Boeing on Wednesday announced it will shrink its workforce further, saying that by the end of next year it will employ 31,000 fewer people companywide than at the beginning of this year.
That’s a cut of just over 19% — from 161,000 to 130,000 — almost double the previous plan to cut 16,000 jobs or 10% of the total workforce.
The brunt of the additional cuts can be expected to come in Boeing’s Seattle-area operations, where the company recently said it has already reduced employment by 13,000 through layoffs, buyouts and attrition.
“There’s no doubt that this moment is among the most difficult in our more than 100-year history,” said Boeing chief executive Dave Calhoun. “The COVID-19 impacts on our commercial customers continue to be devastating.”
He called the job cuts “tough but necessary action.”
The shrinking of Boeing goes beyond the workforce. Discussing the company’s third-quarter financial results on a call with Wall Street analysts, executives said they intend to reduce the overall real estate footprint of Boeing facilities by almost a third.
The one bright spot in Boeing’s outlook remains the imminent return of the grounded 737 MAX to service, expected to be approved by air safety regulators next month.
Notably on Wednesday, executives seemed to be avoiding the MAX name in favor of simply “the 737.”
Boeing is shrinking
Calhoun warned three months ago that more job cuts would have to be made beyond the 10%, without specifying a figure.
Though Boeing did not break down the local impact of the additional job losses announced Wednesday, many of the cuts will inevitably be made in the pandemic-hit Commercial Airplanes division.
Spokesperson Bradley Akuiburo said that “as with our previous workforce actions, we expect our corporate functions and commercial airplane and services businesses to be most affected.”
Boeing Commercial Airplanes boss Stan Deal wrote in a memo to his division Wednesday, “For the next few years, the reality is airlines will need fewer commercial airplanes, so we must match our production rates and our business to reflect this reduced demand.”
In July, Boeing said it would achieve its initial 10% target through 19,000 employees leaving while about 3,000 new hires joined the company, mostly on the defense and space side.
That round of cuts, now complete, included 8,320 employees companywide opting to leave with severance pay in two separate rounds of voluntary buyouts.
This time around, Akubuiro said that beyond natural attrition as employees leave or retire, Boeing is looking at a reduction of about 7,000 additional cuts company-wide via further rounds of buyouts and layoffs through the end of 2021.
Asked on CNBC Wednesday morning if this would be the end of the job cuts, CEO Calhoun said the forecast is “conservative” but added, “I will never just draw a floor.”
Recently, Boeing disclosed that it is considering selling its local Commercial Airplanes headquarters at Longacres in Renton.
On the call with analysts, Greg Smith, Boeing’s chief financial officer and executive vice president of enterprise operations, confirmed the company aims to significantly reduce its real estate, with many employees encouraged to remain working from home.
“We anticipate a reduction of approximately 30% in office space needs,” Smith said. “We’re reviewing every piece of real estate, every building, every lease, every warehouse, every site to look at how we can be more efficient.”
However, Boeing has no immediate plans for the massive empty space that will be left inside the Everett assembly plant when the 787 consolidates in South Carolina next year and the 747 ceases production the following year.
Calhoun said Boeing won’t move 737 production from Renton into that space as some have speculated. And he declined to commit to building the next new airplane there.
“We know we have some great skills in (Everett) … and that will factor,” he said. “But we’re not just going to try to fill empty space. That would not be in our best interest.”
In another ominous signal for Everett, Calhoun hinted that the entry into service of the new 777X — already pushed out from this year to 2022 — could be further delayed.
“While we continue to drive toward entry into service in 2022, this timing will ultimately be influenced by certification requirements,” Calhoun said.
That may have been merely the now-standard deference to the Federal Aviation Administration (FAA), but the regulator’s certification process for the 777X is expected to be more rigorous following the lapses in oversight during certification of the MAX.
Trying not to say “MAX”
Calhoun’s analyst call came just a day ahead of the two-year anniversary of the crash in Indonesia of Lion Air JT 610, and he began by expressing his sympathies with the family members of the 346 people killed in the two 737 MAX crashes.
Calhoun said the company still expects the MAX to return to service by the end of the year, pending FAA approval.
He said Boeing’s priority then will be starting the necessary modifications to get back in the air more than 450 MAXs that were built after the grounding and remain undelivered.
Boeing said it expects to deliver about half of those aircraft by the end of next year and most of the rest in 2022.
Calhoun said Boeing will keep the production rate for new MAXs at the Renton plant low until the number of parked airplanes is reduced.
“We’re determined not to create a bigger problem than we started with,” he said.
Because the Civil Aviation Administration of China (CAAC) is expected to approve the MAX to return to service later than the FAA and aviation regulators in Europe and Canada, Calhoun said the finished jets that are in storage for Chinese airlines will be left to the back of the line for later delivery.
However, he didn’t actually use the term MAX, which seems to be on the way out at Boeing.
During the conversation with analysts, Calhoun never once used the name. Smith did so a few times, but for the most part the two executives doggedly referenced the plane only as “the 737.”
In his message to employees, Deal also avoided the word MAX altogether, instead referring twice to the imminent return to service of “the newest members of the 737 family.”
The executives did not take questions from the press Wednesday as they’ve done for many years past. In a statement afterward about the terminology, Boeing insisted that it will continue to use the 737 MAX name while also using “the 737 family” and also referring to “the official aircraft model designation.”
The MAX is a Boeing marketing name, like the Dreamliner name attached to the 787, and has certainly lost its usefulness as a sales tool.
The official aircraft designation for the main MAX model is 737-8, as opposed to the previous generation model, the 737-800 — a distinction likely lost on most members of the flying public.
Airlines may well like to disassociate the new upgraded, recertified-as-safe 737 from the version that crashed.
While deliberately abandoning the MAX name could be seen as insensitive or deceptive, Boeing may achieve the same goal by quietly moving away from its usage.
Burning through $55 million a day
Boeing reported a net loss for the quarter ending in September of $466 million, or 79 cents per share. That compares to a profit of $1.2 billion, or $2.05 per share, in the same quarter last year.
Adjusting for changes to pension costs, Boeing said, its operating loss was $754 million or $1.39 per share for the quarter, down from an adjusted profit a year ago of $895 million or $1.45 per share.
Boeing’s revenue for the three months fell to $14.1 billion, down from $20 billion a year earlier.
The lost revenue was not only from all the grounded MAXs that cannot be delivered, but a growing excess inventory of undelivered 787 Dreamliners.
Smith said the backlog of 787s is mainly due not to the COVID-19 impact on airlines but to the need for rework on the jets due to quality issues at the aft fuselage plant in North Charleston, S.C.
He said deliveries have been slowed “due to the additional time we’re taking to inspect and ensure each of our 787s are delivered to our highest quality standards.”
Revenue from the Commercial Airplanes division was down 56% compared to a year ago.
Boeing’s defense division made a profit of $628 million, despite another write-off of $67 million on the KC-46 Air Force refueling tanker program, due to extra production costs caused by the disruption of the COVID-19 pandemic.
During the quarter, free cash flow — the money Boeing took in minus what it spent on operations and capital expenditure — was negative $5.1 billion.
That’s a cash outflow of $55 million per day, down from $62 million per day in the previous quarter.
As part of its efforts to conserve cash, Smith said, Boeing will for the foreseeable future fund the company contribution to its employees’ 401(k) plans with Boeing stock rather than cash.
A $3 billion contribution to the company’s defined benefit pension plan in the fourth quarter will also be funded by Boeing stock instead of cash.
Boeing ended the quarter with $27 billion of cash on hand, with debt of $61 billion.
The company last projected the additional costs of the MAX grounding at $20.6 billion. That figure still stands as no new charges were added this quarter.
With the Dow Jones Industrial Average down 942 points or 3.4% Wednesday, Boeing shares fell $7.11 or 4.6% to close at $148.13.
A surplus of airplanes
The backdrop to Boeing’s losses is the financial stress on airlines.
International Air Transport Association (IATA) data shows that worldwide air passenger traffic fell 64% this year through August. Almost 7,000 aircraft are parked on the ground, cutting in half the total fleet capacity in terms of airplane seats.
Calhoun said the drastic reduction in air travel underscores the fundamental importance of the aerospace industry.
“Our airline customers and suppliers not only employ millions of workers, they also serve as a connecting and driving force to the entire global economy,” he said.
Yet the industry has contracted dramatically, and he said “the overall recovery has been at a slower pace than we originally anticipated.”
In a presentation Tuesday to the International Society of Transport Aircraft Trading (ISTAT), aviation data analysis firm Cirium forecast that the pandemic is likely to render about 4,000 passenger aircraft permanently surplus.
Cirium’s global head of consultancy, Rob Morris, said about 10% of those aircraft could be converted to freighters. The rest are “doomed,” he said, destined to be scavenged for parts or simply scrapped.
Separately, Morris said Cirium research indicates that of the roughly 450 737 MAXs Boeing has built but hasn’t been able to deliver, as many as 200 will have to be reallocated to a new airline because the original customer no longer wants them.
Even Boeing’s best customers are struggling for survival.
Stalwart Boeing customer All Nippon Airways (ANA) of Japan reported Tuesday a net loss of $1.8 billion in the past six months and announced it will downsize its operations. ANA will permanently retire 35 aircraft this year, including 22 Boeing 777s.
Southwest Airlines, Boeing’s largest 737 MAX customer, last week reported a net quarterly loss of $1.2 billion and a cash burn of $12 million per day.
American Airlines, which reported a quarterly loss of $2.4 billion, projected that through the rest of this year it will burn through between $25 million and $30 million per day.
In a financial filing Wednesday, Boeing stated that “the pace of a commercial market recovery will be heavily dependent on COVID-19 infection rates, progress on testing, government travel restrictions, and timing and availability of a vaccine.”
“We currently expect it will take approximately three years for world-wide travel to return to 2019 levels and a few years beyond that for the industry to return to long-term trend growth,” the filing concludes.
However, on the analyst call, Calhoun offered almost giddy hope of a speedier recovery.
“There is a moment, honestly, somewhere in the middle of next year when maybe we’re over the second wave, and maybe there’s a vaccine, and maybe it’s being distributed,” he said. “Then all of a sudden, everyone’s waking up to renewed schedules, and the psychology will lend itself, in my opinion, to a little bit of a run on the bank with respect to narrow-body airplanes.”
“I may be dead wrong,” he then conceded.
At the end of his ISTAT presentation Tuesday on the state of the world’s passenger jet fleet, Cirium’s Morris outlined various aviation recovery scenarios, only one of which assumed that rosy outcome.
The bottom line for both Airbus and Boeing is that in every other scenario, Cirium’s airplane production forecast is for “further cuts in 2021, with no significant ramp-up until 2023 or 2024.”