Boeing doubles projected cost of 737 Max grounding to $18.4 billion

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Nearly 200 completed Boeing 737 MAX airplanes including some for Southwest Airlines, are parked at the Grant County International Airport in Moses Lake Washington. In March 2019, aviation authorities around the world grounded the passenger airliner after two separate crashes.

Nearly 200 completed Boeing 737 MAX airplanes including some for Southwest Airlines, are parked at the Grant County International Airport in Moses Lake Washington. In March 2019, aviation authorities around the world grounded the passenger airliner after two separate crashes. (Mike Siegel /Seattle Times/TNS)

Boeing doubled its projection of the cost of the 737 Max crisis Wednesday, adding another $9.2 billion in losses, accounting write-offs and estimated higher future production costs. This brings the total to date to $18.4 billion.

And in more bad news, the company announced a further cut in the production rate of the 787 Dreamliner. Boeing currently produces 14 of those widebody jets per month, seven each in Everett, Wash., and in North Charleston, S.C.

Boeing had previously said that would go down to 12 jets per month in late 2020 due to sluggish near-term demand and a dwindling backlog of orders. On Wednesday, the company effectively conceded that outlook was optimistic and said it will cut the rate to 10 jets per month in early 2021.

While the rest of the company was profitable, absorbing the Max hit in 2019 resulted in an overall loss from operations of $2.2 billion in the fourth quarter and a net loss for 2019 of just over $1 billion.

One analyst called it a “Kitchen Sink quarter,” suggesting that new CEO Dave Calhoun wants to put all of the company’s negative news out at once.

The Max grounding’s costs for the quarter include a one-time accounting write-off in the quarter of $2.6 billion related to paying compensation and making concessions to airline customers.

Boeing also estimated that lower 737 production would add a further $2.6 billion in additional costs, related to the increase in overhead costs as more time is needed to deliver airplanes than planned following the halt in production and the anticipation of a gradual ramp-up over an extended period after production resumes.

And finally Boeing projected another $4 billion that it will absorb as losses in the year ahead, to cover “abnormal production costs to be incurred during the suspension and gradual resumption of production at low production rates.”

Boeing had previously estimated the total cost of the grounding through the end of September at $9.2 billion. Wednesday’s additional $9.2 billion projection covers the impact from October through the anticipated return of the Max to service, which Boeing has said it expects by midsummer.

The loss for 2019 doesn’t take into account the $4 billion projection for abnormal costs in 2020.

Boeing CEO Dave Calhoun, who took charge earlier this month after the board fired Dennis Muilenburg, in a statement offered reassurance that Boeing is financially strong enough to withstand this massive accumulation of losses.

“We recognize we have a lot of work to do. We are focused on returning the 737 Max to service safely and restoring the long-standing trust that the Boeing brand represents with the flying public,” said Calhoun. “Fortunately, the strength of our overall Boeing portfolio of businesses provides the financial liquidity to follow a thorough and disciplined recovery process.”

Regarding the production rate cut on 787, Boeing said it hopes to hike the rate back up to building 12 jets per month in 2023.

That certainly will depends on orders from China coming through once the current trade tension with the U.S. ends. But even then, Boeing doesn’t anticipate getting back again to the current 14 jets per month production level.

For the full year, Boeing’s 2019 revenue was $76.6 billion, down from $101 billion in 2018.

The net loss for the full year was $636 million, or $1.12 per share, compared with a 2018 profit of $10.4 billion, or $17.85 per share.

Within the Commercial Airplanes division alone, revenue for the year dropped 44% compared to 2018 as it delivered more than 400 fewer jets. The unit’sloss from operations was $6.7 billion compared to a 2018 profit of $7.8 billion.

In the fourth quarter, overall company revenue was $17.9 billion, down 37% from $28.3 billion a year earlier. The net loss for the fourth quarter was $1 billion, or $1.79 per share, compared with a 2018 profit of $3.4 billion, or $5.93 per share.

As if its Commercial Airplanes division hadn’t delivered quite enough bad news, Boeing also booked a further $410 million write-off due to the recent setback on its Commercial Crew space program for ferrying astronauts and cargo to the International Space Station.

In December, a software error cut short the first orbital test flight of the Starliner crew capsule. The write-off will cover the cost of a potential additional uncrewed mission to get that program back on track.

In a note to investors Wednesday, Rob Stallard, a financial analyst with Vertical Research partners, referred to the earnings results as “the Kitchen Sink quarter,” implying that new CEO Calhoun wanted to get all the bad news out there in one go as he begins his tenure, hoping for nothing but upside from here forward.

However, as Stallard noted, “with the Max still not in the air, Boeing’s financial guidance remains suspended” and the markets will need more reassurance that this really is the lowest point of the Max crisis.

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