Ever since a door panel blew out on a Boeing 737 Max three miles over Portland, Ore., on Jan. 5, regulators have unleashed a rash of restrictions, audits, and mandates that have left the iconic manufacturer operating in a straitjacket. (You can read Fortune’s full feature about Boeing’s travails here.) But shortly after that cataclysm, the U.S. Department of Justice gave an extra tug on the straps, and possibly made it tougher for Boeing to free the arms lashed behind its back. Though little noted at the time, Boeing’s 10-K, filed on Jan. 31, disclosed that the DOJ is reviewing the deferred prosecution agreement (DPA) that it signed with Boeing in early 2021 following two of the half-dozen deadliest crashes in the past decade, the Lion Air and Ethiopian Airlines disasters in late 2018 and early 2019, respectively, that claimed the lives of 346 passengers and crew flying aboard Boeing 737 Max jets.
As part of the pact, Boeing agreed to pay $2.5 billion in fines and damages divided among the DOJ, the airline customers hobbled by the Max’s almost two-year grounding, and the victims’ families and heirs. The DOJ also hit Boeing with criminal charges for concealing problems with the new flight control system that caused the tragedies, but effectively agreed not to prosecute if, for the following three years, Boeing would substantially strengthen its safety and compliance programs and provide thorough and accurate data on its aircraft designs and production processes. Put simply, the deal left Boeing vulnerable to a new DOJ crackdown if it screwed up again.
The blowout heard round the world amounted to an open invitation for the DOJ to examine whether lax safety procedures the pact was supposed to fix triggered the new disaster. In late February, Bloomberg, the New York Times, CNN, and other outlets independently reported confirmation from anonymous sources that the DOJ and the U.S. Attorney in Seattle are investigating whether Boeing had breached the agreement. (Boeing hasn’t commented, and the DOJ wrote Fortune in an email, “Decline to comment.”) If the department finds that the planemaker violated the pact, it can extend the restrictions already in place or impose new strictures that would further curb Boeing’s freedom of action and also impose big fines.
The threat of a new DOJ clampdown is hardly the only menace Boeing is facing. On Feb. 26 the FAA issued a sharply critical report slamming Boeing’s safety culture as “inadequate and confusing,” noting a “disconnect” between senior management and the manufacturing personnel on ensuring safeguards. The following day, the agency gave the planemaker a 90-day deadline to develop a comprehensive plan to address “systemic quality-control issues.” The National Transportation Safety Board (NTSB), the agency that investigates airline accidents, is conducting a probe that it says will last 12 to 18 months into what caused the mid-flight debacle. In a preliminary report, the NTSB found that Boeing workers removed the panel at the 737 plant in Renton, Wash., but didn’t reinstall four bolts when they replaced the two-by-four-foot assemblage, so that Air Alaska received the aircraft without the securing bolts in place.
The regulatory onslaught goes well beyond investigations and audits and to the heart of Boeing’s operations. The FAA has installed dozens of inspectors in Renton overseeing all aspects of its 737 production. And the watchdog has temporarily capped production of the 737 Max at 38 per month, far below the target of 50 Boeing planned to reach by 2025 or 2026. It also required that Boeing put on hold its blueprint for a Max assembly line at its Everett, Wash., factory that was central to ramping up future production of the bestselling aircraft.
The outlook for Boeing and its stock
Here’s why the possibility of a new DOJ haymaker is especially concerning: Despite all the other regulatory woes and 737 production limits, Boeing’s financial fortunes appeared on the upswing. That’s the view its leaders are selling hard. During the Q4 earnings call on Jan. 31, CEO David Calhoun predicted that Boeing would lift its free cash flow to $10 billion by 2025 or 2026. Indeed, after already bouncing from huge post-crashes and COVID losses, it managed to garner $4.4 billion in free cash flow for 2023.
Now the big question is whether all the regulators pulling on the buckles and loops of Boeing’s straitjacket, with a potential yank from Justice to come, will seriously delay what looked like the start of strong comeback.
Prior to the Air Alaska catastrophe, Boeing appeared en route to at least approximating its fantastic run prior to the two fatal crashes. In an extraordinary ascent from the close of 2010 to early 2019, it proved masterful at working the lever that more than any other drives share prices higher: generating bigger and bigger profits on each dollar it added in capital.
From the start of 2010 to the close of 2018, Boeing grew its adjusted assets from $78 billion to $135 billion, or 71%, according to a measure called COROA, or “cash operating return on assets,” developed by noted accountant Jack Ciesielski. But its “operating cash flow” exploded almost fivefold, or by 400%, from $3.6 billion to $17.1 billion. The magic? Boeing generated 22 cents in extra cash flow from every $1 in new assets. By early 2019, it had tripled its COROA from 4.6% to 12.1%. For 2018, its COROA (cash generated by all the assets such as inventory, PP&E, and goodwill still deployed in the business) exceeded those of virtually every big industrial name, including Honeywell, Lockheed Martin, Danaher, and Northrop Grumman.
Its share price followed the liftoff in profitability. From the end of 2010 through March 2019, Boeing notched an annualized total return of 29.5%, easily beating Microsoft (21.7%), Apple (19.6%), and Alphabet (18%), not to mention the S&P 500 at 14%. In those eight years, its stock vaulted sixfold from $73 to $364.
But from 2019 to 2022, as safety problems hidden for years erupted into the accidents and delays that hammered its results, Boeing suffered one of the most sudden, dramatic reversals in corporate history. In those three years, it suffered $21 billion in GAAP net losses, and its COROA, our return on asset metric, swung from over 12% to an annual average of negative 4.2%. Its stock followed suit, collapsing since the peak in early 2019 to $201 on March 1, a drop of 45% that erased $100 billion in market cap.
Even if Boeing achieves the goal that management predicts by reaching $10 billion in free cash flow by 2025 or 2026, that figure would still lag the peak of $13.6 billion posted in 2018. But if this colossus can really get there, its stock looks like a bargain. Shares would be selling at just 10 times projected free cash flow in as little as two years. That its valuation remains so depressed speaks to the market’s serious doubts Boeing can deliver on that number.
As Ron Epstein, an analyst for Bank of America, told CNBC on Feb. 29, “Number one for the company will be quality compliance and culture; that stuff comes first. This investigation plus the FAA and NTSB are pushing back its goals. The financial targets will have to come later.”
The regulatory house arrest that just got a potentially new guardian, the DOJ, makes the $10 billion target a much longer haul. Boeing enjoys the most singular advantage of virtually any major company. It shares with European consortium Airbus what’s essentially a global duopoly in a giant business, the production and sales of large commercial aircraft. The two capture practically every order in a fast-growing field whose rapid advance is ensured as growing global wealth and raw demographics inevitably swell the world’s hunger for air travel.
That business model’s the envy of any manufacturer, and in the pre-crash years, Boeing showed just how incredibly profitable it could prove. Then Boeing’s self-inflicted mistakes staggered one of the world’s greatest cash machines. As long as the regulators, including an unforeseen extension of the DOJ guardrails, keep their grip on Boeing, expect its results to be delayed at the gate, instead of cruising at 35,000 feet.
