Boeing Takes $4.9 Billion Charge for Prolonged Grounding of 737 MAX Planes
(Source: Reuters; published July 18, 2019)
By Eric M. Johnson
SEATTLE --- Boeing Co said on Thursday it would take an after-tax charge of $4.9 billion in the second quarter on estimated disruptions from the prolonged grounding of its lucrative 737 MAX passenger jets after two deadly crashes.
The charge is from “potential concessions and other considerations to customers,” and the impact of continued lower production, the world’s largest planemaker said in a statement, as airlines that use the planes extend flight cancellations until November.
The charge will result in a $5.6 billion reduction in revenue and pre-tax earnings in the second quarter, Boeing said.
Boeing shares rose 2 percent in after-hours trading, which Morgan Stanley analyst Rajeev Lalwani said was a sign that investors were comfortable with the size of the charge and Boeing’s production plans, disclosed less than a week before the company plans to release quarterly financial results on July 24.
“The company showed a degree of confidence in a return to service before year-end and getting up to 57 per month on 737 production in about 12 months, which investors were increasingly skeptical of,” Lalwani said.
Boeing is facing one of the worst crises in its history as its fastest-selling jetliner has been grounded since March after crashes in Ethiopia and Indonesia that together killed 346 people in a span of five months. (end of excerpt)
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Boeing to Recognize Charge and Increased Costs in Second Quarter Due to 737 MAX Grounding
(Source: Boeing Co.; issued July 18, 2019)
CHICAGO --- Boeing announced today it will recognize an impact to earnings when it releases second-quarter 2019 results on July 24.
Boeing will record an after-tax charge of $4.9 billion1 ($8.74 per share) in connection with an estimate of potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays. This charge will result in a $5.6 billion reduction of revenue and pre-tax earnings in the quarter.
While the entire estimated amount will be recognized as a charge in the second quarter, the company expects any potential concessions or other considerations to be provided over a number of years and take various forms of economic value.
Additionally, Boeing's estimated costs to produce the aircraft in the 737 accounting quantity increased by $1.7 billion in the second quarter, primarily due to higher costs associated with a longer than expected reduction in the production rate. The increased 737 program costs will reduce the margin of the 737 program in the second quarter and in future quarters.
Boeing continues to work with civil aviation authorities to ensure the 737 MAX's safe return to service, and these authorities will determine the timing of return to service. For purposes of the second-quarter financial results, the company has assumed that regulatory approval of 737 MAX return to service in the U.S. and other jurisdictions begins early in the fourth quarter 2019.
This assumption reflects the company's best estimate at this time, but actual timing of return to service could differ from this estimate.
The second-quarter financial results will further assume a gradual increase in the 737 production rate from 42 per month to 57 per month in 2020, and that airplanes produced during the grounding and included within inventory will be delivered over several quarters following return to service. Any changes to these assumptions could result in additional financial impact.
"We remain focused on safely returning the 737 MAX to service," said Boeing Chairman, President and CEO Dennis Muilenburg. "This is a defining moment for Boeing. Nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes. The MAX grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks."
Boeing Chief Financial Officer and Executive Vice President of Enterprise Performance and Strategy Greg Smith added, "We are taking appropriate steps to manage our liquidity and increase our balance sheet flexibility the best way possible as we are working through these challenges. Our multi-year efforts on disciplined cash management and maintaining a strong balance sheet, in addition to our strong and broad portfolio offerings, are helping us navigate the current environment."
Boeing's previously-issued 2019 financial guidance did not reflect impacts related to the 737 MAX. Due to the uncertainty of the timing and conditions concerning 737 MAX return to service, new guidance will be issued at a future date.
Boeing will issue its full second-quarter earnings release on July 24 and discuss the company's financial results and outlook, including impact of 737 MAX grounding, during a conference call that day.
As Grounding Drags on, Forecast Drops for 737 MAX
(Source: Forecast International; issued July 18, 2019)
At the beginning of 2019, Boeing planned to increase production of the 737 from 52 aircraft per month to 57 per month by mid-year. At the time, Boeing had a firm order backlog for 4,754 aircraft, including 4,661 orders for 737 MAX models. Demand for the older 737 “Next Generation” models has faded, and Boeing will soon deliver the remaining NG models in 2019.
Boeing’s plans for a production increase were upended by two fatal crashes of MAX 8 aircraft in early service (a Lion Air aircraft in October 2018 and an Ethiopian Airlines aircraft in March 2019). Initial conclusions from investigators pointed at problems caused by the MAX’s new automated anti-stall system (MCAS). Regulators have grounded the aircraft as Boeing develops and implements any necessary changes to the aircraft’s systems to make it safe to fly.
In April, Boeing announced a temporary cut in the 737 production rate from the then-current 52 per month to 42 per month. Aircraft rolling off the production line are placed into storage pending clearance by regulators of the MAX family’s return to flight. Our current forecast for 2019 reflects the production of these undelivered aircraft even though Boeing will not deliver most of them until 2020.
We have cut expected production of the MAX in 2019 to under 400 aircraft (Boeing’s reported deliveries for the year will be much lower even under a best-case scenario). Our near-term forecast assumes that Boeing will be stuck at the 42-per-month rate deep into the autumn of 2019, and will then return to the prior 52 aircraft rate per month by December. We think the rate will temporarily stay at 52 per month in the first half of 2020 as the manufacturer finally delivers aircraft built in 2019 along with aircraft then rolling off the line.
Boeing could then return to its plan for a production ramp-up to 57 aircraft per month around the middle of the year.
Boeing is altering the way the MCAS functions during flight operations, and the forecast assumes that the problem can be solved with a relatively easy-to-implement fix. However, there is a substantial risk that Boeing faces a more protracted process of gaining the necessary regulatory approvals than it currently anticipates, or that the changes to the aircraft’s systems will be more time-consuming than we expect. We expect to periodically adjust the forecast as the projected timeline for the MAX family’s return to service firms up.