(Bloomberg Opinion) -- Boeing Co. is the least deserving of the corporate needy in the coronavirus crisis, but the nature of its position means it must get a special cut of a $2 trillion aid package working its way through Congress. As the only U.S. company capable of producing a major commercial jetliner, the country’s biggest exporter, and a major defense contractor, it’s the linchpin in a supply chain responsible for 2.5 million jobs. It’s not too big to fail; it’s too important to fail. Lawmakers are understandably balking but their consternation would be better directed at a conversation around what kind of conditions can make the concept of U.S taxpayer assistance palatable for a company whose 737 Max jets ferried 346 people to their deaths and whose history of risky decision-making is at least partly to blame for the current cash crunch.
The sticking point for Congress on much-needed fiscal stimulus to blunt the economic impact of coronavirus-related shutdowns across the country is how to distribute a $500 billion pot of corporate-leaning bailout money and what sort of strings should be attached. Of that, $50 billion in loans would reportedly go to the commercial-airline industry, while cargo carriers would get $8 billion. Another $17 billion would go to “businesses critical to maintaining national security.” The remaining $425 billion is for businesses, state and local governments, with little detail beyond that of who would be eligible for the funds and most of the decision-making left to Treasury Secretary Steven Mnuchin. That’s to the chagrin of Democrats, who have blocked the bill in an effort to put more parameters on how the money is used and ensure protections for workers. The two sides appeared to be approaching an agreement that would ensure more oversight over the money.
Boeing had sought a minimum of $60 billion in support for itself and its suppliers, but negotiators were at one point looking at language that would have effectively blocked Boeing from tapping into government funds because of its pre-coronavirus problems, according to the Washington Post. The current status of aid for Boeing is unclear, although President Donald Trump reiterated his support for a bailout on Monday, saying Boeing will “need some help,” the same day the company said it was shutting down its Seattle-area manufacturing hub for two weeks after a worker died of coronavirus complications.
In an apparent attempt to get ahead of lawmaker’s criticism, Boeing late Friday announced that it was suspending its dividend and that CEO Dave Calhoun and chairman Larry Kellner would forgo their pay until the end of the year. That’s the bare minimum that should be expected of all companies that take government funds and it’s reasonable to expect special conditions for Boeing given its unique situation. Some ideas:
Resetting Relations with the FAA: The Max crisis highlighted the degree to which the Federal Aviation Administration had delegated certification work for new airplanes to company employees, allowing for obfuscation and an apparent cozy deference among agency management to Boeing's own goals and timelines. When then-CEO Dennis Muilenburg was hauled in front of Congress last October, he repeatedly deferred when questioned about the company's relationship with the FAA and declined to provide any public suggestions for guardrails that would improve the certification process. The general impression was that Boeing was hoping for more minor revamps, rather than a wholesale reevaluation. Any bailout money should be tied to a commitment to work with Congress on reforms that make aviation regulation safer and protect against future crises. Included in this should be tougher rules around the revolving door for Boeing lobbyists and the FAA. It seems unhealthy that an executive like Ali Bahrami be allowed to flip-flop between safety oversight for the FAA and lobbying for Boeing and other manufacturers’ interests at the Aerospace Industries Association.
Restricting M&A: In the wake of its own bailout during the 2008-2009 recession, General Electric Co. sold assets to convince regulators to drop the cumbersome label of systemically important financial institution. But a breakup doesn't seem to be an answer for Boeing here: Splitting its defense and commercial businesses would likely render both sides of the company less competitive and wouldn't make either less important. There should, however, be a rethink of whether it’s in the country’s interest to allow Boeing to get even bigger from here. Before the Max crisis and the coronavirus crisis, Boeing had been aggressively pushing into the realm of its suppliers with a series of acquisitions and joint ventures aimed at capturing more lucrative maintenance and repair work for itself. One possible bailout parameter could be an end to this foray in vertical integration. Meanwhile, Boeing’s $4.2 billion purchase of a majority stake in Embraer SA’s commercial-jet program is still pending because of a holdup by European Union regulators. Without the deal, Boeing would essentially cede the market for regional planes to Airbus SE, which acquired the A220 program from Bombardier Inc. But following through with it adds to the debt load and it may be hard to justify prioritizing the purchase over, say, workforce protections.
Backstopping the Pension: While the Republican proposal reportedly includes a ban on new buybacks for the duration of the bailout loan and a two-year limit on salary increases for the upper echelons of management, the duration of these prohibitions should be expanded for Boeing. One potential benchmark is returning its pension to healthier funding levels. The company decided in 2017 to plug its wide pension deficit with $3.5 billion of its own stock. “It’s an irresponsible thing to do certainly from the perspective of the plan participants,” Daniel Bergstresser, a finance professor at the Brandeis International Business School, told Bloomberg News at the time. “Ideally, you would like to put assets in the pension plan that won’t fall in value at exactly the same time that the company is suffering.” You can say that again. A portion of Boeing’s pension may be recoverable given its defense work for the U.S. government, but even factoring in that adjustment based on ratings firm standards, the unfunded balance was about $13 billion at the end of 2019, according to Bloomberg Intelligence analyst Matthew Geudtner. That’s higher than any company on the S&P 500 Index apart from General Electric Co. and Exxon Mobil Corp. And that was before the 70% drop in Boeing’s shares in this year’s coronavirus sell-off and the plunge in interest rates following two emergency Federal Reserve cuts. Every 25-basis-point decrease to the 3.3% discount rate assumption at the end of 2019 adds about $2.8 billion to that obligation. Should the current market moves hold, Boeing’s net pension deficit will have widened by about $10 billion, Vertical Research Partners analyst Rob Stallard estimated last week.
Boeing deserves to be punished for its mistakes, but its rank-and-file workers do not. Allowing a bailout that prevents mass layoffs while ensuring that Boeing is a better corporate citizen seems like the best way forward.
This assumes a similar adjustment for defense contractor Lockheed Martin Corp.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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