Boeing Co. (NYSE: BA) made a sharp turn upward Wednesday after holding the dubious distinction of being the worst-performing component of the Dow Jones industrial average this year.
The aerospace company’s surge was accompanied by a stock market rally that had the Nasdaq nearing record highs as signs of an economic recovery were emerging.
Boeing’s stock price was bolstered by a vote of confidence from the activist hedge fund Third Point and by an aircraft leasing company’s announcement that it would not cancel its order for the 737 Max.
Shares of Boeing rose by 12.95% Wednesday, closing at $173.16. For the day, it was the best performing among the Dow stocks, rising by 2.05%. Even with the surge on Wednesday, Boeing’s price is still down more than 55% from its 52-week high of $391.00.
Initially, there was a bit of confusion about Boeing’s good news. Dan Loeb’s Third Point Offshore Fund listed the airplane manufacturer as one of its monthly “winners” for May. Some Wall Street investors interpreted that to mean the hedge fund had taken an equity stake in the Chicago-based company. CNBC clarified the situation, reporting that Third Point’s investment was in Boeing debt.
Avoided Government Bailout
Earlier this year, Boeing raised $25 billion with an investment-grade bond issue so it could avoid seeking assistance from a government bailout fund established because of the COVID-19 pandemic’s devastating effect on the economy. The federal bailout program could have resulted in the government taking an equity stake in the company.
Third Point’s vote of confidence in Boeing comes after many other investors, including Warren Buffett of Berkshire Hathaway Inc. (NYSE: BRK-A), appear to have lost faith. Buffett has sold off all of his company’s airline holdings. Asked last month at Berkshire Hathaway’s annual meeting for his assessment of Boeing, Buffett called it “one hell of a company” but expressed doubts about how it would fare while air travel is facing such a huge struggle.
“The airline business, and I may be wrong, and I hope I’m wrong, changed in a major way,” he said. “I’ve been basically told not to fly.”
He added: “We like those airlines but the world has changed … and I don’t know how it’s changed.”
As Bad News Piled Up
Boeing’s commercial aviation division has suffered a one-two punch with the grounding of the 737 Max aircraft after two fatal crashes and the coronavirus pandemic, which has devastated the commercial air travel industry. Year to date, Boeing shares rank among the bottom 25 companies in the S&P 500.
The 737 Max crashes — one in Indonesia and one in Ethiopia — led to a worldwide grounding of Boeing’s best-selling commercial jet. None of the planes have been delivered since March 2019.
After the pandemic brought air travel almost to a halt, hard-hit airlines began canceling and delaying their purchases of the 737 Max. That leaves more than 400 of the single-aisle planes sitting in what have become huge parking lots around the country.
Boeing resumed production of the 737 Max last week at what it called a “low rate” after being halted since January. The company said it planned to increase production to 31 per month in 2021.
On Wednesday, aircraft leasing company SMBC Aviation Capital said it had no plans to cancel any of its firm order for 89 of the Boeing planes “at this point.” But it will delay delivery of 68 of them for four years, pushing back the time frame to 2025-2027.
Role of Leasing Companies
Aircraft leasing companies are among the largest 737 Max customers. They control more than 40% of the global fleet.
Last month, the world’s largest leasing company, Aercap, deferred delivery on dozens of 737 Max planes and indicated that it may cancel some orders. In April, Avolon canceled an order for 75 of the commercial jets, which were scheduled for delivery in 2023.
SMBC, based in Dublin, Ireland, appears to be in a solid position to make good on its promise to go through with its 737 Max purchase. On Wednesday, it reported a record profit before tax of $364.5 million for the fiscal year ending March 31.
The company, which is owned by a consortium that includes Japan’s Sumitomo Corp. and Sumitomo Mitsui Financial Group, says it has a strong capital and liquidity position.
Single-aisle airplanes like the 737 Max are appealing to lessors because they are easier to re-lease and will be more in demand when airline traffic recovers. The cabins also cost less to reconfigure than the interiors of wide-body jets.
Calhoun Keeps the Faith
Boeing chief executive Dave Calhoun has repeatedly voiced confidence in the 737 Max and says it is a vital part of the company’s future. But he has also acknowledged that the commercial aviation industry has huge challenges.
“Traffic levels will not be back to 100%,” Calhoun has said. “They won’t even be back to 25%. Maybe by the end of the year we approach 50%.” A long-term recovery for Boeing seems plausible as more people get back to flying, but it will be a long road back.”
He has said that he expects that a U.S. airline may not survive the year. “The threat to the airline industry is grave — there’s no question about it,” he said. “And apocalyptic does actually accurately describe the moment.”
Even as commercial aerospace has struggled, Boeing is shored up by its defense business, which may produce more revenue this year than the commercial side.
Wednesday’s surge may be a sign that the prospects for the airlines and aerospace companies are improving.
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