG.
They tried but they ran out of [edited] money.
The effects of COVID 19 will effect travel for couple years. Declining air traffic and airlines losses will push out deliveries. Boeing needs a realistic production plan before government bailout. Boeing needs to adjust production levels and employment to something like half (e.g. 25 737 and 7 787 a month)
Government bailout money is to sustain long term existence of Boeing, not pay for idle workers
Boeing is going to adjust anyway.
Probably more like 3 x 787 a month, 747 terminated, 777 still in test and have to see, 777 ramped down or off, 737 who knows when.
Of course then we have unemployed workers to maintain.
Like where Warren Buffett gets preferred stock at guaranteed 8% return for his financial input, the US gov should get first in line return of 8% on their 60B loan ahead of all other investors, dividends, and seven figure executive pay.
Exactly what NZ Govt has done to Air NZ. 8% interest, convertible bonds. No dividends until it is repaid. No share buy backs in the past.
Airbus was considering re engining the A320 with PW GTF’s since the late nineties. They weren’t mature, CSeries convinced Airbus to move ahead on the NEO.
https://www.flightglobal.com/pandw-plans-pw8000-first-run-for-1999/19712.article
https://www.google.com/amp/s/mobile.reuters.com/article/amp/idUKKBN0OY2P120150618
Also Airbus aiming to kill Embraer is non-sense. Never competed, had good relations and even owned a share in the past.
Damn, they are so noble!
You are familiar with the concept?
Emirates Airlines cancelling all flights starting March 25
https://www.youtube.com/watch?v=8dlCy3bEqKw
Nikki Haley has guts.
https://vancouversun.com/pmn/health-pmn/former-u-n-ambassador-nikki-haley-leaves-boeing-board-opposing-federal-aid/wcm/2c6e6192-0ffa-4ce6-b747-3be35778d7fe/
Recall she was clear and principle when ambassador to the UN, on target, naming names.
I have not researched what she did as governor of South Carolina, she took credit for attracting a very large automobile assembly plant.
Companies setting up factories in the south know the routine. Let it be known that they are interested in building a factory and wait for all of the southern governors to fall all over themselves in a bidding war. That she incentivized a company to set up shop in her state means that she purchased that decision. Is all.
First, Boeing should launch the FCS and NMA as soon as possible;
Second, Boeing should built them in IAM union plants in the state of Washington;
Third, Boeing should pick as much as possible US owned and based Tier1, Tier2 and Tier3 performing the works in the US.
Absolutely. And the Government should get serious about an infrastructure bill immediately.
All aircraft have components sourced from all over the World. I do not understand the idea that only the US suppliers should be cared for. Boeing needs all of the parts.