“Several years went by before the public grasped what the Wrights were doing; people were so convinced that flying was impossible that most of those who saw them flying about Dayton [Ohio] in 1905 decided that what they had seen must be some trick without significance – somewhat as most people today would regard a demonstration of, say, telepathy. It was not until May, 1908 – nearly four and a half years after the Wright’s first flight – that experienced reporters were sent to observe what they were doing, experienced editors gave full credence to these reporters’ excited dispatches, and the world at last woke up to the fact that human flight had been successfully accomplished.” -Frederick Lewis Allen, from “The Big Change: America Transforms Itself, 1900–1950” (1952)
Considering Wright Brothers’ mind-bending invention, it may be quite surprising what Warren Buffett wrote in his 2007 letter to shareholders:
“…if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
That quote is a chilling reminder that incredible human ingenuity may not necessarily lead to dazzling returns for the investors. Buffett mentioned the above quote in the context of airlines, but it is somewhat relevant for aerospace OEMs as well. World Encyclopedia of Aircraft manufacturers, published in 1993, identified 3,272 companies that had built aircraft at any point in history, almost 40% of which were based in the US. With the passage of time, for all intents and purposes, aerospace OEM had evolved into an effective duopoly of Boeing and Airbus and the rest of them either failed or got acquired. But even for Boeing/Airbus, it wasn’t just good old capitalism that let them win, but it also required handholding from the state or bit of regulatory capture to help them dominate aerospace OEM. As a result, shareholders of Boeing/Airbus did really well over the long-term. However, today we are at a point of time when investors are asking questions whether that will remain to be the case going forward.
Here is the outline for this month’s deep dive:
Section 1: Short Primer on aerospace OEM: I have briefly discussed why aerospace OEM has high barrier to entry, how China is trying to encroach into this industry, and some other broader industry dynamics primarily focusing on commercial segment.
Section 2 Boeing Business Model: Boeing’s four divisions (BCA, BDS, BGS, and BCC) were explained, but given BCA’s significance to Boeing, it is at the crux of the discussion.
Section 3 The five mountains ahead of Boeing: Five of the biggest challenges ahead of Boeing, namely post-737 MAX scars, competition from Airbus, post-Covid recovery timeline, repairing/restoring relationship with China, and Boeing’s culture, are discussed in this section.
Section 4 Valuation and model assumptions: Model/implied expectations are elaborated here.
Section 5 Management, incentives, and capital allocation: Boeing’s current management, their incentives, and a brief history of Boeing’s capital allocation is shown here.
Section 6 Final Words: Concluding remarks on Boeing, and brief discussion on my overall portfolio.