Crippled by the historic pandemic-driven downturn in demand for airplanes while also struggling to fix self-inflicted manufacturing issues on its two bestselling commercial jets, Boeing declared its sixth straight quarterly loss Wednesday.
Chief executive Dave Calhoun offered optimism, laced with caution about the long road to recover that remains.
“We view 2021 as a key inflection point for our industry as vaccine distribution accelerates,” he told employees in an internal message.
And in an interview on CNBC Wednesday morning, Calhoun said that in the U.S. and a few other countries, domestic travel is returning fast. “Traffic really is ready to burst back,” he said. “Our customers are getting ready for it. That is right in front of us.”
But in a call with Wall Street analysts later, Calhoun’s outlook was more cautious.
“Recovery is gaining traction but remains uneven,” he warned.
“We continue to anticipate the next six months will be very challenging for our airline customers and the entire industry,” Calhoun said. “COVID-19 case rates are still high in many areas around the world and travel restrictions remain in place.”
He noted that February domestic air traffic worldwide was less than half of 2019 levels and that international air passenger travel remains extremely low, with February traffic just 11% of what it was in 2019.
Globally, he said airlines are flying less than 60% of their normal capacity.
He reiterated previous predictions that passenger levels overall won’t return to 2019 levels until 2023 or 2024.
Boeing reported a first-quarter loss of $561 million on revenue of $15.2 billion, results largely in line with market expectations, though the jet maker burned through cash at a higher than expected rate of $41 million per day.
Over the past six quarters, Boeing has reported cumulative net losses of $13.4 billion.
On top of the depressed demand for commercial jets from the COVID-19 pandemic, a manufacturing problem with the 787 Dreamliner — one of the planes that some airlines still want to take — meant Boeing managed to deliver just two of those jets late in the quarter.
Despite the financial hit from the almost five-month-long pause in 787 deliveries, Calhoun said it “was the right thing to do and is another demonstration of our unrelenting focus on quality.”
He said a separate problem that halted 737 MAX deliveries this month should be fixed soon.
Looking to the future, Calhoun also gave a bare outline of internal plans to design and build Boeing’s next airplane in a new way that will be both more efficient and avoid adding to the lengthening list of its engineering missteps.
MAX production rate depends upon China
The quarterly results were improved by 58 deliveries of the 737 MAX, before this month’s glitch, and by revenue from the Defense Department ordering 27 more KC-46 air-to-air refueling tankers.
The major hit to finances in the first quarter, beyond the lower production rates from the pandemic, was the lack of 787 deliveries until late March. This was due to the discovery of a manufacturing quality issue at the joins of the fuselage sections.
Calhoun minimized these as “fit-and-finish issues with respect to the joins of our fuselages” that Boeing is fixing through enhanced process controls and more communication with the suppliers of the fuselage sections.
These “are just nagging problems, difficult problems, and we applied real engineering talent and expertise to that,” he said.
Deliveries resumed with two Dreamliners delivered last month and a further seven so far this month.
Boeing Chief Financial Officer Greg Smith said on the analyst call that about 100 undelivered Dreamliners are currently awaiting the fuselage-join fix. As mechanics work through the backlog, “the majority” can be delivered by year end, he said.
Ken Herbert, financial analyst with Canaccord Genuity, told investors Wednesday that while that outcome is possible, there is a risk it may not materialize.
“With the continued pressure on international travel, the outlook for 787 does not appear to be improving soon,” Herbert wrote.
On the defense side of the business, Boeing recorded a $318 million write-off for the modifications underway in San Antonio on the two new Air Force One jets. Smith attributed this largely “to COVID-19 impacts and performance issues at a key supplier.”
Boeing’s latest engineering mishap came only this month so didn’t show up in the first-quarter financial results.
That was the discovery of an electrical problem on the 737 MAX that forced the grounding of about 100 MAXs already in service and a temporary halt in deliveries.
Calhoun said April deliveries of the MAX will therefore be “very light.” However, he said, Boeing is “finalizing the plans and documentation with the FAA” for a relatively quick fix that will allow airlines to return their airplanes to service.
On CNBC, Calhoun said that work will take only three to four days per airplane once the FAA approves Boeing’s fix, which consists of changing some fasteners that mount electrical control units behind the pilot in the cockpit and ensuring the units are electrically grounded.
Calhoun said he expects FAA approval in “relatively short order,” so that Boeing can catch up on MAX deliveries in time for the summer recovery in air travel that U.S. airlines are focused on.
CFO Smith said Boeing currently has about 400 MAX jets built and stored in inventory, left over from the two-year-plus grounding of the jet.
Although Boeing will “have to remarket some of these aircraft and potentially reconfigure them,” he said, it still expects to deliver about half this year and the majority of the rest next year.
Speaking to the financial analysts, Calhoun said more than a third of the planes that were parked by airlines during the grounding have returned to service.
Still, he warned of a potential serious roadblock to the recovery of MAX production: Formal approval by China’s aviation regulator to unground the MAX is now not expected until the second half of this year.
He said the opening of the Chinese market — which represents 25% of the global growth in the aerospace industry over the next decade — is critical to 737 MAX production rates as well as prospects for future orders.
With U.S.-China tension currently high, he said Boeing will lobby the Biden administration to restore trade relations.
“It’s time for us to just point out the economic implications of trade with China in the aerospace industry and commercial aviation specifically,” Calhoun said. “We have great relationships in China, we have firm orders on the books with China, but we need to get the orders train going again.”
“We’ve got to reinstate our trade relationship in aerospace with China. That’s a big part of the market long-term,” he said. “But it’s going to take a little time.”
Calhoun said Boeing still plans to gradually increase the MAX production rate to 31 jets per month in early 2022.
Asked about the yawning gap in market share that has developed between Boeing’s MAX and the rival Airbus A320neo jet family — a MAX backlog of about 3,200 jets versus an A320 backlog of more than 5,600 jets — Calhoun conceded that he cannot make up the share lost during the worldwide grounding of the MAX following the two fatal crashes.
“I can’t make up for the production gap that we created,” he said. “I’m not going to try to regain that ground. I’m simply from this point forward going to try to hold our own.”
Boeing’s debt grows
Peter McNally, financial analyst at Third Bridge Group in New York, said Wednesday that “while Boeing delivered overall revenues that were generally in line with consensus expectations, the company came up short in a few key areas.”
“Cash flow failed to meet expectations while liquidity fell and debt remained high,” he said.
Boeing’s revenue for the quarter was down from $16.9 billion a year ago.
The quarterly loss, 92 cents per share, compared to a loss in 2020’s first quarter of $1.11 per share. Last year, jet production was stopped in March as Boeing closed its factories in response to the pandemic outbreak.
Boeing reported free cash flow — defined as cash from operations minus capital expenditures for property, plant and equipment — of negative $3.4 billion for the quarter.
Boeing’s cash on hand at quarter-end fell $3.7 billion to $21.9 billion. The company’s net debt increased by nearly $4 billion since last quarter to $41.7 billion.
On CNBC, Calhoun said that the heavy cash outflow was nevertheless “still slightly ahead of the track we had planned” toward the goal of getting back to positive cash flow next year.
CFO Smith said cash flow should improve through the remainder of the year as Boeing ramps up 787 Dreamliner and 737 MAX deliveries.
Rob Stallard, financial analyst with Vertical Research Partners, said in a note to investors that while these first-quarter results “are clearly not good on both an absolute and relative basis, this should have been widely expected by investors.”
The one bright spot in the aviation market during the pandemic has been the air cargo market.
More dedicated freighter aircraft are needed globally today than in 2019 because there are so many fewer passenger aircraft flying that used to carry substantial amounts of cargo in their bellies.
On Wednesday, Boeing announced an order from Azerbaijan cargo carrier Silk Way West Airlines for five 777 Freighters. That’s worth about $828 million, according to market estimates from aircraft valuation firm Avitas.
A new approach for Boeing’s next new jet
Beyond the downturn from the pandemic, Bank of America analyst Ron Epstein asked Calhoun on Wednesday’s call how Boeing can recover long term following the long litany of engineering problems that have emerged on the 747-8, the 737 MAX, the 787, the 777X, the KC-46 Air Force tanker as well as the company’s space projects and now its Air Force One program.
Calhoun responded by citing “an awful lot of fantastic work in our defense programs,” and said there are plans to transfer that to the commercial side and significantly change how Boeing’s next new airplane is engineered and built.
Boeing’s expertise in making structures out of carbon composites, and new engineering modeling techniques developed on the defense side that apply both to the airplane design and the manufacturing processes, will make it possible to “create parts that can be assembled in one motion with great efficiency.”
While this has been successfully accomplished on low-volume defense projects, including the T-7 Red Hawk jet fighter trainer, Calhoun said, “We have to prove to ourselves we can do it at scale.”
Boeing’s shares closed Wednesday at $235.46, down $7.01, or 2.9%.