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 $18.4 billion.
The company reported a full-year net loss of $636 million, the largest in Boeing’s history.
In additional bad news, the company announced a further cut in the production rate of the 787 Dreamliner, which will slow production at the widebody jet plant in Everett.
But new CEO Dave Calhoun said he’s confident about the MAX and Boeing’s eventual recovery. “We will get through this moment,” he said. “I believe we’ll deliver the safest airplane in the sky.”
He also insisted that Boeing’s culture and its recent corporate focus on finances and cost-cutting were not factors in the company’s flawed design process that led to the two MAX crashes that killed 346 people.
Calhoun said getting the MAX safely returned to the skies will be Boeing’s overriding priority.
Invoking the company’s legacy of safety and quality, he cited the weekend’s successful first flight of the massive 777X airplane as “a proof point of Boeing’s engineering and technical prowess.”
A sea of red ink
One analyst said Wednesday’s report described a “kitchen sink quarter,” suggesting that as a new CEO, Calhoun wants to put all of the company’s negative news out at once.
The decision to cut the 787 Dreamliner production rate further was not a surprise, given sluggish near-term demand for widebody jets and a dwindling backlog of 787 orders.
Boeing produces 14 of those jets per month, seven each in Everett and in North Charleston, S.C. The company had previously said that it would go down to 12 jets per month in late 2020.
On Wednesday, the company conceded that outlook had been too optimistic and said it will cut the rate to 10 jets per month in early 2021. Chief financial officer Greg Smith said a decision will be made later on whether to maintain the even split of work between Everett and North Charleston.
Boeing said it hopes to hike the rate back to 12 jets per month in 2023.
That will depend on orders from China coming through after the trade tension with the U.S. eases. Even then, Boeing doesn’t anticipate returning to the 14 jets per month production level.
Yet the 787 news was swamped by the sea of red ink flowing from the MAX crisis.
While the rest of the company was profitable, absorbing the MAX hit resulted in an overall fourth-quarter loss from operations of $2.2 billion and a net loss of just over $1 billion.
The new additional costs of the MAX’s grounding include a one-time accounting write-off of $2.6 billion related to paying compensation and making concessions to airline customers.
Boeing also estimated that reduced 737 production would add $2.6 billion in additional costs, related to the increase in overhead costs as more time is needed to deliver airplanes than planned after the halt in production and the anticipation of a slow 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 — not reflected in the 2019 financial results — to cover “abnormal production costs to be incurred during the suspension and gradual resumption of production at low production rates.”
Boeing had 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.
Calhoun on the MAX flaws
Calhoun, who took charge earlier this month after the board fired Dennis Muilenburg, said in a statement that Boeing is financially strong enough to withstand this 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,” Calhoun said. “Fortunately, the strength of our overall Boeing portfolio of businesses provides the financial liquidity to follow a thorough and disciplined recovery process.”
Asked how Boeing had missed the design problems with the new MAX flight-control system — the Maneuvering Characteristics Augmentation System (MCAS) — he reiterated previous comments that the design made incorrect assumptions about pilot reaction, assumptions also made by the regulators.
“That is a very discrete, very specific engineering decision that ultimately was flawed. We all wish it wasn’t,” Calhoun said in a teleconference following the earnings report.
“I don’t think culture contributed to that miss,” he said, adding that he has spoken directly to the engineers who designed MCAS and that “they thought they were doing exactly the right thing, based on the experience they’ve had.”
However, Calhoun conceded that, beyond the design of MCAS, there may be broader culture issues at Boeing related to schedule and cost pressures.
During the teleconference with media, he was asked specifically about a detail that emerged earlier this month when Boeing disclosed to investigators a trove of internal Boeing emails and instant message conversations.
Those documents showed that Boeing’s chief technical pilot on the MAX, Mark Forkner, considered it a crucial mission to dissuade Lion Air from its plan to require simulator training for its pilots. This was more than a year before one of Lion Air’s MAX planes crashed, killing 189 people.
Calhoun responded that whether “culture and schedule in any shape or form may have led to a bad recommendation on [pilot] training” is something he’s going to take “very seriously.”
“I can’t stand the thought,” he added.
Is this the low point?
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, revenue for the year dropped 44% compared to 2018 as its jet deliveries fell by more than 400. The unit’s loss from operations was $6.7 billion compared to a 2018 profit of $7.8 billion.
In the fourth quarter, 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 enough bad news, Boeing also booked a further $410 million write-off due to the recent setback of 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 the 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 of the way as he begins his tenure.
However, as Stallard noted, “with the MAX still not in the air, Boeing’s financial guidance remains suspended” and the markets will need reassurance that this really is the lowest point of the MAX crisis.
Despite the size of the newly projected cost of the MAX crisis, it was somewhat smaller than Wall Street analysts had feared. “Expectations were for something worse,” said Ron Epstein, an analyst with Bank of America.
The consensus forecast among analysts was that Boeing would write off another $4.6 billion in “customer compensation” to the airlines, rather than the $2.6 billion Boeing projected. Epstein said that estimate could rise later. “It’s their best guess at this time, given the conversations they’ve had with airlines.”
The stock market took solace in the losses being less than expected and seemed to anticipate that things can only get better: Boeing’s stock closed at $321.83 for the day, up $5.27, or 1.7%.
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