Boeing swung to its first annual loss since 1997 as 737 MAX costs doubled to $19 billion and the aircraft manufacturer indicated it would cut production of its bigger 787 Dreamliner aircraft, currently its main source of income.
Boeing, struggling to restore public confidence and recover from the biggest crisis in company history, halted production of the once fast-selling 737 MAX grounded in March following two deadly crashes. The company is immersed in compensation talks with airline customers and dealing with lawsuits from victims’ families and a criminal probe.
Boeing shares were 1.2% higher, as analysts expected an even larger charge for 737 MAX costs. The stock lost about a quarter of its value since March 2019.
Deliveries of hundreds of jets remain frozen while Boeing updates the flight control system and software to address issues involved in both crashes.
President and CEO David Calhoun believes Boeing can win regulatory approval for the aircraft to fly by mid-year. Boeing initially targeted 737 MAX approval in 2019. That optimistic timeline, coupled with criticism that company culture valued profits over safety, contributed to former CEO Dennis Muilenburg’s departure.
Calhoun, who served on Boeing’s board for 10 years, dismissed suggestions he was an “insider” ill-suited to introducing radical change and pledged to overhaul the culture.
“I think I watched the same movie you did,” he told reporters.
Costs related to the 737 MAX grounding reached $14.6 billion in 2019 and the company warned of another $4 billion in charges in 2020 due to slowly re-starting production. Boeing estimated a $9.2 billion price tag for the MAX fallout in the third quarter.
The amount does not include potential settlements or damages from lawsuits the company faces from victims’ families in both crashes, which together killed 346 people. Boeing is also the target of a US criminal investigation into matters related to the 737 MAX.
It also remains to be seen whether passengers will fly in the 737 MAX once regulators approve Boeing’s fixes.
“I can’t market it or merchandise it or hang banners on it or change the name. That won’t convince anybody. But when they see it operating and they see it flown and they see pilots getting on, I think we’re going to be okay,” Calhoun said.
Boeing’s core operating loss was $2.53 billion, or $2.33 per share, compared with a profit of $3.87 billion, $5.48 per share, a year earlier.
Analysts expected Boeing to post earnings per share of $1.47 in the quarter, though several predicted a loss amid a wide range of forecasts due to uncertainties over the 737 MAX crisis.
The company booked more charges on its military tanker and space programmes.
JETS AND CASH
Adding to Boeing’s pain, demand for its bigger and more profitable jet – the 787 Dreamliner – waned in the face of the US-China trade war.
Boeing announced plans to lower the production rate for its 787 Dreamliner to 12 per month in late 2020 from 14 and now expects to cut the rate to 10 a month in early 2021, hurting cash flow at a time when debt is mounting.
Boeing reported negative free cash flow of $2.67 billion for the fourth quarter ended December 31, compared with a positive free cash flow of $2.45 billion a year earlier.
Cash flow recovery is not expected to start until 2021, Chief Financial Officer Greg Smith said.
MAX charges include $8.3 billion to compensate airline customers cancelling flights and scaling back growth plans in a hit to profits while MAX jets remain grounded.
US airlines took the MAX off schedules until early June and said they need at least 30 days after regulatory approval to prepare jets and train pilots. Boeing is recommending simulator and computer-based training.
Calhoun said it would take 18 months to work through its 737 MAX inventory once deliveries resume.
General Electric plans to slash 737 MAX engine deliveries to Boeing by half this year.
In a respite from the MAX crisis, Boeing successfully staged the first flight of a larger jet, the 777X, at the weekend.
Calhoun sent the aerospace giant back to the drawing board on proposals for a new mid-market aircraft, effectively shelving in current plans worth $15 billion to $20 billion.
He told analysts the decision was not about him “not wanting to do new airplanes. We’ll do one.”
“Right now it’s all about the MAX.”