The cost to Boeing of the prolonged stoppage in 787 Dreamliner jet deliveries due to the discovery of manufacturing quality flaws that require extensive rework has soared to $5.5 billion and produced deep fourth-quarter financial losses, the company disclosed Wednesday.
“None of us like charges. It’s a big one,” Boeing CEO Dave Calhoun said on CNBC after the financial results were released. “But it reflects our reality with respect to the 787 delays.”
In an internal memo to employees Wednesday morning, Calhoun said he views the 787 financial hit as “a long-term investment.” He expressed confidence in the future of the 787, saying it’s a jet program with “significant runway ahead.”
In a note to investors after the earnings details came out, Wall Street analyst Rob Stallard of Vertical Research was skeptical.
“Just as we saw with the 737 MAX, Boeing is now racking up massive charges on the 787 with no firm end in sight, and its fate in the hands of the FAA,” Stallard wrote.
Calhoun announced no firm timeline for an end to the unprecedented 787 delivery stoppage. However he hinted that deliveries might resume as soon as April.
Boeing also reported a separate $402 million write-off in the fourth quarter on the KC-46 Air Force tanker program.
The good news in the quarterly results was that 737 MAX production has ramped up to 26 jets per month and Boeing Chief Financial Officer Brian West said the Renton assembly plant is on track “fairly soon” to reach Boeing’s target of rolling out 31 MAXs per month.
And the cash brought in for delivering those MAXs produced Boeing’s first positive quarterly cash flow in nearly three years, stemming the cash bleed that’s been gushing out since the first quarter of 2019.
No profits on the 787
The 787 Dreamliner charges included a $3.5 billion write-off to cover what Boeing will have to pay as compensation to airlines for the delivery delays that it says extend further than previously anticipated.
In addition, Boeing is absorbing another $2 billion in abnormal 787 manufacturing costs resulting from the low production rate and the rework on previously completed airplanes.
Boeing said most of those costs will be incurred through the next two years, with $285 million recorded in the fourth quarter.
That’s up from Boeing’s estimate in the fall that fixing the 787 manufacturing flaws would add about $1 billion in abnormal manufacturing costs.
The write-off acknowledges that the 787 program now won’t cover the accumulated costs of producing the jet.
Even excluding the massively swollen cost of developing the jet between 2003 and 2011 — estimated at north of $15 billion — and considering only production costs since then, Boeing is conceding that the 787 won’t be profitable in the foreseeable future.
Analyst Nick Cunningham of Agency Partners in the U.K. wrote to investors Wednesday that “the 787 issue keeps on expanding and extending in duration.”
Dreamliner deliveries initially halted in fall 2020 when engineers discovered unacceptable gaps between fuselage sections. A few deliveries resumed in March 2021, only to stop again in May as the Federal Aviation Administration raised questions about Boeing’s plan for inspecting the airplanes for the defects.
In October, an Italian 787 supplier was found to have installed faulty titanium parts. In November, the FAA cataloged a growing litany of 787 defects that needed investigation, including small gaps in the structure surrounding the passenger and cargo doors.
CFO West said that at the end of 2021, a total of 110 completed Dreamliners were parked in storage awaiting delivery.
He said the rework on every one of those aircraft includes a “pretty labor-intensive rework solution on the door surrounds.”
Rather than stipulate a time frame when it expects 787 deliveries to resume, Calhoun said that Boeing will take the time needed to get it right and wait for approval from the FAA.
“While we never want to disappoint our customers or miss expectations, the work we’re putting in now will build stability and predictability going forward,” Calhoun wrote in his memo to employees.
Analysts have cautioned investors that 787 deliveries may not resume in the first half of this year. Last week, American Airlines and United Airlines during their quarterly earnings calls gave their expectations on taking delivery of 787s.
United’s executive vice president, Gerry Laderman, said he doesn’t expect to receive any until “after the summer.” American’s chief financial officer, Derek Kerr, was more optimistic when he specified “mid-April” for that airline’s next delivery.
While both Calhoun and West declined to offer formal guidance on timing, Calhoun told analysts the airlines know everything Boeing knows and he indicated that the American Airlines estimate of mid-April is reasonable.
Another charge on the tanker program
Meanwhile, Boeing’s Air Force KC-46 tanker program continues to be a loss maker.
West said one part of the write-off on the tanker program stems from the growing cost of fixing the jet’s remote vision system.
That’s the technology that allows the operator of the refueling boom inside the tanker to see on a computer screen the approaching jet fighter that is lining up behind the tanker to be refueled in midair.
Another factor contributing to additional tanker costs, West said, was disruption to the supply chain during the coronavirus pandemic.
The latest charge brings the total of Boeing’s tanker-program write-offs since 2014 to $5.4 billion, expenses the company must cover itself under the terms of the fixed-price firm contract it won in 2011.
Asked about the chaotic impact on the airlines of the rollout of 5G cellphone service last week, Calhoun on CNBC expressed optimism that the industry can soon solve the signal interference problem that has led to flight cancellations, though more affecting smaller airplanes rather than Boeing jets.
“We are working on technical solutions that I think will soften and dampen this to the point where it won’t be noticed,” Calhoun said.
All the charges in the fourth quarter led to a net loss of $4.2 billion, or $7.02 per share, for the quarter. And for third straight year that brought Boeing an overall loss for 2021.
The net loss for the year was $4.3 billion, or $7.15 per share.
Revenue for the fourth quarter was $14.8 billion.
Primarily because of lower quarterly revenue in Boeing’s defense and space unit, that was down 3% from a year ago. And in a disappointment to Wall Street, it was 11% below what analysts had projected, according to S&P Global Market Intelligence.
Total revenue for 2021 was $62.3 billion, up 7% from 2020.
Cash flow from operations was $716 million in the fourth quarter. In the same quarter last year, Boeing saw a cash outflow of $4 billion.
Free cash flow, which is cash from operations minus expenditure on plant and equipment, was $494 million in the quarter compared to negative $507 million the previous quarter.
“We’ve restructured operations, we’ve returned the MAX to service … and as a result, we got our head above water with respect to free cash flow,” Calhoun said on CNBC. “I feel very good about that progress.”
West said Boeing still has 335 MAXs parked in inventory since the grounding that lifted at the end of 2020. West said he anticipates most of those will be delivered “by the end of 2023.”
With deliveries of those stored planes added to new planes fresh off the assembly line, West said Boeing should deliver about 500 MAXs this year.
In another move that should increase cash flow, West said that because of the current high demand for cargo jets, Boeing plans to increase production of the 777 this year from two airplanes per month to three.
After repaying one loan, Boeing’s net debt fell from $42.4 billion the previous quarter to $41.9 billion at year end.
Boeing’s share price sank almost 5% Wednesday, dropping $9.83 to close at $194.27.
All the charges wrapped up in the last quarter’s results suggested a management attempt to pile the costs of the bad news as much as possible into last year, so that Boeing has a better chance of showing some profit in 2022, for the first time since 2018.
In a statement, Calhoun called 2021 “a rebuilding year.”