With the airline business staggered by the coronavirus pandemic, Boeing Commercial Airplanes boss Stan Deal told employees Thursday the company must reduce its workforce “to ensure our business is more closely aligned to the realities of a different-sized commercial market once the recovery starts.”
Deal’s message makes clear he’s trying to stave off involuntary layoffs and also strongly suggests that cuts in aircraft production rates are likely.
In stark messages to employees pointing to the dire circumstances, Deal and Boeing CEO Dave Calhoun in Chicago announced a plan to make initial job cuts through voluntary buyouts, offering some employees the opportunity to leave with a severance payment and benefits package.
A person familiar with the discussions said details of the buyout plan are not yet determined, but at this point it is expected to reduce the workforce by “several thousand.”
Boeing remains the largest private employer in Washington state, offering high pay and good benefits. Last year, despite the grounding of the 737 MAX, it added 2,000 jobs in the state, ending the year with just under 72,000.
The company has already limited overtime, frozen hiring and cut discretionary spending to only business-critical activities, so Thursday’s action points to mounting concern as the industry’s position worsens daily.
In his message to employees, Deal said “the voluntary layoff plan aims to reduce the need for further workforce actions.” He didn’t need to spell out that if the business environment worsens, the next step he wants to avoid would be involuntary layoffs.
Deal also wrote that Boeing will continue to support its airline customers “as they navigate extraordinary headwinds – and it may mean deferring airplane deliveries or other forms of assistance.”
This indicates Boeing will have to consider slashing production rates. Airlines all over the world are already asking Boeing to defer deliveries, to cancel some orders outright, and to allow them to switch out orders.
International travel has shriveled to a trickle of flights. The market for long-haul widebody jets such as the 777 and 787, already in a slump before the pandemic, is unlikely to see the recovery in demand Boeing had projected over the next two to three years. Some airlines are likely to go out of business.
Domestic air travel has also cratered, with thousands of narrowbody aircraft parked on the ground and those flying often carrying as few as a dozen passengers.
London-based aviation consultancy Ishka estimated Thursday that up to 10,500 aircraft are now grounded worldwide and that this will climb beyond 12,000 in April. “That’s half the world fleet,” Ishka wrote in its analysis.
On Monday, industry analyst Rob Stallard of Vertical Research projected that the airlines will need 2,000 fewer aircraft over the next five years than previously forecast.
“Passenger demand has collapsed,” Deal told his employees.
He cited the latest International Air Transport Association (IATA) forecast that the revenue lost by passenger airlines worldwide will be “upward of $252 billion this year – and could go potentially higher.”
While a drastic reduction in airplane demand is clear, the details of just how bad it will get and how long the crisis will extend are still to be determined.
Ishka’s report noted that several airlines, including Germany’s Lufthansa, Air New Zealand and Italy’s Alitalia, have already indicated that they will emerge from this crisis as leaner airlines.
Calhoun, in his message to employees, also indicated that even after a recovery, the future market for commercial jets will be smaller for “years to come.”
“It will take time for the aerospace industry to recover from the crisis. When the world emerges from the pandemic, the size of the commercial market and the types of products and services our customers want and need will likely be different,” he wrote. “We will need to balance the supply and demand accordingly as the industry goes through the recovery process for years to come.
“It’s important we start adjusting to our new reality now,” Calhoun wrote.
He reiterated that he remains committed to “doing everything possible to keep this team intact.”
“We can’t get back to regular operations again after the crisis if we don’t have the people and skills to make that happen,” he said.
Yet the move to offer buyouts means Boeing is now resigned to losing some people. The danger even with voluntary cuts is that expertise will be lost and the company’s technical capabilities reduced.
Analyst Rob Spingarn of Credit Suisse, in a note to investors, said this will help Boeing lower costs as it burns cash, then added, almost wistfully: “We hope quality control/engineering talent not in the mix.”
Calhoun said details on the buyout benefits, who is eligible and how the program works, will be provided to employees “in three to four weeks.”
Boeing was already reeling from the prolonged grounding of its 737 MAX when the coronavirus pandemic hit, with revenue and cash flow depleted. The disease has slowed work on recertifying the MAX, while clouding the outlook for sales once it returns.
The company has has $15 billion in liquidity available to take it through the current crisis and is hoping to tap more from the government relief package. To help Boeing out with the cash crunch, the Air Force agreed Thursday to release $882 million that it has withheld due to ongoing technical problems with the delivered KC-46 tankers.
Nick Cunningham, an analyst at Agency Partners based in London, said that because salaries make up the biggest portion of Boeing’s fixed costs, job cuts are essential.
“As painful as it is going to be, Boeing needs to reduce workers,” he said. “If you don’t, you’ll destroy the company. You have to actually survive as a company in order to come back again.”
Boeing said Thursday that, after a two-week production pause to clean its its Puget Sound-area plants, it still plans to reopen the factories Wednesday, with workers reporting for an overnight shift that begins April 7.
The massive downturn in demand affects Boeing rival Airbus equally.
The European aerospace giant closed its plants in France and Spain for a week last month to clean the plants and has just closed the Spanish facilities again for another 10 days as the crisis in that country worsened.
Airbus says it has $32 billion in cash and credit liquidity available to weather the downturn. That’s twice what Boeing has, although once the U.S. financial relief package is implemented, the credit markets are likely to open up with more funding for Boeing.
Airbus’s assembly plant in Tianjin, China, has already reopened as the virus threat recedes there.
In a video message to employees 10 days ago, Airbus CEO Guillaume Faury told employees not to worry too much about low productivity at this time, adding, “it’s OK. We’ll recover efficiency later.”
He too warned of the new reality:
“This crisis will see our industry undergo deep change in the months ahead.”
Bloomberg News contributed to this report.