New delay in 777X swells massive Boeing loss in 2020, the largest in its history

Hit both by the grounding of the 737 MAX and the global pandemic that paralyzed its airline customers, Boeing on Wednesday reported a massive net loss last year of $11.9 billion, the largest in its history.

The red ink included an unexpected $6.5 billion write-off on its newest airplane, the 777X, which is delayed again and now won’t enter service until late 2023.

Chief executive Dave Calhoun called 2020 “a year like no other.”

“Our world, our industry, our business and our communities were facing unprecedented challenges, and we’re still in the midst of it,” he said in a teleconference call with Wall Street analysts Wednesday morning.

Details revealed during the call show that continuing troubles on Boeing’s key jet programs — the 777X, the 787 and the 737 MAX — will provide an intense drag on the business in the months and years ahead.

Calhoun projected that the company won’t approach pre-pandemic production levels until 2023.

The 2020 annual loss was sharply amplified by the 777X write-off, caused in part by demands from global aviation regulators for a design change to improve that forthcoming jet’s safety.

The company reported $1.8 billion in additional accounting charges, including write-offs for the 737 MAX, the KC-46 Air Force tanker, and the recent settlement of fraud charges with the Department of Justice.

And though there was no special charge reported for the 787 Dreamliner, management warned there is a danger of one later. Production problems have caused quality defects at the joins of the jet’s carbon fiber composite fuselages.

No 787s have been delivered for the past two months. Calhoun said there will be no deliveries this month, either, and “very few, if any” in February.

In the fourth quarter, with a total of $8.3 billion in write-offs, Boeing had a net loss of $8.4 billion, or $14.65 per share, on revenue of $15.3 billion.

Design changes needed on 777X

The huge write-off on the 777X came as a surprise.

The giant 777X jet flew for the first time almost a year ago and is being flight tested. Its entry into service is now delayed until late 2023, three years late, and its market has evaporated for the immediate future as the global pandemic meant long-haul international passenger traffic has nearly disappeared.

The large international carriers that ordered it are all in trouble and no longer want to take delivery for years.

In addition, the botched certification of the 737 MAX ensures that regulators worldwide are already taking a painstaking look at the 777X before they approve it to fly.

On the analyst call, Calhoun said that “to meet various global regulator expectations … we’ve made the decision to implement certain modifications to the aircraft design.”

Those include both software and hardware changes to the “actuator control electronics.”

Actuators are mechanical devices that move the key control surfaces on an airplane, including the horizontal tail (or stabilizer), the rudder on the vertical tail, and various flaps and moveable panels on the wings. On the 777X only, an actuator also moves the jet’s 11-foot long folding wingtips.

Boeing declined Wednesday to specify which 777X actuator or actuators are being modified. But since the modification is required only for the 777X and not the current 777 model, it may be the activation of the folding wingtips that requires the extra design work.

The 777Xs already built and those that roll out before the design change is finalized will have to be retrofitted with the modification.

Calhoun said the 777X charge reflects “an updated assessment of global certification requirements, our latest assessment of COVID-19 impacts on market demand, and discussions with customers with respect to aircraft delivery timing.”

Nonetheless, he said, “Despite the challenges, we are confident in the 777X.”

Boeing also took a $744 million charge related to the deferred prosecution agreement reached with the Department of Justice to allow it to avoid a charge of criminal fraud during certification of the 737 MAX.

This settlement consisted of a $244 million penalty for the criminal conduct described in the agreement, plus $500 million to be set aside as additional compensation to the families of the 346 people who died in the two MAX crashes.

In the final quarter of the year, Boeing also added a charge of $468 million for abnormal production costs on the 737 MAX stemming from the jet’s grounding. This is part of Boeing’s previous estimates of the cost of the MAX grounding, not in addition.

And the troubled KC-46 tanker program added a write-off of $275 million “primarily due to production inefficiencies including impacts of COVID-19 disruption,” Boeing said.

Finally, Boeing’s aftermarket service division — which, for example, provides spare parts and flight-operations support to airline customers — recorded a charge of $290 million driven by the impact to its markets of COVID-19.

Just two years ago, before the twin crises of the MAX and the pandemic, Boeing’s annual revenue had topped $100 billion.

For the full year in 2020, the company had revenue of just $58.2 billion. Its net loss amounted to $20.88 per share..

During the quarter, Boeing’s cash on hand fell by $1.5 billion to $25.6 billion. And its mountain of debt swelled by $2.6 billion to $63.6 billion.

A key metric that investors watch is free cash flow (FCF), which is the cash generated by the business, minus expenditures on plant and equipment. Boeing reported FCF at negative $4.3 billion for the fourth quarter and negative $20 billion for the year.

Boeing shares fell $8.03 or 4% Wednesday to close at $194.03.

Undelivered 787 Dreamliners piling up

Boeing’s financial recovery rests heavily on the 787. International airlines will want this small, efficient, long-haul jet in their fleets when the pandemic subsides and routes begin to open.

It’s the only widebody Boeing could expect to produce at higher volumes, thereby raking in large amounts of cash again.

Unfortunately, the 787 program is in serious trouble.

Due to the fuselage join defects, Calhoun said that 80 Dreamliners are parked and not deliverable until they are inspected and reworked.

Calhoun said engineers have come up with rework solutions for the defect issues at “the majority” — but not all — of the areas on the fuselage where they were identified, including at the joins of the major fuselage sections.

However, he added that the engineers are still analyzing what’s wrong at “a few remaining areas” of the fuselage.

Though Boeing has been dealing with the fuselage defects since at least August, he said “this work may take a few more weeks.”

He reiterated that Boeing will cut 787 production to five jets per month and consolidate in South Carolina in March.

It will close the original 787 assembly line in Everett, though the employees on that line will still have work for much of this year at least: doing inspections for the fuselage defects and reworking where necessary.

The MAX is cleared to fly in Europe

On a day of historically bad financial news, Boeing got one lift as the European Union Aviation Safety Agency (EASA) approved the return to service of the upgraded Boeing 737 MAX.

“Following extensive analysis by EASA, we have determined that the 737 MAX can safely return to service,” EASA executive director Patrick Ky said in a statement. He added that this assessment was carried out independently from Boeing and the Federal Aviation Administration (FAA).

EASA has demanded that Boeing make additional design modifications within the next few years to address certain weaknesses in the MAX’s inherited avionics systems — including adding a third measure of the plane’s Angle of Attack, which the FAA did not require.

“At our insistence, Boeing has also committed to work to enhance the aircraft still further in the medium term, in order to reach an even higher level of safety,” Ky said.

The FAA and the aviation regulators of Canada and Brazil earlier cleared the MAX to fly passengers again.

These four are the major aviation-safety authorities from the countries that manufacture commercial jet planes in the West. Boeing awaits approval from other countries, particularly China, the world’s largest aviation market.

Calhoun said on the earnings call that he expects regulatory approval for the MAX from the remaining aviation authorities in the first half of this year.

He also said he is optimistic that President Joe Biden’s new administration will come to a “detente” on trade with China. If so, that could open up the possibility of new Chinese orders for the first time since 2017.

In addition to fixing the 787 problems, Boeing’s recovery from the current crisis rests on the successful return of the MAX around the world and a steady production increase. However, that won’t be quick.

In Wednesday’s filing, management laid out the MAX ramp-up plan.

“The 737 program is currently producing at a low rate and expects to gradually increase production to 31 per month in early 2022,” Boeing said.

Last week, rival planemaker Airbus announced plans to increase production of the A320neo jet family that competes with the MAX — rolling out at a rate of 40 aircraft per month — to 43 jets per month in the third quarter and 45 jets per month by year end.

Since the MAX was ungrounded in the U.S., Boeing has delivered more than 40 of the jets, all from the store of parked aircraft built up during the grounding.

That leaves approximately 410 more still in storage. Due to cancellations, Boeing said some of those will have to be remarketed and reconfigured for a new airline.

However, it’s become clear that the MAX will not contribute heavily to cash flow until next year.

Airlines make advance payments to Boeing during production of their airplanes, typically amounting to about half the actual purchase price in such advance installments, with the other half due upon delivery.

For the MAXs, airlines made advance payments on deliveries that never materialized. Now some customers, including Alaska Airlines, are using those excess payments along with compensation discounts to pick up their first planes with little or no additional cash needed.

Boeing chief financial officer and executive vice president Greg Smith said Wednesday that even as MAX production increases this year, the “burn down of excess advance payments” will limit the cash it brings in.

Looking to the longer term future and Boeing’s strategic competition with Airbus, the European jetmaker threatens to dominate the single-aisle jet market — the market that will recover fastest when the pandemic subsides — largely because Boeing’s 737 MAX line-up has no answer to the larger, long-haul A321neo.

Calhoun acknowledged the problem when asked about this Wednesday and indicated that Boeing’s next new plane will target that gap in its line-up.

Yet he also made clear that for now, Boeing hasn’t the resources to develop such a new plane.

“Over the near term, it is what it is,” he said, adding that the low demand for air travel gives Boeing breathing space to come up with something, so a delay of a couple of years won’t hurt Boeing.

Instead of pouring money into that, Boeing is cutting costs and shrinking to survive the dramatic contraction of its business.

CFO Smith said on the call that Boeing last year reduced research and development and capital spending by $1.3 billion.

And he said it sold or closed properties totaling more than 240,000 square feet and has identified an additional 5 million square feet that could be disposed of over the next few years.