Bernard Cryan, MJLST Staffer
Boeing Overview
Boeing plays a major role in the aerospace industry—both domestically and internationally. Boeing employs over 160,000 people worldwide and had a revenue of $76 billion in 2019. According to Forbes’ 2019 Fortune Global List, Boeing is ranked as Fortune 100 company. In fact, Boeing is America’s largest manufacturing exporter. Boeing’s business operations are organized into three units: Commercial Airplanes; Defense, Space & Security; and Boeing Global Services. Boeing’s Commercial Airplanes division is responsible for producing “almost half the world fleet” with more than 10,000 Boeing-built jetliners in service worldwide and “about 90% of the world’s cargo is carried onboard Boeing planes.”
737 Max Crashes
Boeing’s popular commercial airplane—the 737 Max—was recently involved in two deadly crashes. In October 2018, 189 passengers were killed on a Lion Air flight taking off from Indonesia. Again, in March 2019, 157 passengers were killed on an Ethiopian Airlines flight just minutes after takeoff. In response, Boeing grounded all 737 Max airplanes around the world and created a $100 million relief fund “to meet the family and community needs of those affected by the accidents.” Nevertheless, Boeing has received harsh criticism and scrutiny over deficiencies in its product and training. The 737 Max airplanes are still not cleared to fly causing Boeing customers to revise or even cancel orders. Certain airlines have also demanded compensation from Boeing for flight cancellations that resulted from the grounding of 737 Max airplanes. Boeing’s stock price fell after the crashes and Boeing’s revenue fell from $101 billion in 2018 to $76 billion in 2019. Boeing even replaced its CEO after he was unable to stabilize the company following the crashes. In sum, the 737 Max crashes have forced Boeing into a vulnerable financial position.
Coronavirus
The recent COVID-19 outbreak has posed additional challenges for Boeing and the entire aerospace industry. Boeing has publicly acknowledged the struggles of the entire industry caused by the coronavirus. For example, coronavirus’ impact on travel has forced American Airlines to fly its first cargo-only flight in 36 years. Boeing is directly impacted by the coronavirus because struggling airlines are not currently in the position to place orders for new airplanes.
Government’s Response
Although there is fierce competition amongst airlines, there is little competition in the manufacture of commercial airplanes. Boeing and Airbus, a European company, are the two main global suppliers of large commercial aircraft and have almost complete market power. President Trump has recognized Boeing’s indispensable role in keeping America competitive in the global industry and has recently stated, “Yes, I think we have to protect Boeing. We have to absolutely help Boeing.” Boeing has publicly expressed support for the government’s plan to bailout the aerospace industry.
Boeing is requesting a bailout of the aerospace industry in the amount of $60 billion. Boeing has suspended paying dividends and CEO Dave Calhoun has given up his pay temporarily. Additionally, United Airlines has threatened to cut jobs if the bailout relief is not passed by Congress. The aerospace industry wants help from the government. Some, however, caution against using the term ‘bailout’ for this type of situation because the airlines did not cause the hardship resulting from the coronavirus. Although Boeing and the airlines are not responsible for the coronavirus, they are at least partly responsible for their current inability to survive through these challenging times—Boeing and the airlines have spent billions of dollars in recent years buying back their own stock. For example, airlines have spent $42.5 billion on buy backs between 2014 and 2019 which is almost identical to the amount the industry is now requesting from the government.
The Bailout and The Takeaway
A government bailout can be in the form of legislation providing money or resources to a company or even an industry to help that company or industry avoid bankruptcy. For example, Congress approved a $15 billion bailout to the airlines in response to the 9/11 terrorist attacks. Another example is the Emergency Economic Stabilization Act of 2008 where the government provided bailout relief to banks after the mortgage crisis. AIG initially received an $85 billion loan (later receiving more money totaling $150 billion) from the Treasury in exchange for 79.9% equity in AIG. The loan was to be repaid with interest; the U.S. government and taxpayers eventually made $22.7 billion from interest payments.
A government bailout of the aerospace industry appears imminent. Boeing is likely to be considered “too big to fail.” The main questions are how much money will go to Boeing and the aerospace industry, in what form, e.g., debt or equity, and what strings will be attached to that money. Will the government acquire some ownership of Boeing as they did with AIG? Boeing CEO has said Boeing may reject any relief from the government if the government demands stake in the company. Will Boeing be required to change any of its Commercial Airplane division business practices? Will there be more government oversight of Boeing’s operations? Will Boeing be required to cut emissions from its planes to help protect the environment? The aerospace industry bailout will be interesting to monitor as things should come together quickly in the next few weeks, or even days.