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John Engle
John Engle
Articles (607) 

Boeing's Space Division Faces a Serious Test in 2021

With its commercial aerospace business still reeling from the impact of the coronavirus, the company needs government contracts more than ever

January 19, 2021 | About:

While Boeing Co. (NYSE:BA) has long enjoyed extensive coverage from the media and Wall Street alike, little of it has looked beyond the ongoing 737 MAX saga in recent months. Yet Boeing is far more than a commercial aircraft manufacturer. Indeed, the aerospace giant is also deeply embedded in the defense and space sector.

Unfortunately, as I have discussed previously, Boeing's defense and space businesses have been having problems of their own. Now that the 737 MAX crisis appears at last to be approaching its end, tje company has an opportunity to focus attention on curing the maladies that continue to afflict its space division.

Lost in space

Boeing's space division has struggled in recent years, as Andy Pasztor and Andrew Tangel of the Wall Street Journal observed on Jan. 16:

"The company's biggest space initiatives have been dogged by faulty designs, software errors and chronic cost overruns. It has lost out on recent contracts with the National Aeronautics and Space Administration to return science experiments and astronauts to the moon, amid low rankings on price and technical merit."

Boeing has been a key player in U.S. space strategy from the very beginning. Indeed, as I have observed before, the company has spent decades building relationships and cultivating alliances within the Pentagon and on Capitol Hill that have won it many lucrative space-related contracts. Unfortunately, a number of embarrassing setbacks have begun to threaten that cozy relationship.

Of particular concern is Boeing's Starliner spacecraft, which failed to dock with the International Space Station in December 2019 thanks to a pair of software glitches. As a result of the failure, Boeing has fallen behind rival SpaceX, which successfully delivered astronauts to the ISS last year.

Other setbacks over the past year have included the scrapping of the XS-1 Experimental Spaceplane program, exclusion from the latest lunar lander development contracts and the opening of an ethics probe by NASA's inspector general.

More important than ever

The coronavirus pandemic has caused a remarkable divergence in the fortunes of the commercial and government aerospace segments. As I have covered previously, aerospace companies with significant presence in the military and space sector have weathered the economic storm far more successfully than those focused exclusively on the commercial sector. However, that has not been the case for Boeing.

During the first nine months of 2020, Boeing's defense and space segment recorded a profit of just $1 billion, down a whopping 60% from 2019. In essence, its space and defense has fallen on hard times at exactly the wrong time, as Pasztor and Tangel pointed out in their recent diagnosis of what ails Boeing's space wing:

"Boeing needs revenues from its defense and space arm, which makes everything from military jets to satellites, as a safety net as it navigates through the MAX crisis and slowed demand for new commercial jets in the pandemic."

New hope for the new year

After years of setbacks and delays, Boeing may soon have an opportunity to dispel lingering doubts about its space business. On Jan. 18, the company announced that it had completed a "full review" of the Starliner's software, setting the stage for another attempt at docking the spacecraft with the ISS. Starliner program manager John Vollmer certainly exuded confidence:

"The work this team put into exhaustively wringing out our software is a defining moment for the program. We're smarter as a team having been through this process, and most importantly, we're smarter as a human spaceflight community...As we continue carrying out these critical milestones and reviews, we remain true to our values of safety, quality and integrity. Completing OFT-2 brings us one step closer to our end goal of transporting astronauts to and from the International Space Station this year."

With an unmanned flight tentatively scheduled for March 29, the software updates will soon be put to the test. If Boeing can deliver this time, it may go a long way to restoring confidence in its space bonafides and open the door to fresh NASA and Pentagon contracts.

My verdict

I suspect many investors will view the forthcoming Starliner flight as a key test for Boeing's space division. If the flight succeeds, Boeing will be back in the running in the new space race, though it will still have to play quite a bit of catchup to pull ahead of its rivals. If Starliner fails again, the company may never be able to recover its former position as a frontrunner in manned spaceflight.

With its commercial aerospace business unlikely to recover fully anytime soon, Boeing's space division is more important than ever. Consequently, I recommend following the Starliner story very closely in the coming months.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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