Key Points:
- Operational Recovery - Following a 2024 bookended by the mid-flight loss of a plane door in January and a production-halting strike in the 4th quarter, Boeing’s production lines are back operating at full capacity.
- Moreover, the $21b equity raise materially strengthens the balance sheet. The company started 2025 with $37.8b in net debt, compared to $55.4b by the end of the 3rd quarter.
- However, external headwinds abound. The company faces many non-controllable challenges, including a likely increase in costs due to a more protectionist trade policy, and more restrictive and competitive foreign markets for its defense equipment due to geopolitical realignment.
Turbulent 2024 - Start With a Falling Door (Mid-Flight), End With a Strike
In January, a defectively installed door fell out of a Boeing 737 Max 9 mid-flight between Portland, OR and Ontario. The incident led to tightening FAA regulations and a production cap of 38 units per month for the 737 Max, and an investigation that remains active today.
Also, between September and November the company had a tough contract negotiation with the IAM Union, which included strikes and the halting of production of 737, 767, 777 and some military units. The negotiation started with a 25% wage increase proposal over 4 years, and ended with a 38% increase plus a $12,000 bonus - and it cost the company up to $50m per day of stoppage.
But Management Turned It Around (And Then Some)
By the end of 2024, the strike was resolved, and the production line reached steady-state in an impressively short time. CFO Brian West, speaking at a Bank of America conference last week, indicated the company already ramped up production of 737 Max’s to the 38 unit monthly cap and expects to reach 42 in a year, contingent on regulatory approval. In addition, the 787 Dreamliner, which is not subject to the cap, is already operating at 5 units per month, and the company targets to gradually increase the production line to 7 units per month.
In addition, management issued $21b in new equity alleviating its over-leveraged balance sheet. Despite the multiple challenges, the company issued 112.5m of common shares at $143/sh, plus $5b in convertible preferred shares. That brought the net debt (including pension liabilities) to $37.8b at the end of the year, from $55.4b at the end of 3Q.
But Protectionist Trade Policies Threaten Costs
Tariffs are likely to increase costs. The company indicates that steel and aluminum represent about 1-3% of direct manufacturing costs, but third-party suppliers may have a harder time absorbing the rising cost of materials (and in some cases, lead to problems finding supply altogether).
In the near term, Boeing is confident they carry enough inventory to offset supply uncertainties, but it is highly probable that the company would have a significant increase in costs.
Retaliatory Tariffs Have Targeted American Plane Manufacturers Before
Unlike the US’s administration approach of broad-based tariffs, foreign countries tend to respond with more strategically directed countermeasures
For example, during the 2017-2018 U.S.-China trade dispute, the US applied tariffs on a wide range of Chinese goods reaching $240b by the end of 2018 (10% to 25% depending on the item, from raw materials to manufactured goods to food and textiles). By contrast, the Chinese retaliation affected a smaller amount of trade, but with a narrower and strategic scope - $100b of goods, including cars and airplanes made in the USA (alongside politically sensitive crops, beef, and others).
This time around, the administration has announced - but not yet imposed - a greater set of tariffs affecting more countries. If history is prologue, the response would be equal to 2018: narrow tariffs targeting politically sensitive sectors, including airplane manufacturing.
Foreign sales represent a slight majority of Boeing’s commercial aircraft sales, so a slowdown in exports would be hard to offset with an increase in local sales, to the extent that tariffs help protect against competitive imports.
Geopolitical Realignment Hurts Boeing’s International Defense Business
The realignment of geopolitical forces has triggered a vigorous effort from European governments to shore up its local defense industry. The latest edition of The Economist (March 22nd, 2025) carries an analysis of the material transformation in the European defense industry. It notes that capital expenditures have expanded 64% since 2021 (using a sample of 10 large companies with public data), which has led to a 3x increase in the production of 155mm artillery rounds to about 1mn units - leapfrogging the US’s production capacity of 600m.
This aggiornamento of the European defense industry will have limited short-term effects, but in the long-run it could lead to stiff competition for international orders in Europe and abroad. The most glaring weakness of European defense contractors is the lack of large-scale orders. The industry is fragmented, with national governments prioritizing domestic producers. This limits the scale of each company, hampering the ability to invest in R&D for the most advanced weaponry. However, as Europe transits to a single-buyer centralized model, the decay of the local aerospace industry may be reversed.
Foreign sales represent about 25% of Boeing’s defense sales, so a reduction in this business could be offset by an increase in domestic backlog. But that is a hypothetical scenario with its own problems, particularly as the administration has also indicated aggressive cost reduction goals in military procurement.
