Boeing resumed losing money last quarter, its losses caused both by continuing pandemic-driven downturn in air travel and by self-inflicted wounds such as the 787 manufacturing mess.
The aerospace giant projected Wednesday that the manufacturing quality defects that have stalled 787 deliveries will eventually cost $1 billion.
CEO Dave Calhoun’s earnings teleconference left Wall Street analysts less than convinced that either the prolonged 787 delivery stoppage or the continued closure of the Chinese market to Boeing jet deliveries will end soon.
Jim Lebenthal, a partner at financial advisory firm Cerity Partners, said on CNBC Wednesday that this presents a “serious management credibility problem.”
And though Calhoun said the global air travel recovery is gathering momentum, he raised new concerns about looming supply chain constraints and labor shortages arising from the pandemic.
“With economic activity picking up, labor availability within our supply chain will be the critical watch item,” Calhoun said, adding that this factor could limit hoped-for production rate increases next year as Boeing struggles to climb out of the clouds engulfing it.
Boeing lost $132 million, or 19 cents per share, in the third quarter. That was an improvement on the loss of $466 million a year ago, when the 737 MAX was still grounded.
It has lost money in eight of the 10 quarters since the second MAX crash in Ethiopia in March 2019.
This time around, Boeing also wrote off $185 million in its space business for the problems that scratched the attempted launch during the quarter of the Starliner commercial crew capsule.
Boeing’s revenue in the quarter was $15.3 billion, up from $14.1 billion a year ago. Revenue from the return to service of the MAX offset the lower 787 deliveries.
However, revenue is still lower than one might expect with Boeing delivering MAXs again. That’s because airlines had largely paid in advance for many of those planes before the grounding. Boeing’s new chief financial officer, Brian West, said those advance payments mean new revenue inflow will be limited through next year.
Boeing said 787 Dreamliner production will continue at the current low rate of about two airplanes per month until the Federal Aviation Administration is satisfied with the manufacturer’s proposed airplane inspection and rework plan and approves the resumption of deliveries.
Dreamliner deliveries initially halted in fall 2020 when engineers discovered unacceptable gaps between fuselage sections. A few deliveries then resumed in March, only to stop again in May after more defects showed up. A total of 105 completed Dreamliners were parked in storage at the end of the quarter.
“We’ve been doing rework nonstop for the last 7 months,” Calhoun said.
The latest setback on the program, revealed this month, was the discovery that an Italian company called Manufacturing Processes Specification (MPS) — a sub-tier supplier to Boeing’s 787 partner Leonardo, which builds large sections of the 787 fuselage and tail in Italy — had been shipping titanium that didn’t meet specifications.
Though MPS was not the sole supplier of the material, on some 787s its out-of-spec titanium was used to make floor beam frame fittings and various brackets, all of which have to be replaced. Calhoun said this is now the major part of the remaining rework on the 787s.
“We are working our way through it,” he said. “We’re well past halfway.”
Boeing said “the low production rates and rework are expected to result in approximately $1 billion of abnormal costs, of which $183 million was recorded in the quarter.”
Calhoun said those costs stem partly from the need to keep the assembly lines up and running even without revenue coming in from deliveries, in anticipation of ramping back up to 5 jets per month as soon as possible after FAA approval comes through.
Boeing will absorb those costs as they are incurred in the coming quarters, rather than as a one-time accounting write-off like the charge in the space business.
Boeing’s update to its 787 program accounting shows that costs deferred into the future, which had fallen steadily for years, rose by $300 million over the past two quarters and now stand at $17 billion.
Boeing’s accounting allows it to spread those long-sunk 787 costs over years of future deliveries, though the setbacks to the program threaten to leave the profits from those deliveries short of the massive total in costs.
The quarterly financial filing states that Boeing expects to fill that $17 billion hole from its profits in delivering the 490 firm orders that are still unfilled — that’s an average of about $24 million in profit per airplane — as well as from delivering anticipated future orders.
With that assumption, CFO West said on the teleconference that 787 program accounting remains poised “near break even.” This means any further setbacks risk a further large write-off, the first since a $1.2 billion charge on the program in 2016.
Wall Street analyst Rob Stallard of Vertical Research was not reassured by the comments from Boeing leadership.
“We still have limited assurance on when the 787 will be cleared by the FAA, and even less on when China will recertify the MAX,” Stallard wrote in a note to investors.
Prospects for a MAX production ramp up
Calhoun noted that U.S. domestic travel leads the industry’s pandemic recovery, with peak travel days reaching 80 to 85% of 2019 volumes. However, August data showed international airline traffic at less than one third of the 2019 level.
Overall, he said, “airlines are flying around 60% of their normal global capacity.”
Calhoun said airlines’ plans to retire about 1,500 older airplanes worldwide should bolster Boeing sales. Citing other reasons for optimism, he said spiking oil prices should increase demand for new, fuel-efficient jets and supply chain shifts during the pandemic have already boosted demand for Boeing cargo jets.
Orders for either new freighters or for Boeing to convert passenger planes to freighters this year “have already surpassed our highest annual freighter tally in history,” Calhoun said.
The 787 Dreamliner and the 737 MAX remain the key programs for a Boeing recovery.
Just days ahead of the anniversary of the first MAX crash of Lion Air Flight JT610 in Indonesia three years ago on Friday, the company said it has delivered more than 195 MAXs and that airlines have returned more than 200 previously grounded airplanes to service.
Boeing is now building the MAX in Renton at a rate of 19 jets per month. Since it delivered only 62 MAXs in the third quarter, the backlog of undelivered planes that peaked at 450 jets during the extended grounding fell minimally.
CFO West said that at the end of the quarter, 370 finished and undelivered MAXs were still stored in inventory.
On Wednesday, Boeing reiterated its plan to boost MAX production to 31 jets per month in early 2022 — a move critical to stanching the cash bleed.
However, any production boost beyond that depends on the large Chinese airline market opening up. West said about a third of the 370 MAXs in inventory are for Chinese airlines.
The MAX is currently shut out of China less by the pandemic than the tension in U.S.-China relations.
Calhoun said that Boeing is hoping China’s aviation regulator will approve the MAX to resume flying there by the end of the year and for MAX deliveries into China to restart in the first quarter of next year.
If it doesn’t, he said, any ramp up beyond 31 MAXs a month at the Renton assembly plant is doubtful.
And West said Boeing’s expectation that it can clear out most of the 370 parked MAXs by the end of 2023 also depends on China opening up.
Calhoun said Boeing continues “to urge leaders in both countries to resolve trade differences.”
“Ultimately, America’s leadership in aerospace, as well as the health and stability of millions of commercial aerospace jobs, rely on free and fair trade,” he added.
The other threat to Boeing’s hoped-for MAX ramp-up in production is supply chain bottlenecks as pandemic effects create shortages of both materials and labor. Calhoun raised this for the first time as a critical risk.
“The evidence is beginning to support that by the second half of next year, our industry will be supply constrained,” he said, adding that he believes this will continue “through all of 2023.”
With the MAX still not ramped up, the 787 blocked from deliveries, and very low production in its other jet programs, Boeing is still burning through cash, though now at a much lower rate than a year ago.
In the third quarter, free cash flow, defined as operating cash flow minus expenditures on cash and equipment, was negative $507 million, compared with negative $5.1 billion in the same quarter last year.
This is largely due to the return to service of the MAX as well as the still uneven recovery in air travel. The cash flow was also mightily helped by a $1.3 billion tax refund.
Nick Cunningham, a financial analyst with Agency Partners in London, questioned the relative buoyancy of Boeing’s share price given the low level of MAX deliveries, the block on 787 deliveries and FAA certification delays that have pushed out first delivery of the forthcoming 777X until late 2023 at the earliest.
“With all three major commercial aircraft programs in various degrees of serious trouble, extremely high debt and cash still flowing out, we do not think Boeing’s valuation yet reflects the seriousness of the situation,” Cunningham wrote in a note to investors.
Boeing stock was down for the day $3.20, or 1.53%, closing at $206.61.
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