The outlook for Boeing Co. to earn copious cash flow is bright. It just turned free-cash-flow positive in the second quarter after years of losses, and the company already has its sights on cash earnings of $10 billion a year. This is driven almost entirely by a rebound of commercial aircraft production.
In two years as Boeing’s chief executive officer, Kelly Ortberg has righted the ship on the manufacturing chaos that had caused the planemaker to run shadow factories and struggle with quality. The turnaround has been impressive enough for the Federal Aviation Administration to trust Boeing again to self-certify aircraft.
See more: Free Cash Flow: Quality in a High-CapEx Environment
The cash-generation recipe is written: Make high-quality aircraft, ensure the supply chain keeps pace, keep costs down, avoid mistakes and cash in on the $597 billion backlog of aircraft. The company can also add to that cash flow by improving performance at its defense, space and security unit, which is known as BDS and carries a lot of dead wood.
That’s why it’s good news for shareholders that Boeing is shedding some of that dead wood after reaching an agreement with Archer Aviation Inc., a startup that’s building a new type of electric rotorcraft. Boeing is taking a 20% stake in Archer and naming a director to the board in exchange for three businesses that are tucked under BDS. The deal has a potential value of $1 billion or more, Sheila Kahyaoglu, an analyst with Jefferies, wrote in a note on Monday.
One of the businesses is Wisk Aero, which is experimenting with electric vertical takeoff and landing aircraft, which results in the clunky acronym eVTOL. Another is Insitu — a fixed-wing drone maker that has $200 million of annual sales and actually turns a profit. The third business, SkyGrid, offers air-traffic management for when — if — drones and eVTOLS crowd the skies.
Boeing, which pledged to participate in Archer’s next round of funding, will make money if the startup is successful at selling these electric rotor aircraft. Boeing also keeps access to valuable Wisk autonomous flight technology.
This shouldn’t be the last deal Boeing does to shed underperforming businesses, especially at BDS. Several of its space businesses that are geared toward exploration and human flight lose money and are dependent on NASA. A big problem for Boeing and other legacy space companies is that NASA is embracing the lower-cost options of newer commercial space entrants, including SpaceX.
United Launch Alliance, the rocket-launch partnership between Boeing and Lockheed Martin Corp., can carry satellites to geosynchronous orbit or astronauts as far as the moon, but the rocket isn’t reusable, and the cost is much higher than launches by SpaceX, which pioneered the reusable rocket. The alliance is working on capturing and reusing the engines on its newest rocket, Vulcan Centaur, which was designed to be expendable. This effort comes as the Department of Defense is pushing contractors to invest much more for missile production.
The most likely scenario is that the alliance gets left in the dust as SpaceX begins commercial flights of its fully reusable Starship rocket and Jeff Bezos’ rival Blue Origin hustles to catch up with its partially reusable New Glenn rocket.
Boeing is also grappling with the troubled Starliner spacecraft that’s designed to take astronauts to the International Space Station. Starliner hasn’t flown since carrying two astronauts to the ISS and then returning to Earth without them because of technical difficulties. SpaceX ended up taking the astronauts home on its Dragon capsule. Boeing continues talks with NASA about when Starliner will fly again.
Boeing provides engineering and maintenance support for the ISS. That contract will end along with the space station, which is scheduled to be retired around the end of the decade and sent hurtling toward Earth to burn up in the atmosphere. Boeing’s best course of action would be to package all these underperforming space businesses and strike a deal with a space startup similar to the transaction with Archer.
The company has defense-related space businesses, especially for military satellites, that fare much better. This includes the autonomous X-37B spaceplane that is launched on a rocket, returns to Earth and is reused. These are the tools that can help Boeing bid on contracts for Golden Dome, an ambitious space-based missile defense plan. These businesses fit better with Boeing’s defense activities than its space operations, and they have potential to add to margin growth.
It’s unclear whether a package of space-exploration businesses would entice one of the rising commercial space companies enough to offer Boeing a large equity stake instead of cash. Certainly, Boeing’s connections with NASA and the engineering talent are attractive. Then again, the go-slow culture that has put Boeing behind the curve on commercial space could be a drag on the entrepreneurial spirit at startups such as Blue Origin or Rocket Lab Corp.
For Archer, the deal with Boeing gives the startup more inroads with defense. Insitu has military contracts to fly its long-range drones for surveillance. Archer is also working with defense startup Anduril to build a version of its eVTOL for the miliary, which is interested in autonomous flight. Perhaps the military pilotless flights could help reduce the timetable for the FAA to approve autonomous flights for civilian use.
Until Archer and other eVTOL makers can go pilotless, these machines will be fancy, electric helicopters that have a low noise profile but are still expensive per seat. Autonomous flights will allow the price point to drop to a level that entices more traffic-weary people to fly across town. Passengers may be more willing to hop on a pilotless aircraft as robotaxis become more commonplace and prove to be safer than human drivers. This is all still years away and faces all kinds of hurdles.
At that point, Archer and other Evtol producers may reach that dream of skies peppered with electric rotorcraft that ferry commuters over congested roads. Boeing’s investment in Archer would then provide a handsome payback. The planemaker would be wise to find a similar arrangement for its underperforming space assets.
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