Bill Boeing would be rolling over in his grave.

So would Wong Tsu. The co-founder of the Boeing Company and his very first engineer understood, back in 1916, that you had to do a lot of shakedown flights to get everything right. The best company test pilots do that still today.

The problems with the 737 MAX are less engineering problems than they are a decision to rush a product to market when many of the company’s own engineers warned against it.

I wrote a more detailed article about Boeing (BA), Why I Won’t Be Buying Boeing, just under a month ago, detailing the problems Boeing is having in terms of quality control on the defense side of its business and explaining why, at this time, I did not think Boeing was a buy. I figured enough ink already had been spilled on the 737 MAX so I wanted readers to know that the Air Force and some intelligence agencies were beginning to sour on dealing with Boeing as well.

These latest safety issues leave me wondering why any PIC (Pilot in Command) would be comfortable taking Boeing’s word on either the defense aviation or commercial aviation side of the business without extensive – and expensive – additional testing on their own.

I doubt these additional expenses are going to be borne by end users without a fight. Many of the derisive comments I received on that recent article centered around the facts that (1) Boeing has a massive backlog of orders worth tens of billions of dollars, and (2) with Boeing enjoying a duopoly in commercial aviation with Airbus SE (OTCPK:EADSY), where else is an airline going to go?

I answer these two rejoinders with the following:

  1. It doesn’t matter if you have a trillion-dollar backlog if you are selling at significantly lower margins – or a loss. I believe BA is going to have to take a serious haircut on pricing in order to effectively compensate airlines for the additional expenses all are currently incurring and will likely continue to incur.
  2. Airbus.

I do not dislike Boeing as a company or as an investment. I never fall in love with a stock nor do I disparage a company without due consideration. I’m a proponent of aerospace and defense and would like to see these companies produce the finest products at the best price. On the defense side, our nation depends upon it.

However, I believe that Boeing, for now, has lost its way.

The first of the recent safety issues, released just last week, speaks to incredibly poor quality control. When a surgeon leaves an instrument in a patient’s stomach, it shows sloppy workmanship and a team around that doctor that’s either incompetent or cowed by the power and status of the surgeon.

Leaving tools or candy wrappers or other trash (all considered Foreign Object Debris, or FOD) inside fuel tanks before they are sealed speaks to the same issue. Have Boeing workers become complacent or subversive, or is management just so concerned with shipping product out the door that workers fail to report such problems like those on the surgeon’s team?

Before I once more own shares in Boeing, I want to know that the company has skilled workers who care about the quality of work they do and quality control inspections that ensure only completely safe aircraft are released for flight. I don’t want to see one civilian put at risk and I don’t want to see any young Airmen in the same position.

Sadly, this degradation in quality control is not new. I remember one incident in 2010 when there was an electrical fire in the main cabin of a 787 during flight testing that was caused by tools left in the electrical bay. This kind of thing can cause the grounding of an entire fleet and result in more delays, more costs to the customer (military or commercial) and bigger haircuts for Boeing to have to take, all of which will affect their bottom line. (Even today, the 787 is dogged by complaints of shoddy production only addressed after the clients have accepted the aircraft.)

Never forget the old saw about the guy who defends his numbers by saying “We’re losing money on every order but we’re making up for it in volume.”

The latest news is even more troubling to me. The engine-control wiring in the 737 MAX, like most aircraft, are supposed to have a metallic shield, sort of like an airborne lightning rod, that protects the wiring against damage from a lightning strike. Such a strike could result in a power loss to both engines in mid-flight.

The FAA has proposed a directive that will require every 737 MAX aircraft assembled so far, including those already delivered, to be inspected in order to fix a problem that has just been discovered with this metallic lining. It might be one plane or every one of them, but the wording used was that all aircraft “may be affected by the identified unsafe condition.” Let’s say it’s only one single airplane that has the problem. Do you want to be halfway across the Pacific when lightning strikes that one?

The FAA estimates it should only take 12 hours of work for mechanics to check and repair the problem on each plane, so there will be apologists aplenty saying it’s no big deal. If it’s no big deal, why didn’t the company spend those 12 (or less) hours before trying to sell the aircraft as safe and ready to fly?

Instead of now rushing to say, “We are glad this problem was identified and we are working round the clock to inspect every single aircraft” the company spokesman only noted that the issues aren’t expected to affect the anticipated return of the planes around mid 2020.

From this response, it seems evident that management is more concerned with reassuring airlines they will get their planes on time and reassuring investors that these minor problems should not affect the stock price.

I would like to buy Boeing shares. The company was once a serious player in ensuring America’s intelligence community and air and space forces could depend upon Boeing in such a way that these people could do their jobs and do them safely. Until I believe these service men and women, and all commercial passengers, can trust that Boeing management shares my concerns, I will not be buying Boeing.

Good investing,

JS

PS — There are many other companies in potentially dangerous industries that always put safety first. You are welcome to review my most recent article on TOTAL as an example.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Unless you are a client of Stanford Wealth Management, I do not know your personal financial situation. Therefore, I offer my opinions above for your due diligence and not as advice to buy or sell specific securities.

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2020-02-27