EDIT: And an hour after writing this Boeing just now announcing (surprise, surprise) they don’t expect return-to-service until July and stock is currently trading down 5.5%)
I shorted BA for a few months based on many HN posts after the crashes, but covered my position after it seemed to stabilize at ~320. I think it will probably head lower, but as a general rule I try to find companies I believe in rather than companies I don’t.
It was a very interesting choice to maintain the dividend for now. I think they will have to revisit that and it will kick-off the next big swing downward.
Last week the WSJ reported [1] that they are in the process of raising a new $5 billion round. Now [2] the word on the street is they’re looking for $10 billion over 2 years - a “mid term” debt round, structured as a line they can draw on over several years - somehow this is supposed to limit the effect it will have on their debt rating. A significant Moody’s downgrade seems like it’s past due, and Moody’s recently announced they put BA “on review”. [3]
Their debt at the start of Q4 was $15 billion and then rose to $20 billion by the end of Q4. Back in 2018 it was closer to $12 billion. I wouldn’t be surprise to see it near $25 billion at the end of Q1.
Supposedly Boeing keeps about $10 billion in liquidity “available” but they’ve burned through that by now.
The “charges” they take against the MAX disaster which started at $5.6 billion could balloon as high as $20 billion as the ramifications continue to unfold. [4]
Lastly I would point out that over the last decade plus timeframe the FAA hollowed out as a regulatory agency into a box checker. Today they have as I understand it just ~750 total pilots and engineers on staff to review technical data from the plane manufacturers. The FAA said last year to do it themselves they would need 10,000 more. [5]
> “It would require roughly 10,000 more employees and another $1.8 billion for our certification office,” Elwell told the Senate subcommittee on aviation and space.
> The FAA Aircraft Certification Service had a budget of $239 million for fiscal 2019 and about 1,300 employees, 745 of whom are pilots, engineers and technical staff who oversee design approvals and production.
I recall news articles claiming Congress recently approved significant new funding for the FAA, but looking at their budget [6] PDF page 37 it seems like “Regulation & Certification” remains level-funded at $1.3 billion the last three years.
A more recent report on the MAX specifically [7] said;
> The report said the FAA had just 45 people in an office overseeing Boeing's Organization Designation Authority (ODA) and its 1,500 employees.
...
> The FAA's office oveseeing Boeing has just 24 engineers and they face a wide range of tasks to ensure compliance in overseeing Boeing's 737, 747, 767, 777, and 787 programs.
> The review added there are only two technical FAA staff assigned per Boeing program and some are "new engineers with limited airworthiness experience."
The full report which this article is excerpting I believe is this one. [8] See specifically PDF Page 47 but put down any objects you might be prone to throwing before beginning to read.
I would imagine engineers qualified to actual critically review detailed 737 specifications aren’t unemployed and take a long time to hire. How long will it take the FAA to even staff up to the point where they can start doing their job if they are only just now getting the money to hire? Pundits saying they expected the 737 return-to-service to happen before New Years and now say it’s happening any day now I think don’t comprehend the massive gap between what the FAA used to do and what they are now tasked with doing, and that they literally don’t have the qualified people in-house to even start doing much of this work. All that assumes necessary funding has even been appropriated and there are the people and the culture in place to even do the work. Big IFs.
To me that points to a extremely delayed return to service as new engineers are hired and brought on to critically review documentation which used to be rubber stamped — let alone dealing with the actual software failures and faulty design specifications which straight up didn’t/don’t conform to modern safety standards.
In short, my prediction is that BA will inevitably have to suspend its dividend, it will take a charge upwards of $20 billion for the MAX, return to service will be extremely delayed beyond analysts wildest expectations, they will be downgraded by Moody’s and their debt load will increase to nearly $30 billion over the course of 2020 into 2021, and there is a remote chance of a debt squeeze, and the company declaring bankruptcy and having to restructure.
I don’t currently own any position in Boeing (other than through holdings in the S&P500) and do not plan on initiating any BA position in the next 72 hours. This is not investment advice.
They have 1300 total employees and only 24 review all of Boeing's planes? That's insane! What the fuck are the others doing? Can't be all HR (no offense to HR)
Your claim here is that FAA's Certification practice has been hollowed out, but your evidence is that it's been funded consistently. Can you further support the claim? 230MM is less than 0.2% of DoT's budget; what would the incentive have been to downsize it?
The top-level Certification & Regulation line item is constant over just the last 3 years. I did not look at historical data going back decades. I thought that I had read reports of the FAA getting a massive funding increase for Certification but the budget seems to dispute that. So this piece of the puzzle — whether or not major new funding has been made available for Certification in the last few months — I am not very clear on.
Delegation seems to have steadily increased in scope since the 1930s. A brief and interesting history of Delegation from the FAA is here. [1] It has evolved over decades to become what it is today.
The specific concept of the ODA - Organization Designation Authorization — which is the program which delegates certification work to Boeing, didn’t exist until 2009. Last year Boeing had 1,500 people working internally in their ODA Compliance program, and there were just 45 people at the FAA BASOO (Boeing Aviation Safety Oversight Office).
Cost was one factor, but perhaps not the primary driver. Wanting to leverage private industry expertise is usually the reason cited. I don’t think it was downsizing necessarily as a cost control measure. It was downsized as a policy decision that delegating increasing amounts of the compliance work to industry was the right way to get the job done because that’s where the experts were.
In concept it’s almost reasonable. In practice they underestimated the degree to which Boeing could fuck up on the designs, overestimated the level of independent authority would vest in the ODAs to correct deficiencies, and I think eventually you lose “critical mass” back at home base (the FAA) and the ability to actually oversee the people doing the work.
I mean, the FAA Director went on record saying they would need to hire 10,000 people to fully staff this function. This to me indicates they have lost the critical mass required to perform the role even primarily as an outsourced effort.
Excerpting from PDF Page 13 of the JATR report;
> The BASOO is required to perform a certification function, including making findings of compliance of retained (non-delegated) requirements, while also performing the oversight function of the Boeing ODA. The BASOO must have the resources to carry out these two primary functions without compromise. The JATR team concluded that FAA resource shortfalls in the BASOO (and other allocated resources) may have contributed to an inadequate number of FAA specialists being involved in the B737 MAX certification program. In some cases, BASOO engineers had limited experience and knowledge of key technical aspects of the B737 MAX program.
> The BASOO delegated a high percentage of approvals and findings of compliance to the Boeing ODA for the B737 MAX program. With adequate FAA engagement and oversight, the extent of delegation does not in itself compromise safety. However, in the B737 MAX program, the FAA had inadequate awareness of the MCAS function which, coupled with limited involvement, resulted in an inability of the FAA to provide an independent assessment of the adequacy of the Boeing proposed certification activities associated with MCAS. In addition, signs were reported of undue pressures on Boeing ODA engineering unit members (E-UMs) performing certification activities on the B737 MAX program, which further erodes the level of assurance in this system of delegation.
Further, from PDF Page 46;
> The FAA initially delegated acceptance of approximately 40% of the B737 MAX project’s certification plans to the Boeing ODA. Additional certification plans that were originally retained for acceptance by the FAA were later delegated to the Boeing ODA as the certification project progressed. While the JATR team did not conduct an exhaustive review of other ODAs, the team observed that delegating the acceptance of certification plans does not appear to be a widespread practice for the FAA.
“Does not appear to be widespread” seems to me to be a political way of saying “outside of acceptable practice and this should never have been done.”
The next paragraph continues;
> Finding F5.1-A: The FAA extensively delegated compliance findings on the B737-8 MAX project to the Boeing ODA. Safety critical areas, including system safety documents related to MCAS, were initially retained by the FAA and then delegated to the Boeing ODA. (See also Findings F4.1-A, F4.1-B, and F4.1-C.)
Delegation was used to an improper extent in the project, and what little staff they had dedicated to the BASOO appear to have insufficient experience, technical expertise, or knowledge of the 737-8 systems themselves.
Now the FAA is on record as saying those same people will have all the time they need to get it right without any compromises. In my experience, a team that failed under undue pressure the first time will take a deliberately exorbitant amount of time, given a second bite at the apple and the instructions to “do whatever it takes to get it done right.”
> Today they have as I understand it just ~750 total pilots and engineers on staff to review technical data from the plane manufacturers. The FAA said last year to do it themselves they would need 10,000 more. [5]
Not 10000 more pilots and engineers. 10000 more employees. Now they have "1,300 employees, 745 of whom are pilots, engineers and technical staff who oversee design approvals and production."
Well they aren’t talking about hiring 10,000 for the mail room.
This is the number he gave to answer what it would take to do the whole thing internally with no delegation whatsoever. Hard to say how of this number is just political grandstanding.
I shorted BA for a few months based on many HN posts after the crashes, but covered my position after it seemed to stabilize at ~320. I think it will probably head lower, but as a general rule I try to find companies I believe in rather than companies I don’t.
It was a very interesting choice to maintain the dividend for now. I think they will have to revisit that and it will kick-off the next big swing downward.
Last week the WSJ reported [1] that they are in the process of raising a new $5 billion round. Now [2] the word on the street is they’re looking for $10 billion over 2 years - a “mid term” debt round, structured as a line they can draw on over several years - somehow this is supposed to limit the effect it will have on their debt rating. A significant Moody’s downgrade seems like it’s past due, and Moody’s recently announced they put BA “on review”. [3]
Their debt at the start of Q4 was $15 billion and then rose to $20 billion by the end of Q4. Back in 2018 it was closer to $12 billion. I wouldn’t be surprise to see it near $25 billion at the end of Q1.
Supposedly Boeing keeps about $10 billion in liquidity “available” but they’ve burned through that by now.
The “charges” they take against the MAX disaster which started at $5.6 billion could balloon as high as $20 billion as the ramifications continue to unfold. [4]
Lastly I would point out that over the last decade plus timeframe the FAA hollowed out as a regulatory agency into a box checker. Today they have as I understand it just ~750 total pilots and engineers on staff to review technical data from the plane manufacturers. The FAA said last year to do it themselves they would need 10,000 more. [5]
> “It would require roughly 10,000 more employees and another $1.8 billion for our certification office,” Elwell told the Senate subcommittee on aviation and space.
> The FAA Aircraft Certification Service had a budget of $239 million for fiscal 2019 and about 1,300 employees, 745 of whom are pilots, engineers and technical staff who oversee design approvals and production.
I recall news articles claiming Congress recently approved significant new funding for the FAA, but looking at their budget [6] PDF page 37 it seems like “Regulation & Certification” remains level-funded at $1.3 billion the last three years.
A more recent report on the MAX specifically [7] said;
> The report said the FAA had just 45 people in an office overseeing Boeing's Organization Designation Authority (ODA) and its 1,500 employees.
...
> The FAA's office oveseeing Boeing has just 24 engineers and they face a wide range of tasks to ensure compliance in overseeing Boeing's 737, 747, 767, 777, and 787 programs.
> The review added there are only two technical FAA staff assigned per Boeing program and some are "new engineers with limited airworthiness experience."
The full report which this article is excerpting I believe is this one. [8] See specifically PDF Page 47 but put down any objects you might be prone to throwing before beginning to read.
I would imagine engineers qualified to actual critically review detailed 737 specifications aren’t unemployed and take a long time to hire. How long will it take the FAA to even staff up to the point where they can start doing their job if they are only just now getting the money to hire? Pundits saying they expected the 737 return-to-service to happen before New Years and now say it’s happening any day now I think don’t comprehend the massive gap between what the FAA used to do and what they are now tasked with doing, and that they literally don’t have the qualified people in-house to even start doing much of this work. All that assumes necessary funding has even been appropriated and there are the people and the culture in place to even do the work. Big IFs.
To me that points to a extremely delayed return to service as new engineers are hired and brought on to critically review documentation which used to be rubber stamped — let alone dealing with the actual software failures and faulty design specifications which straight up didn’t/don’t conform to modern safety standards.
In short, my prediction is that BA will inevitably have to suspend its dividend, it will take a charge upwards of $20 billion for the MAX, return to service will be extremely delayed beyond analysts wildest expectations, they will be downgraded by Moody’s and their debt load will increase to nearly $30 billion over the course of 2020 into 2021, and there is a remote chance of a debt squeeze, and the company declaring bankruptcy and having to restructure.
I don’t currently own any position in Boeing (other than through holdings in the S&P500) and do not plan on initiating any BA position in the next 72 hours. This is not investment advice.
[1] - https://www.wsj.com/articles/boeing-considers-raising-debt-a...
[2] - https://www.cnbc.com/2020/01/20/737-max-crisis-boeing-seeks-...
[3] - https://www.marketwatch.com/story/boeings-debt-on-review-for...
[4] - https://apple.news/AcnxFGCurRfW3l1BNvzr6aw
[5] - https://www.forbes.com/sites/jeremybogaisky/2019/03/27/want-...
[6] - https://www.transportation.gov/sites/dot.gov/files/docs/miss...
[7] - https://www.reuters.com/article/us-usa-boeing-faa-certificat...
[8] - https://www.faa.gov/news/media/attachments/Final_JATR_Submit...
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