This is Matt Russell and today we are running a special replay episode, our breakdown of Boeing.
We recorded this episode in September of 2023. That was before the mid-air blowout on a Boeing 737,
operated by Alaska Airlines, and the subsequent management changes. But it serves as a very useful
overview of the commercial airline industry at large, how we got here and what the future might look
like. And more importantly, it's going to pair well with the breakdown we're releasing this Wednesday
about the Brazilian-based airplane manufacturer, Embraer. So stay tuned for that and please
enjoy this episode on Boeing. This is Business Breakdowns. Business breakdowns is a series of
conversations with investors and operators diving deep into a single business. For each business,
we explore its history, its business model, its competitive advantages, and what makes it tick.
We believe every business has lessons and secrets that investors and operators can learn from,
and we are here to bring them to you. To find more episodes of breakdowns, check out joincollossus.com.
All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts,
podcast guests, their employers, or affiliates, main maintain positions in the securities discussed in
this podcast. This podcast is for informational purposes only and should not be relied upon as a
basis for investment decisions. This is Zach Pross, an investor at Iverna Capital, and today we're
breaking down Boeing. Founded in Seattle on 1916, by William Boeing, the company has produced thousands
of commercial and military aircraft over the past century. It is an important national and global asset,
and one half of arguably the most famous do-oply in business alongside Airbus.
To break down Boeing, I'm joined by John Austrower, founder, and editor-in-chief of the Air
Current. You can split Boeing's business into three segments, commercial, defense, and services.
For this discussion, we focused primarily on Boeing's commercial business, which account for
nearly 40% of its revenues last year. We talk about the cost and complexity of building new airplanes,
how the 737 Max disaster changed the business, and when the future of commercial planes will look
radically different. Please enjoy this business breakdown of Boeing.
All right, John. Thank you for joining us to break down the heralded Boeing Corp.
I think maybe to set the stage, it would be helpful from my perspective, from the audience's
perspective, to provide some context on the commercial side of the business, the defense side of
the business, how big the industry is, what secular trends or tailwinds support businesses growth,
and where Boeing fits into the equation. Yeah, absolutely. The best way to think about Boeing
and Airbus, too, is really they're both publicly traded companies, but it's really important to
think of both of these aerospace giants not necessarily as individual discrete companies,
but as extensions of their national patrons. Yes, they're publicly traded. Yes, they operate
with the same type of commercial considerations as other companies, but fundamentally, they are
extensions of both commercial dominance that the EU and the US want to wield around the world.
These are instruments of soft power. And so they play a very, very, very specific role in fabric of
the nations which they're associated. So with respect to Boeing, I mean, you'll look at history
over 100 years where they evolved from the earliest fabric airplanes all the way to carbon fiber
composite jetliners that can do an 8,000 mile hop in one complete flight. You can fly
Perth to London right now, nonstop in a Boeing 787. That's an amazing thing. I mean, just to watch
that progression over the last 100 plus years. So looking at that, this is a company that from
the commercial side of the business really had an important inflection point right around the
start of the jet age. As we transitioned into the 707s and the DC8s in the early jet age
for hopping around the world on jet airplanes, what ended up happening was the entire ethos of
the industry shifted gears and sort of the macro picture for airplane operations went from
higher faster farther to faster better cheaper. And so you look at that evolution and really
largely explains why we've been flying around between 30 and 40,000 feet and somewhere between
eight and nine tenths of the speed of sound because the most durable single trend in all of
aerospace predominantly on the commercial side is to deliver products that have a lower operating
cost, whether it's lower fuel burn, lower maintenance, airlines don't generally want more
performance because there's a whole ecosystem designed around the structure that we have right now
and fitting within that and optimizing that has been predominantly the vehicle for how they become
profitable. And so Boeing has served their customers to that end. And so that's the commercial
side of the business. I'm the defense side of the business thinking of it as a national asset.
And these are strategic capabilities of the United States of America. There aren't a lot of
teams that can design a transport aircraft or a fighter jet or a bomber in this country. You're
in the world really. So protecting those capabilities and cultivating them is a strategic goal of the
US. That's a super helpful summary. I guess if I were going to take a white piece of paper,
what exactly is the business model for Boeing today? There are two big pieces that drive the
model on the commercial side. One is growth and one is replacement. And so even environment in
say North America and Europe, which is more geared toward replacing the existing fleet
with new more fuel-efficient airplanes that might be larger or have new engines that provide a
performance benefit. And then you have the emerging markets. You have China. You have India. You have
Asia-Pacific at large. You have the Middle East and Latin America that have not traditionally been
the big drivers in the first chunk of the jet age. It was very much watching US and European
economies grow to the scale that they have. Now we see China with a significant demand for airplanes.
There's a whole geopolitical element around that today about who they're willing to take airplanes
from and why and when. But if you look at where India is today as they aspire to be an economy
and a global powerhouse alongside the US and China. So that's driving a lot of the trends.
In the background of all of this, the environmental side, where there are a lot of people in this
industry wondering whether or not either of those growth models are fundamentally sustainable. But
getting back to the business model question, traditionally the airplane business has been
practiced by Boeing. On the commercial side has been to ride the demand waves up and down.
And so as demand accelerates, Boeing will accelerate production to meet that demand. And they have
always seen it as a benefit to be most closely aligned to those waves. The problem with that is that
any up wave also creates a down wave. So managing that ends up creating large numbers of people
being potentially laid off on the opposite side of the boom. And so what that has meant is that
they have made their money on building and delivering airplanes. So the way delivering airplane
at about two thirds of the final price of the airplane is actually paid on delivery. The first
third or half or so is working capital to buy engines, interiors, do salage, wings, build all that
on the way there to building the airplane, also pre-delivery payments as well. And so
that is the primary driver of revenue within Boeing's commercial business. On the opposite side of
that is the services business where the long tail of an airplane as an interservice will need maintenance
and upgrades and new tools for its life that have to make it more efficient or keep it operating.
I've seen estimates that that's like 70% of the total cost, life cycle cost of an airplane.
Boeing and Airbus also have tried to increase their share of the services business
from the commercial side of the world because it ultimately is more stable than the ups and downs
of the market where you've got airlines that are growing too fast and then coming down
and hardening their side which results in changing production rates and all that. It's really
interesting pre-COVID. There was really a sense that things had stabilized in terms of growth.
And I would actually probably put that to about the point of about 2017.
Heading into 2018 and 2019, there was an absolute oversupply in the market for the largest
twin-iola airplanes. Boeing and Airbus, Boeing in particular, had been building at an incredible,
incredible pace. A 787s after their initial development of the airplane to deliver financial
return on that airplane. And frankly, the demand for it was there for several years as airlines
waited for that airplane. However, what we really saw financially in the years leading up to the
pandemic, there was a glut of twin-iola airplanes. So this is an industry that, particularly,
Boeing, I would say, and there's plenty of evidence to support this, that they have chased the
ups and downs in a way that has left them at the mercy of overproduction and then the consequences
of that on the opposite side. So we have a business that's effectively settled into Dauopoly,
at least on the commercial side and on the aerospace and defense side, obviously a bit more competitive.
Presumably, they have their own kind of issues that they dominate there. It's a business that's
been around for a hundred years. How is the industry structure settled in the way that it has?
Form follows function in a lot of ways. And so the barriers to entry that come along with that
require a particular form factor. And that's one of the things that we're in the process of seeing
challenged now, which I think is makes the next five to ten years probably the most exciting time.
And aerospace in the last 50, but coming back to the core of your question, Boeing is a global
company. Airbus is a global company. These are super tankers of economic activity. I mean,
just an incredible, incredible number of jobs that are closely tied to the social fabric of both
the US and European economists. So there's absolutely a political element that comes along with
this in terms of the staying power and their influence within all of that when an industry
matures in the way that it has like commercial aircraft where you see the rise of low-cost carriers,
ultra low cost carriers, we can get from Seattle to Dallas for 45 bucks. I mean, what that does is it
even more biases you toward less disruption. And so again, maintaining that form factor and holding
on to the existing designs because once you have them and the infrastructure that comes with them,
I mean, you're talking about when you're buying an airplane, you're talking about a 20 to 30 year
relationship between the airline and the aircraft manufacturer. So it just doesn't change that easily.
You know, you've got simulators and you've got pilots and you've got maintenance organizations
and you've got the understanding that comes along with how you build these things and take care of
them and just isn't a thing that changes very quickly. And what we've seen, I think, on multiple
occasions in this industry is that when you do try to change it really quickly, things break and
they break really painfully. We saw that with the 787 development. I mean, when Boeing went from
high bypass engines and long range performance with a really highly optimized aluminum airplane
and flyby wire on the triple seven to just less than a decade later with majority carbon fiber
composite design, you know, more electric architecture and a totally new production system to do all
of this. Boeing ended up spending estimates have ranged from anywhere between 300 and like 900%
of what they originally planned depending on how you measure it. I mean, they thought they were
going to be able to get away with this forum investment of under five billion in $2003. Again,
I've seen estimates from 14 to 60 depending on how you measure. How much does it cost to produce
an airplane between the cost associated with a established program and then once that program
is established, the associate R&D, the sunk costs, incremental aircraft expenses, I just want to give
the audience an appreciation for the scale that we're working with here. Yeah, absolutely. So
a new aircraft program, the estimates are around 15 to 20 billion dollars. And so you're talking about
a single-iola airplane, Boeing will tout or Interbus will tout 110 to 130 million dollars in list
price for the sake of this discussion and the sake of understanding of the aerospace industry,
no one ever pays list price. Generally speaking, typically discounts of 40 to 60 percent are
very, very common and typical. I would say across what an airline actually pays for an airplane.
When you think about the maturity of an airplane program like the A320 or the 737, you're talking
about a, again, this is very rough, but a all-in cost to build a probably anywhere between 25 to 35
million in an airplane. Very rough numbers. And they'll end up selling for about 50 to 55. And so,
again, there are so many different factors that go into establishing a price, how you measure it,
maintenance contracts, life cycle deals, all the different items that in terms of what goes to Boeing,
what goes to suppliers that you purchase equipment that then gets shipped about. It's a very, very,
very squishing number in terms of what that actually is, but generally Boeing has sought profit margins,
anywhere between five and 15 percent for a commercial airplane. But in some time,
it has an airplane that ensures that it gets a lot better, which is why it's such a long-term
business. And then how long would you expect the aircraft to be in service for? An airplane
delivers today, typically the economic useful life of an airplane is measured in roughly 25 to 30
years. So an airplane that goes today will probably see service till 2050, which is an amazing
thing when you really think about it. You think about going backwards from the jet age, beginning
the jet age, or beginning from the Wright brothers in 1903 to 1953. I mean, that was fabric,
covered airplanes at Kitty Hawk all the way to the very start of the jet age. And that's how long an
airplane is going to be in service for that delivers today. And so, thinking through the coordination
problem, how many suppliers, vendors, third parties are you coordinating to get an aircraft manufactured
and delivered to its customer? So what I always like to say is that if the flying public understood
how complex it is to get an airplane off the ground from building it to delivering it to
flying it, they would either never complain or never fly. I'm not sure which one, because fundamentally,
the complexity of managing that process from making sure that all the parts arrive in the proper
sequence are installed in the proper sequence are installed correctly, the QA, all of the engineering
that goes along with that. I mean, you think of aerospace is an incredibly precise manufacturing
process. And it is. I mean, we're talking about 1,000th of an inch tolerances, or even 10,000th
of an inch in some cases. What you're fundamentally talking about is the single most challenging
industrial task humans do. This is no knock on SpaceX and commercial space business. That is
incredibly incredibly challenging. They do not have the tempos and volumes that commercial aerospace
does. And they also do not have an environment which is anywhere near as inhospitable to the product.
So a rocket will wait for good weather, perfect pristine weather and an airplane will fly
in terrible weather and be serviced by people whose salaries range anywhere from minimum wage all
the way through three or four hundred thousand dollars a year. This is the normal process of having
an airplane in service. So what it does, it requires just so much more robustness in how it's
taken through its operation. And so to coordinate all of the suppliers, you're talking with thousands
of suppliers. Those suppliers have suppliers and those suppliers have suppliers and those suppliers
have supply. I mean, you're talking about a chain that in some cases is four or five six levels
deep, especially when you talk about raw materials like titanium and the specialized metals that are
required for jet engines. I mean, it's really an amazing process to manage all of that. And by
like every single step has to work. There's no fudging it. And so the amount of coordination that's
required there is truly one of the arts of this business to then build it. Have it meet your
specifications across millions of parts. By the way, then you're doing it several hundred times a
year, maybe as many five or six, seven hundred times a year. That is an incredibly, incredibly
challenging thing. And it requires an unbelievable amount of institutional knowledge for how you do that
and how you do that in a way that is repeatable, safe and oh, by the way, that I mentioned profitable
to do all these things together is just unbelievably challenging when you're talking about a margin
in the single digits. Before we get to some more recent history, it seems that Boeing's merger
with McDonald Douglas in the late 1990s is worth spending a bit more time on. Why was that
important from your perspective in explaining how the business situated today? The merger between
you and Boeing and McDonald Douglas in 1997 was a huge moment. And number one, it represented the
exit of McDonald Douglas from the commercial world and the absorption of its defense business
into Boeing for the most part. And that was a function of both the end of the Cold War, but also
the result of different corporate strategies that both companies had. And Boeing had been a much
more stable company than McDonald Douglas going to that point. It's commercial business that struggled
for years at a terrible accident also in the late 1970s with the DC-10, which had by many similarities
for strike and resemblance to what happened with the Max decades later. And what it's
the trajectory that it's at the company upon. But fundamentally what it did at the time was it
changed a lot of the corporate culture about how Boeing thought about its role as an aircraft
manufacturer. And going from McDonald Douglas to leadership was primarily running the company at
that point. And doing so brought a lot of very Jack Welch GE-centric approaches to how the company
was run in terms of thinking about the company as a financial instrument. And so in nearly 2000s,
there was a huge push to divest a lot of the key pieces of the company that the leadership viewed
as non-core. So which is to say Boeing wanted to be an aircraft integrator. They pull all the
pieces together and they wanted to have that design capability. And that was going to be their
expertise and aircraft assembler. And so in the case of the 1787 they divested their witch-doll unit
and their Tulsa unit to create spirit aerosystems which is now their biggest supplier.
The company that they've had enormous challenges with as a supplier which is now facing significant
financial troubles because of the sum total of the strategies that created it. And so that has guided
a lot of how the company has behaved over the last 20 years. And so thinking about the role of
the merger here, there were ultimately markers along the way that saw Boeing prioritizing different
things over time at a corporate level. That just massively accelerated that. And so a lot of the
criticisms that have been levied against the company, a lot of folks who were internally of the
belief that that was the major turning point. And again after that it was again the sum total of
each misstep sort of compounding the issue getting farther away from solving the core problem,
which is how do you take this incredibly complex integrated product and have an enterprise that
is equally complex, equally integrated and responsive to the needs of your customers and ultimately
the needs of everyone in your ecosystem. And so that has been Boeing's singular challenge and
it's manifested in a lot of different ways over the years with respect to program performance,
financial performance and how that's ultimately in full until today.
And so perhaps an appropriate segue, you know, for a long period of time, Boeing was this
darling of the equity markets. I believe the equity value per share nearly tripled from 2016 to
2018 and that it made national news for the wrong reasons. And so I'd like you to kind of help us
to better appreciate and turbulence that Boeing has faced here over the past, call it five years or so.
It's been an interesting century for Boeing. You got to go back pretty much to the beginning of
the 2000s for explaining how it got to where it got. So when they launched the 77 in 2003, 2004,
they undertook that process over what ended up being two, three years longer than they expected,
because of technology wasn't ready, the splat chain wasn't ready. And certification just took way
longer. Because of that astronomical cost, it caused them to prioritize the speed to deliver a
single-iola airplane. The 77 is a twin-iola airplane with greater fuel efficiency as quickly as
airlines could get it. But the cost of developing a new single-iola airplane at a time when
Airbus was coming out with the E320neo drove them to put new engines and create the 737 MAX.
And so in during those years between 2011 when they launched the airplane and entry to service in
2017, those years were transition years for Boeing. While they were starting to deliver 787s,
which by the way, we're losing a lot of money per delivery at that point. But over time generating
significant cash, Boeing does accounting. It is not on a unit basis, it's on a program basis,
which we could probably spend an entire program on just that. But during the interim years,
when they were building a bridge to the 737 MAX transition, and also the 777X, which was an
updated version of their Longhull 7, which would have new carbon fiber wings, and also new GE
engines for significantly improved fuel efficiency and capacity. During that time, Boeing significantly
ramped up production of its metal winged 777, and the 737X, which ironically enough was the
generation that preceded the MAX. And based on a lot of moves that they made in the early 2000s
to really optimize those programs under a certain set of really legendary leaders inside Boeing,
they became the cash cows. They generated tremendous tremendous tremendous cash for Boeing at a time
when the 787 was getting on its feet. And so that's where Boeing was able to earn that reputation
you spoke about in terms of the darling of the equity markets, which drove its stock price
to record levels at one point, pushing $500 a share. And then in October of 2018, a 737 MAX,
leaving Jakarta crashed with 109 people aboard, all were killed. And it was the first accident
with the MAX and kicked off an investigation into what potentially had happened. And five months later,
there was another crash. And the Ethiopian 302 crashed killing all aboard another 737 MAX,
two brand new airplanes. And you think about the history and the safety of the industry.
Maybe you talked about the incredible complexity of this business. One of the most amazing
accomplishments of this business is how safe aviation and commercial aviation has become.
We just don't even think about it anymore for the most part. But what we had in this case
after literally one of the safest years in commercial aviation history, you had two airplanes
crashing within months of each other. That just doesn't happen. So pretty quickly after,
we kicked off a series of groundings started with the Chinese and went around the world,
regulated by regulator. And a couple days later, the Canadians in the US were the last to
ground the airplane. And investigation really centered on a few different things. Number one,
the flight control system of the airplane and a system called M-TAS, called the Manuver
Characteristics Augmentation System. And that was designed to meet certification requirements
for how the airplane handled when it was at a high angle of attack. It's just that the nose
was really high up. And certain conditions were met like the flaps were up in the autopilot,
it was off and it was being hand flown. And how the airplane would respond as it slowed and
approached a stall. And so out of the system that would automatically swivel the tail plane of
the airplane to lower the nose. And in the case of both incidents, the system was erroneously
activated because of bad angle of attack data that caused the system, which was that point driven
by a single sensor, a single data input to activate and activated repeatedly and ultimately caused
both crews flying those airplanes to lose control. There has been numerous pieces written
over the last several years about exploring all the different causes. Certainly, there's been
a lot of discussion about the pilot reaction to both systems. One of the things that the
aerospace safety community has looked at with respect to both incidents is that neither of those
accidents happen if M-TAS doesn't exist. And so you look at the sequence of events, that was what
ultimately triggered the airplane being grounded for 20 months, when it finally went back to service
in the US in December of 2020. Given those circumstances, there's been leadership turnover.
How is that permeated through the culture and the strategic direction of what the company is today
and what it potentially becomes as we kind of look into the future? The MAX crisis did set off a
leadership transition. Boeing was under siege during that entire process from this harrowing
tragedy in October 2018 all the way through the end of 2019 for the leadership side of it.
And then CEO Dennis Mollenberg was ultimately outstead at the end of 2019 and David Kellhoon took
over shortly thereafter. And Kellhoon had been on the board for years. I think it's really important
to note that as all of this is happening, all of this chaos is swirling around, around Boeing
and this horrible tragedy, which is unthinkable on a scale that I don't even think Boeing could have
fathomed fundamentally the strategy of Boeing at a high level has not changed. Culturally, there
are elements that they're emphasizing more. They've achieved safety officer. They've stood up
new programs for safety promotion and an ombudsman for the organization and really additional checks
and balances. But fundamentally, the corporate strategy of Boeing has not changed. Building airplanes
for the world airlines for growth and replacement. That continues to be the metric by which they're
measured on Wall Street, which is cash generation. And so they're at a point where having gone from
continuing to build airplanes at almost 42 per month for 737s to stopping the line completely.
And then restarting it and sort of running headlong into the factors that drove its performance
to that point. So it's relationship with suppliers getting its supply chain back up and running.
While you're dealing with, by the way, all this is happening as a global pandemic is running
rough shot over the global economy. And supply chain fragility was the concern to sure. And so all
of the macro forces are colliding with the local forces. And it makes it really, really hard to get
back on footing. And right now Boeing absolutely demonstrably has gotten more stable than it was before
in terms of the number of airplanes that they're producing. But they're still running into
supply chain issues. Getting back up to a rate and a regular tempo is still really challenging. But
I would say that largely speaking, they are building airplanes at a much more regular pace than they
certainly had been over the last 18 months. Did this kind of disruption threaten the oligopoly
or the do-oply that's in place? Did it create opportunity for someone to enter and challenge it?
Like Embraer or perhaps a Chinese upstart? I was trying to better understand what the competitive
headwinds are that the business could face. It's a fantastic question because I think there are
those who are wondering that as well who are trying to be that new entrant. Have a company start a
bit of Long Beach called Jet Zero, for example, they're trying to do a blended wing body, which is
like the entire airplane was a wing, rather than the human wing that we know with Boeing airplanes.
Going back to the idea of Boeing as a strategic asset, how do you best protect that strategic asset?
And folks like the Secretary of the Air Force have sort of commissioned based on our reporting
commission analysis internally about what is the long-term effect of this amount of disruption
on Boeing on the Pentagon's ability to project and also the State Department's ability to project
soft power. The economic officers of the State Department are involved with helping with Boeing
sales campaigns. Absolutely. In the same in the EU, this is not uncommon. So the health of these
companies and the reputation that they wield are again direct extensions. So you think about
does that environment foster one that causes or helps a new entrant spur to action? And during this
market is one of the hardest things you can do in the so far. One of the major prerequisites for
entering this business is to have sovereign backing. And the last company to try and compete directly
hit the head with Boeing and Airbus is Bombardier in Canada. And what happened was they started in 2008
with an airplane called the C-Series. And it was by all measures are really technically superior
airplane to the 737 and the 8 320. And it could not get the market traction that was needed to allow
them to reach a scale and a cost of doing business that allowed them to continue. And that airplane
was absorbed into Airbus in 2018. So in so many words, they failed strategically to have this product
deliver their future. So it's not an environment that is hospitable at all. When we've seen Mitsubishi,
the Japanese industrial conglomerate tried to do the same thing with a regional jet. They too
decided to pull back and they end up shelving the program and it will almost certainly never
actually will never come to fruition. And so this is a really challenging business. So
as far as what we have today is a competitive landscape where Boeing and Airbus are trying to
compete with one another trying to get back on their feet. Airbus has supply chain challenges
to 100%. They are different because they don't have the overhang of what happened with Max and other
regulatory challenges that Boeing is facing both in the US and globally. But I think what we're seeing
now is the rise of China. There's a whole new element to this because it's geopolitical,
it's industrial. One of the things I mentioned earlier that the way the Max grounding happened
was that China was the first to ground the airplane. And China was by all safety assessments
was doing so out of an overwhelming abundance of caution based on what they saw technically.
But what I think has evolved over time in terms of the airplane actually returning to service in China,
it only came back fairly recently. Many years after the US did, I think it had become
effectively upon in the geopolitical game that was born out of trade policies that started in
the Trump administration, or carried forth in the Biden administration. And so Boeing has
absolutely been a casualty of that. There's reporting that suggests that maybe as early as this
month, Boeing will start delivering Chinese 737 Max's again from their inventory, but there are
also signs that they may not. I mean, this comes as the Chinese government is saying, no, you can't
have an iPhone if you're in the Chinese government. There are other kinds of restrictions that are
taking place there. So you see these geopolitical cross currents that are just as important as the
supply chain cross currents that make this a lot more challenging. So all this is happening as
China wants its own industry. And they have their say don't entity called KOMAC. And KOMAC has the
ARJ 21, which is a I need to 100 seat regional jet, which is flying around China. And you have
what's called the C919, which is the same size roughly as the 737 and the Airbus A320. And that
airplane has now entered service was certified by the Chinese. It is not certified outside of China
to operate. There are a handful of possible export customers. But for the most part, this is going
to be an airplane that flies in domestic Chinese airspace and only domestic Chinese airspace.
And so so far there are two in operation. So you think about the thousands and thousands and
thousands and thousands of seven thirty sevens and eight three twenty's flying around the world.
There are two Chinese C919's flying. So there's a long way to go. However, China obviously has
the Chinese market. And it's a captive market in that regard in terms of how purchasing decisions are
made and how these industrial ties are developed. Yes, China is going to be a growing part of the
duopoly over the coming decades. I all accounts. It will happen, but it will probably happen slower
than people think. But is it going to have an impact on Boeing and their most absolutely because
when you collide the industrial and the geopolitical together, there's no way that it won't affect
both companies. Some very basic math. There's something like 5,000 orders for the 737 max. I think
you said they may be producing up to 30 or 48 months, meaning we've got the years and years of
demand for this aircraft. What does that mean to the way that this business grows and executes from here?
Is it just a function of how quickly they can build the aircraft? Yes. When you switch from higher
faster farther performance, the faster better cheaper, how quickly you can get it to market is
tremendously important. And so you have backlogs that mean Airbus is six or seven thousand right now.
I'm probably fudging those numbers, but they're big, really big numbers in Boeing between four and
five thousand. And so that's what Boeing and Airbus are going to be doing for the next 10 years.
Coming back full circle here, is that going to be sufficient from an environmental perspective?
The changing winds of climate change and the politics that come along with that and the
policies that come along with that are absolutely going to affect both. Over the next five years,
Boeing is actually in the process of developing its first full-scale demonstrator airplane to
significantly reduce the amount of fuel and by extension carbon emissions that it creates.
Just for context, the last time Boeing took a full-scale airplane and changed its shape to
reflect where they thought the planet or the market was going was the 1950s and the 707.
That's how long it's been. So this airplane is called a transonic, trust-braced wing.
It looks like it's got a super skinny long wing and has a pair of trusses that hold up the wings.
And what Boeing is doing is under a shared grant with NASA, they're slicing and dicing an old
McDonald Douglas MD90 aircraft and they're going to be installing these really advanced wings
on this test aircraft. And in 2028, they will fly. And so it's Boeing's first real test of whether
or not they're going to get away from what we traditionally know as the form factor for airplanes,
which is that low-wing, potted engine type approach. All this is happening as GE, for example,
is developing what's called the open rotor engine, which is effectively a 144s, a 12-foot
diameter fan engine without that kind of familiar nascel around it. It's almost like a propeller,
but I'm like a jet engine. All of these things are converging and whether or not they actually come
to market and whether or not they make the business case closed and they can convince airlines that
this is a path forward. Will I think in large measure decide what the 2030s look like? The 830
20 Presender Service in 1987, 88 and the 737 entered service in 1967. So is the 320 newer? Yes,
it is by a good two decades in the technology within it reflects that. But fundamentally,
these designs are really old. They're really reliable for the most part and they're familiar,
and there's an infrastructure built up around that. But ensuring one of the subtext of the entire
commercial aerospace industry is asking whether or not the type of emissions that the industry has
produced, which is about 2 to 3% of the world's carbon emissions on its own, will be allowed to
continue in a way that they have and what effect does that have on price of air travel? If sustainable
aviation fuel, which is a type of fuel that significantly reduces the amount of carbon emissions
in the production and the life cycle of fuel by up to 80% potentially in some cases gets fielded
and does it get fielded to a large enough proportion of the total fuel need? Is there supply to meet
the demand? It's not going to be cheaper, at least where we said today it's four or five times
more expensive than traditional jet fuel. What does that do to a price of a ticket? What does that do
to the elasticity of demand? Will people stay home? Will they travel? Will airlines buy as many airplanes?
So these are the types of questions that have to be answered over the next five to 10 years. So
I think where the aerospace industry is in terms of its business model, this is existential. How it's
going to progress and how it intersects with the importance socially in terms of the number of
jobs that it provides both for industry but also tourism for moving people around the world.
And also the role of governments in terms of whether they subsidize air travel to again keep these
industries going and what that ultimately means for how much it costs and where we can go. I think
one of the big questions is what does the world look like in 2033 for your travel? And by all accounts
it is not going to look like the way it does today. So I noticed that you didn't mention EVTOL which
I believe Boeing made a rather significant investment at least $450 million if not more.
Which for their CAPEX budget I appreciate is not a massive number but it's also not meaningless.
I'm curious if that plays a role in the evolution of commercial aircraft in the near-term or even
the long term. Boeing actually has a very transparent strategy related to EVTOLs. I think one of the
things that Boeing has tried to do over the last several years and it kind of intersects with
their defense business as well is the role of autonomy in flying to either reduce pilot workload
or to remove in the case of the EVTOL investments that they've made in a company called Whisk which
they now wholly owned to remove the pilot altogether. So you effectively have flying glass elevators
in so many words. To do that it requires a totally new type of technology using autonomous
systems and the system of systems that's required to manage all of autonomous aircraft that are
potentially carrying pastures. And so that's the bet that Boeing has made. And over the long term
one of the threads that runs through all of this is scarcity. And in this particular case the
scarcity of pilots. And so if you don't have enough pilots to grow with the airplanes that you're
trying to deliver in parts around the world, the only is of the belief that any next new airplane
that they have is going to have a significant autonomous capability are ideally having autonomous
capability, which is being proven out through their EVTOL business with Whisk. And I think that is
a bet that Boeing has been consistent on for the last several years since at least 2017, 2018 when
they first started talking about their autonomy strategy more publicly in terms of what they thought
the requirements were going to be for a new airplane and the ability for the industry to grow over
the long term. So the growth enablers are changing in terms of the supply side, which I think is
really fascinating in its own right. But I think what we're going to really see is what cost
whether it's dollars and cents or regulatory relationships or the airline relationships, pilot
relationships, all that are going to evolve to make that happen over time. So I think as we watch
the next 10 years, these are going to be the pieces that are really worth watching. I mean,
it's one thing to look at demand, it's one thing to look at geopolitics. Those are going to be
huge drivers in how the industry progresses, but certainly in terms of the cost to develop the
next leap in fuel efficiency. And that's another phenomenally consistent trend in this business,
that every next leap gets even more expensive. So managing that and what levers you pull to reduce
the cost of operation and deliver the value of the airplane, that what is presumably going to be
a higher cost in the previous generation are all baked into this. It is hands down the most
fascinating industry in the world. I'm terribly biased in terms of my view of that opinion, but
took as always an aviation angle somewhere. It touches so many facets of our day to day life in
terms of what goods are sitting, whether it's on our desks in our offices or in our refrigerators.
How do you get fresh flowers from Africa and have them be delivered to Amsterdam or an iPhone that
flew over from Shenzhen? It's so part of our everyday life in terms of the economics of how the
world moves, how it communicates with itself culturally in terms of those interactions.
Really is just so fundamental to how we've created this industry that we frankly take for granted
every single day. People are far more likely to complain about, not dreadful than they are to embrace
the amazingness of it and what it has done for our lives. It's survivability and it's
ability to evolve given what is absolutely an existential reality of climate change and economics
is going to be the story of the next 10 years. I know you largely focused on the commercial side of
things, but cargo is obviously a big business here as well and that only to people can plan about
their inability to get from point A to point B, but also getting things from our factories to our
homes. So the impact on our lives is pervasive. I want to spend a little bit of time going through
the P and L of the company. We spoke to the strength of the business in 2018. Peak revenue was
well in excess of a hundred billion dollars. It's run rateing closer to sixty billion today, so
we're still almost 50 percent below peak. Is that just a function of producing a planes quicker?
What else is impacting the profitability of the business? The output for delivering your planes
is the big driver. In the more your planes you deliver, you can amazing things happen when you go
up and rate under the same factory. You overheads just get the benefit of spreading them across a
good number of units and your unit costs just fall tremendously, especially when your workforce
stays relatively stable. Volumes are the goal there. And certainly stability and reproducibility
and again, getting in that flywheel effect where you have a run beat of a production line running
42, 737 a month or more 42, 737 per month just for context. There are 21 manufacturing days in a month.
So that means that's two every single day. And when you can do that with a degree of consistency
where you're not having to stop a line because of supply chain issues or you're missing engines or
you've got to forbid you have another safety crisis, that is just it goes straight to the bottom line.
It creates a really virtuous flywheel within the organization where it has a stable
drum beat. And so yes, those numbers that $100 billion was 100% driven by a stable,
growing rapid tempo of aircraft production. And so if we kind of zoom out, like basic summary from
a traditional business analysis perspective is that this is really a wonderful business. You have
significant barriers to entry in a regulated industry. You have high switching costs. If any of
their customers want to change fleet, they would incur significant costs and expenditures related to
trading their employees and maintenance. The customer base is relatively diversified,
supplier base, likewise, perhaps there's some soul-surf nature of what they do, but many of which are
not. What kind of challenges do they face? We know at the speed of production, safety considerations,
but it seems like an incredibly entrenched industry and an established player within that industry.
And is it really just at these existential questions that you spoke to kind of or what should
keep those interested in Boeing up at night? The biggest challenges facing Boeing and Airbus
are global. And yes, everything you just said is true in terms of the barriers to entry,
the stability of it all. I think fundamentally, even as all these external forces are bearing
down on Boeing and Airbus. And I think there's a recognition within both companies that how you
maintain your own house is going to be the thing that allows you to weather these storms. That's
cultural, that's strategic in terms of having a supply chain that works with you and not against
you to have, be less adversarial and to have a customer base that sticks with you over the long
term to have those relationships. So I think the government relationships that come along with that
as well all play into that. So the biggest threats to Boeing and Airbus are themselves
making up series of compounding missteps that lead them away from their fundamental goal of
number one acting as strategic assets of the US and the EU, but also delivering airplanes. And ultimately
the outgrowth of all that when you do that well is shareholder returns.
Our customer, you conclude in question, our lessons you can take away from this business from
potentially an investment perspective, but also an operating perspective and apply to other
businesses outside of aerospace and defense. I'd be curious on your read there. Yeah, it's
interesting. I've had a long term editorial series in my head that I've written about at times
between the similarities between the iPhone and Boeing airplanes. Boeing and Apple are very,
very different companies structurally and strategy wise, but they face a lot of the same challenges.
So if you think about the iPhone 15, which we just had announced, and you think about the Boeing
triple 7X, which is in development right now, you look at two products that have reached a
point of maturity and the amount of evolution that incremental evolution that now goes into them.
So everyone wants the next radical, what is the iPhone 15, this radical change from the 15?
Well, you see the life cycle of these two products are really maturing in a really profound way.
What changes? It's the camera. It's the engines. It's the processors. Little avionics changes,
but fun amount of the form factor remains the same. So you watch these two products evolve over time,
and you think about how you transition to that next new form factor. We've got the Apple Vision
Pro headset coming and how that is sort of the sum total of all the different technologies that
they've honed over the last 15, 16 years since the iPhone was unveiled. So you can see them start
this new product category. I find it interesting that you have Boeing looking for that next product
category, but it's really, really challenging. This is where the divergence happens in terms of
the maturity of each business. The better, the richer your huge cost is huge. The market is uncertain,
but they are tracking closer to each other than I think anyone realizes. The similarities and
the differences are important in terms of understanding the evolution of both companies.
And in many ways, the importance of growing demand from China and India being equally important.
This has been a wonderful story. We appreciate your time. Thank you for joining us. My pleasure.
Thanks for having me. To find more episodes of breakdowns ranging from Costco to Visa to Moderna,
or to sign up for our weekly summary, check out JoinColosses.com. That's J-O-I-N-C-O-L-O-S-S-U-S.com.
