Deep Red Sea: Boeing losses mount as 737 MAX crisis continues

UPDATE 26-09-2019, 19:00 (UTC +3): Added comments from  Chief Executive Officer David Calhoun and Chief Financial Officer Greg Smith from Boeing’s earnings Conference Call.

As the 737 MAX is staying put at least until mid-2020 and cash flow further diminishes as Boeing posted record-low orders and deliveries’ numbers, the company published its Q4 and full-year results for 2019 with an update on the 737 MAX and the 787 programs, including the total costs of the groundings.

The latest financial update indicates how deep the manufacturer’s losses are. While it ended Q3 2019 with a profit of $895 million, mostly due to the admirable performance of Boeing’s Defense, Space & Security and Global Services divisions, its nine-month performance was already in the red. Losses amounted to $864 million, mostly related to the $4.9 billion charged the company voluntarily took due to the 737 MAX groundings shortly before it announced its second-quarter performance.

Nevertheless, Q4 2019 was an eventful period for the company, including the fact that its former Chief Executive Officer Dennis Muilenburg was ousted from the company. Boeing also expected the groundings of its “game-changer” aircraft to end during the period when it announced its Q3 results. However, persisting issues, such as the potential short-circuit of the controls of the horizontal stabilizer and onboard flight-control computer problems have delayed the return-to-service of the MAX.

Furthermore, Boeing announced that it would temporarily stop the production of the narrow-body on December 16, 2019. The production stop came into effect on January 6, 2020, as Boeing started redeploying employees working in Renton, Washington, to other facilities that manufacture other products.

Swimming in losses

Boeing ended Q4 2019 with a net loss of $1 billion and a full-year loss of $636 million.

The Commercial Division of the company, which recorded only 380 aircraft deliveries throughout 2019, ended the quarter with a loss of $2.8 billion and a full-year end result of $6.6 billion in the red. Revenues were down by 44% compared to 2018, as deliveries dropped from 800 to 380 throughout the year. Meanwhile, the Defense, Space & Security and Global Services branches reported a quarterly profit standing at $31 million and $684 million and a yearly profit of $2.6 billion and $2.6 billion, respectively.

David Calhoun, the newly inaugurated President and Chief Executive Officer of the Chicago-based manufacturer, recognizes that the company has “a lot of work to do” as Boeing aims to return the “737 MAX to service safely and restoring the long-standing trust that the Boeing brand represents with the flying public,” he added.

“Safety will underwrite every decision, every action and every step we take as we move forward. Fortunately, the strength of our overall Boeing portfolio of businesses provides the financial liquidity to follow a thorough and disciplined recovery process.”

“Rebuilding the relationships with our customers and our regulator in the process of getting the MAX back up is also critically important,” said Calhoun when answering a question during Boeing’s investors call, reiterating that the manufacturer is always “dependent upon these relationships.”

Whether the aircraft brings the same value of proposition as previously, Calhoun answered that he spoke directly to the biggest MAX customers and they expressed that they “still believe in the value of this airplane.”

Further financial liquidity is, reportedly, guaranteed by a $12 billion loan that Boeing secured on January 28, 2020. The company faces a difficult year in terms of net spend: without including the 737 MAX production restart, Boeing also aims to complete its tie-up with Embraer, which the Brazilian regulators approved on January 28, 2020. It still faces the hurdle of receiving the stamp of approval from the European Commission: the judgment day for that decision is set for April 6, 2020.

However, the manufacturer expects 2020 to be much more difficult in terms of cash flow. “Primarily due to the fact that MAX advance payments will be lower than in 2019 based on our latest 737 delivery assumptions,” states Greg Smith, the Chief Financial Officer of the company.

According to the manufacturer, the suspense of production and the following restart of the grounded jet will result in $4 billion of “abnormal production costs that will be expensed as incurred, primarily in 2020.” Production of the aircraft will resume before the groundings lift, something that is a “risk mitigator,” indicates the CFO. The production line will be slowly brought up in “a very methodical way” to ensure the stability of the production.

An updated projection indicates that the whole 737 MAX debacle will cost Boeing $18.4 billion.

Dreamliner production reduction

While its cash-cow, the 737 MAX has stayed on the ground since March 2019 after the second fatal crash of Ethiopia Airlines Flight ET302, the Boeing 787 Dreamliner was by far the most popular product from the manufacturer throughout 2019, as it delivered 158 units to airlines out of the total 380 deliveries.

Worryingly, the demand for the Dreamliner is also dropping: the production rate of the aircraft will be reduced from 14 per month to 12 per month in late-2020, with a further reduction in early-2021 to 10 per month. It will be once again increased to 12 per month in 2023. The reduction in demand is mostly associated with the China-U.S. trade war that has resulted in Boeing receiving zero orders from Chinese carriers since November 6, 2017, when Juneyao Air ordered one Boeing 787 Dreamliner. Out of the total 1485 orders for the Dreamliner, Chinese carriers account for 109 aircraft or 7% of the total demand. A further 56 787s are associated with Unidentified Customers.

During Boeing’s conference call, the manufacturer’s executives stated that it would be a “major stimulus” once “Chinese customers come back” as China and the United States conclude their trade deal negotiations. “There’s no reason to believe” that an order from a Chinese company needs to wait for Phase Two of the deal between the two countries, noted Calhoun.

Whether the New Midsize Airplane (NMA) is a go-ahead and is currently needed in the market, Calhoun stated that he does not believe Boeing has gaps in its product offerings, but he will “simply listen to customers and markets.”


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