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Sell Boeing Until Further Notice

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Summary

  • Boeing has a cockroach problem.
  • Lack of oversight - "unchecked power" always corrupts.
  • Opportunity cost of holding Boeing stock is too high.

Sell Boeing (NYSE: BA)

A lot has been written about Boeing and its stock. A google search of "Boeing 737 Max" returns 101 million hits. "737 Max 8" results in 53.8 million.

Boeing's current challenge comes down to two realities of human nature.

1. The "unchecked power" corrupts, due to the expected profit motive and the euphoria from feeling invincible.

2. The cockroach theory – if there is one cockroach in your kitchen, then there is certainly many more in your house.

First, Boeing's management and the manufacturing teams have enjoyed a total lack of oversight from the Federal Aviation Administration (FAA). A recent New York Times investigation concludes that the FAA "handed nearly complete control to Boeing" of the 737 Max production. The Roots of Boeing's 737 Max Crisis: A Regulator Relaxes Its Oversight. The NY Times also concludes that the dereliction of the FAA even "compromised the safety of the plane.

Boeing's management and engineers must have known that such a critical part of a plane needed a closer oversight and approval from the FAA. Any company manufacturing a product, as critical as a plane, and surrounded by lawyers, smart engineers, usually knows all of the compliance requirements. Within boundaries of the law and compliance demands, the company then produces the goods in a cost effective manner. In order to lower the cost of manufacturing, the 737 Max avoided minimal FAA inspections, and reduced the time to market. Boeing knew the software required that oversight, but chose to omit this necessary manufacturing process, in lieu of quicker turnaround and profit. It is now common knowledge that that Boeing was overseeing the FAA instead of the other way around. https://www.seattletimes.com/business/boeing-aerospace/with-close-industry-ties-faa-safety-chief-pushed-more-delegation-of-oversight-to-boeing/

The less oversight one suffers where there is supposed to be a strict supervision, the more powerful one feels. It is human nature. If one could avoid the compliance rules that is expected to lead to quicker time to market and profits, one would naturally avoid it, feel powerful and experience the exhilaration of escape.

Boeing's management revealed its arrogance on March 27, 2019 by rejecting a broader oversight of its activities. https://www.washingtonpost.com/business/2019/03/27/global-aviation-industry-converges-renton-wash-boeing-details-max-software-fix/?noredirect=on&utm_term=.038367a9140c If everything were fine in the past manufacturing process of 737 Max, why would the current management reject an increased oversight for public safety from a level of no oversight at all?

Second, if the software problem on BA planes were easy to fix, they would have fixed it by now. Boeing has a cockroach problem. Given the management's adverse reaction to minimal oversight, I strongly believe more Boeing planes will have more problems in the future. I also think that the problem on the 737 Max is not going to be completely solved for another 20 months.

The engineers have been working on the Max 737 problem since October 29, 2018. That is nine long months. It is obviously not an easy patch to fix. Since October 2018, many more pilots came forward, explaining their dreadful experience flying the 737 Max. There are probably many more pilots who are afraid to come forward, because they need to fly the planes for work.

If it is taking more than nine months to fix a software patch and train the pilots for the new process, think about how much longer it would have taken to bring the 737 Max 8 to the market, if the FAA exercised a normal level of oversight and Boeing had complied with that process. Boeing however is still in self denial that its processes have worked well until now, albeit with no oversight, and refuses to make changes to the development process. It is difficult to calculate how much time Boeing saved, and how much money it had made by facing no FAA oversight and bringing the planes to the market rapidly, because we do not know the impact of FAA oversight on a plane manufacturing process easily.

The risk now however is too much oversight going forward. Is too much oversight going to reduce the productivity and creativity of Boeing's engineers and frustrate the management? The current crisis is already taking a tremendous amount of management's time.

I think Boeing needs a new management. I would sell the BA stock and buy something else as an "investment." The opportunity cost of holding BA with a cockroach problem is going to be higher than estimated in the longer time period. I expect more airlines cancelling the 737 Max jet orders, besides the Flyadeal and Indonesian carrier Garuda. Coupled with the cancellations and demand for lower prices from the airlines, (ALK, AAL, UAL, LUV, ALK, DAL, JBLU, AZUL, ALGT, SKYW, SAVE, ZNH, CEA, LTM, RYAAY) BA’s total cost to fix its current dilemma will be twice the original estimate of $5 billion.

I would buy AAPL, CHGG, TTD, RPD, CRWD, HXL, SQ, TEAM, PCTY, CYBR, DIS, or find other investments in biometric screening, electrical scooter, electric car battery makers, artificial intelligence, 5G,or genetic engineering, etc. At least I'll know what I am buying without a cockroach problem.

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Analyst's Disclosure: I am/we are long SQ, AAPL, DIS, CRWD.

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.

We do not own any airline stocks, or BA.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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