Coronavirus rubs salt into Boeing's wound by crushing air travel
- A Monitor Desk Report 03 May, 2020 | 739 Views|-+
Dhaka: The American aircraft manufacturer Boeing had a terrible 2019 as its top-selling product 737 MAX was grounded by safety issues last March. Conditions are far worse in 2020 as the 737 MAX is still grounded, and now the COVID-19 pandemic has caused demand for new aircraft to shrivel up.
In 2019, the company repeatedly missed self-imposed deadlines to get the 737 MAX recertified. As a result, Boeing delivered just 380 commercial jets last year: down 53 per cent year over year. This caused the company to post a core operating loss of USD 3.4 billion and burn USD 4.3 billion of cash in 2019.
Not surprisingly, Boeing’s recent first-quarter earnings report was quite awful too. Given that airline executives almost universally agree that it will take a long time for air travel demand to recover, Boeing’s pain could continue for many years.
The pace of Boeing’s aircraft deliveries slowed again last quarter. The company delivered just 50 commercial jets, with the majority being 787 Dreamliners. As a result, the commercial airplanes segment reported a USD 2.1 billion operating loss. This included a USD 336 million charge to repair a substandard component on older 737 jets.
Investors should be far more concerned about Boeing’s cash flow. Boeing burned through USD 4.7 billion last quarter: more than its full-year cash burn for 2019. Between compensation payments related to the 737 MAX grounding, delayed aircraft deliveries resulting from customers’ distress, and Boeing’s need to support its supply chain, cash burn will likely continue to exceed reported losses for most if not all of 2020.
This has forced Boeing to steadily increase its borrowings. It ended Q1 with USD 38.9 billion of debt and USD 15.5 billion of cash and investments. As recently as the end of 2017, Boeing had negligible net debt, with USD 11.1 billion of debt offset by USD 10 billion of cash and investments. It also had a pension deficit of USD 15.9 billion as of the end of 2019. If anything, that pension deficit is bigger now, because of a sharp plunge in interest rates and weak stock market performance year to date.
Boeing’s management recognises that it will take a while for demand to return, especially for the wide-body jets that serve long-haul international routes. As a result, it is slashing 787 production by 50 per cent by 2022 from 14/month to 7/month and cutting 777 family production from 5/month to 3/month next year. Boeing had previously announced plans to reduce 787 Dreamliner output to 10/month by early 2021, but it had intended to start increasing production again by 2023.
Boeing also expects to ramp up 737 MAX output more slowly than it had planned previously. It currently estimates that the production rate will reach 31/month by the end of 2021. Prior to the 737 MAX grounding, it was in the midst of boosting production to 57/month.
While Boeing is doing its best to cut costs, dramatically lower production rates will put pressure on profit margins and lead to much lower free cash flow than the USD 13.6 billion the company generated in 2018. The commercial airplanes business accounted for 60 per cent of Boeing’s 2018 revenue and likely contributed an even greater proportion of its cash flow.
Furthermore, the near-term pain will extend beyond the commercial airplanes division. With airlines retiring lots of planes and desperate to cut costs, demand is now plummeting on the commercial side of Boeing’s services division which was the lone bright spot in Boeing’s first-quarter earnings report generating USD 708 million of operating income (up 8 per cent year over year) on USD 4.6 billion of revenue.
By the end of this year, Boeing is likely to have at least USD 35 billion of net debt, and its pension deficit could be close to USD 20 billion. And while management expects free cash flow to turn positive again next year, that would only be due to the one-time tailwind of delivering many of the 737 MAX jets assembled after the grounding last year and currently held in storage.
Boeing knows that it needs to solidify its balance sheet by repaying the debt it has incurred since the beginning of 2019. However, with free cash flow likely to remain weak for an extended period, that could take five years or more. Until then, the company’s dividends and share buybacks will remain suspended. Thus, Boeing’s annual free cash flow could remain well short of the all-time high of USD 13.6 billion reached in 2018 for the foreseeable future.