Boeing CEO Dennis Muilenburg, at the center of a storm over the deadly crashes of the 737 MAX that intensified last week and led to the firing of a top executive this week, on Wednesday held firm to the projection that the jet should get approval to return to service before year-end.
In the first of two critical public appearances this month, Muilenburg held a teleconference call with analysts and the press to discuss the earnings results, which showed Boeing’s third-quarter profit slashed in half compared with a year earlier.
If approval to fly the MAX commercially does come by December, Muilenburg said Boeing plans to incrementally increase production through next year from the current rate of 42 jets per month up to 57 per month.
However, he reiterated his warning that should the grounding extend into next year, “we might need to consider possible further rate reductions, or other options including a temporary shutdown of the MAX production line” in Renton.
Boeing added $900 million to its estimated costs for producing the 737, due to the extended 19% slowdown of production during the grounding. That will reduce the 737’s profitability and cash flow in future quarters and brings Boeing’s estimated cost of the MAX grounding so far to $9.2 billion.
Boeing also announced other negative news affecting the larger widebody jets built at its Everett plant.
Because of a rapidly shrinking order backlog on the 787 Dreamliner, Boeing will cut production of that jet at the end of 2020 from 14 to 12 jets per month. Muilenburg blamed U.S. trade tension with China and a consequent drop in widebody jet orders.
And after delays in development of the new 777X airplane, mainly due to design problems with its GE engine, first delivery is pushed out from next year into “early 2021.”
As a result, the already low 777 delivery rate of 3.5 jets per month will slide next year to just 3 per month, Muilenburg said.
Progress on the MAX
Unsurprisingly, the MAX crisis dominated Muilenburg’s call with analysts.
He declared that “with the changes we’re making to the MAX software and (pilot) training, we’re confident the MAX will be one of the safest airplanes ever to fly.”
Calling the crisis “a defining moment for Boeing,” Muilenburg said, “We have changed from this and will continue changing.”
He said Boeing has completed the software redesign of the flight-control system — known as the Maneuvering Characteristics Augmentation System (MCAS) — that went wrong on both crash flights in Indonesia and Ethiopia, and has conducted more than 800 flights with the updated software.
Boeing has hosted flight simulator sessions with more than 545 pilots representing airline customers and regulators to give them hands-on experience with the revised flight controls.
And Muilenburg said Boeing is working on a second software update that adds redundancy to all the flight-control systems by routing them through both flight-control computers, instead of using only one of the computers on any given flight.
Last week, he added, Boeing performed a successful dry run of the certification flight test that the Federal Aviation Administration (FAA) will conduct prior to granting final approval for the MAX to re-enter passenger service, which the company expects this year.
However, Muilenburg spoke of a “phased approach,” with foreign regulators possibly granting approval later than the FAA.
“Timing may vary by jurisdiction,” he said.
As a result of this and the logistics of getting the planes prepared to fly again, it will take an extended period of time after return to service is approved before the undelivered MAXs that are currently parked are all cleared away.
Muilenburg said “the majority” of those more than 300 MAXs will be finally delivered to customers in the first year.
Boeing’s financial results for the third quarter showed a profit of $1.2 billion, or $2.05 per share, on revenue of $20 billion.
That’s compared with a profit in the same quarter a year ago of $2.4 billion, or $4.07 per share, on revenue of $25 billion.
The Commercial Airplanes division showed a revenue drop of $5.8 billion compared to a year ago as it delivered just five 737s in the quarter, all military variants, compared to 138 deliveries in the same quarter last year.
Commercial Airplanes showed an overall loss of $40 million compared to a profit a year ago of $2 billion.
Boeing absorbed the hit without any additional write-offs to cover the expenses of compensating customers and continuing to build 737 jets that it cannot deliver. But the financial bleeding was clear in the reduced profits, negative cash flow and the increase in projected 737 costs.
Before the MAX crisis, Boeing had been gushing cash from increasing jet production, and cash flow had become the metric by which investors judged the company’s performance. But with 737 MAX deliveries at zero, Boeing’s operating cash flow for the quarter was negative, at minus $2.4 billion, compared to positive cash flow a year earlier of $4.6 billion.
The addition of $900 million to the projected future manufacturing costs for the 737 follows previous increases to that projection of $2.7 billion since March. The total increase of $3.6 billion will be spread over the entire 737 remaining production run, which for accounting purposes is assumed to be 3,100 aircraft.
That’s an increase of about $1.2 million in the cost to produce each jet and a correspondingly lower profit per aircraft.
Boeing’s total debt swelled by $5.5 billion during the quarter. Chief financial officer Greg Smith said the company added the debt not only to pay for MAX production while no corresponding revenue is coming in, but also to fund the proposed acquisition of Brazilian regional jetmaker Embraer.
That acquisition was expected to close this year, but Boeing said Wednesday that’s now slipped into 2020 as it still awaits regulatory approval from various overseas bodies, including the European Union.
Overall, the financial results came in even lower than the reduced expectations on Wall Street. Boeing’s core profit figure, adjusted to exclude certain pension items, was $1.45 per share, well below the consensus projection from analysts of $2.09 per share.
The one figure in the financial results that looked good was the reduction in the cumulative cost of the 787 Dreamliner that has been deferred into the future. Total deferred costs now stand at $22 billion, which is $1.2 billion lower than last quarter. With 35 Dreamliners delivered in the quarter, that means with each airplane delivered Boeing took a $37 million accounting bite out of that total cost.
At that rate, even if Boeing delivered only what’s currently in the backlog and with no further improvement in productivity, it would take $20 billion out of the total deferred cost. This suggests Boeing should eventually be able to cover the total in deferred costs.
Despite the financial impact of the MAX crisis, Boeing has maintained payments to shareholders at a high level. During the quarter, the company paid out $1.2 billion in dividends, reflecting a 20 percent increase in dividends per share compared to the same period of the prior year.
Following Muilenburg’s teleconference, Boeing stock rose but then fell back, closing for the day up $3.50 or just over 1% at $
The news that 787 production will be cut next year is not a surprise. The plane has an order backlog of about 530 airplanes, which is three years of production at the rate of 14 jets per month.
Boeing said it will maintain that lower rate of 12 a month for approximately two years. Bank of America analyst Ron Epstein said that seems optimistic, given the slow order rate, and he predicted production will be cut further.
Muilenburg said he anticipates a “wave of widebody replacement” orders to accelerate early in the next decade. But widebody orders remain depressed, with no sign of that changing as trade tensions, especially between the U.S. and China, depress order activity.
On Oct. 12, President Trump tweeted about a “trade deal I just made with China” that would produce orders for “16-20 Billion in Boeing Planes.” However, no deal has yet materialized.
Muilenburg said on the earnings call that “we remain hopeful that airplanes will ultimately be part of the trade solution.”
Ken Herbert, an analyst with Canaccord Genuity, said that after the FAA gives its initial go-ahead on the MAX, the potential lag in approval from the European Union and from China in particular adds considerable uncertainty around the schedule Muilenburg laid out for the ramp-up in deliveries and production.
With the U.S.-China trade talks so transactional, he said, “the Chinese could easily sit back and make things as painful as possible.”
“So there are a lot of external factors that unfortunately for Boeing are really out of their hands,” he added.
As the earnings call ended Wednesday, Muilenburg spoke of his upcoming testimony before Congressional committees in both the House and Senate on October 30. His own future as CEO likely depends on him coming across well in those hearings.
“I anticipate there will be tough questions … a lot of scrutiny,” Muilenburg said. “We support the scrutiny … Everybody here is aligned on the objective of a safe aviation system for our country.”