April Becomes Worst Month Ever For Boeing—So Far

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Credit: Stephen Brashear/Getty Images

April is the cruelest month for Boeing. As of April 6, the aerospace and defense giant’s Puget Sound, Washington, sites were closed indefinitely for deep cleaning, and Boeing is trying to convince workers to come back after at least one local death from the COVID-19 pandemic was reported in late March. That same day, the company announced that work at its factory in Charleston, South Carolina, was suspended, too.

Meanwhile, Boeing is asking if there are some workers who do not want to come back at all.

On April 2, Boeing announced voluntary layoffs, and CEO and President David Calhoun acknowledged there likely will be changes coming to its product lines. But as monumental as those changes might be, they are not the biggest concern. Instead, the OEM first must figure out how to finance itself through the rest of the year.

The numbers were well-publicized in March as the U.S. Congress raced to pass its multitrillion-dollar stimulus and relief bill in response to the coronavirus pandemic, the CARES Act. Jaws dropped when Boeing sought a $60 billion aid package for itself and its suppliers as part of the legislative sausage-making.

But it is easy to see why it did so: Short-term commercial paper financing is frozen as a recession suddenly grips the U.S. and likely the world. Boeing Chief Financial Officer Greg Smith said access had dried up, at least temporarily. Calhoun tried to offer a brave face and said Boeing has access to $15 billion in cash and another $9.6 billion revolving credit line.

So why would Boeing seek government aid? The company ended 2019 with more than $27 billion in debt, doubling the red ink from the year before. By mid-March, before credit markets froze, it had newly opened and then fully drawn down a credit line totaling nearly $14 billion. Boeing Commercial Airplanes alone is burning through more than $4 billion a month to bankroll itself and some suppliers, starting with Spirit AeroSystems and General Electric Aviation, and it faces other big bills such as the $4.2 billion acquisition of most of Embraer’s commercial division and $4 billion in debt repayments. Analysts say Boeing could have to nearly double its debt again this year, especially if the grounded and halted 737 MAX is not recertified until late this year due to further delays caused by the COVID-19 pandemic.

Boeing wants either no strings attached on direct U.S. aid or government guarantees that back its loans from other financiers. Calhoun tried swatting down the idea of giving Washington outright equity in what is the country’s biggest exporter and second-biggest defense prime.

But that is likely easier said than done. “There aren’t many options to explore for Boeing without a guarantee from the government,” says Dhierin Bechai, an investment advisor with the Aerospace Forum whose Boeing analyses are widely followed on Seeking Alpha. The commercial aviation outlook has turned so bad so rapidly that newly minted airliners are being flown to storage. Even if commercial credit markets thaw enough for new debt to be taken on, Boeing could get hammered on the terms of that debt. “Doing the math, you can conclude rather quickly that Boeing can sustain a couple of months, but if this is going to last well into late 2020, then this is not sustainable,” Bechai said March 31.

But there probably will be less work in which to be involved. Any day now, Boeing is expected to announce new, lower production rates for 2020 and perhaps for the longer term.

Analysts are lowering their expectations for future production. Rob Stallard and Karl Oehlschlaeger of Vertical Research Partners on March 30 said they envision a revised requirement for 6,300 new airliners over the next five years, compared with their previous forecast of 8,300. By type, they foresee 1,540 fewer narrowbodies and 380 fewer widebodies, both roughly 25% cuts versus their prior demand model.

Analysts Sheila Kahyaoglu and Greg Konrad of Jefferies on March 31 forecast that aircraft deliveries will fall about 70% year-over-year in 2020, and they reduced their 2020-23 cumulative delivery estimate by around 60%, as airlines continue to defer deliveries with a significant portion of the widebody fleet parked.

The Jefferies duo assume Boeing will produce its 787 widebody at an average rate of four a month this year, stepping up to six in 2021 and 2022. They also forecast 777X deliveries at a rate of one per month, “which is quite pessimistic relative to [an] assumption of three a month.”

Similarly, Manfred Hader and Robert Thomson of Roland Berger say a recovery to overall 2019 production rates will take two years, albeit faster for Airbus and longer for Boeing, given the MAX situation.

The new normal for Boeing (and Airbus) is lower for longer when it comes to large commercial aircraft demand. With the MAX already putting it behind, Boeing may become eager for any American to boost his or her stake in the company, even Uncle Sam.

Michael Bruno

Based in Washington, Michael Bruno is Aviation Week Network’s Senior Business Editor and Community and Conference Content Manager. He covers aviation, aerospace and defense businesses, their supply chains and related issues.

Comments

3 Comments
An interesting choice of words, "giving Washington outright equity". Giving implies a gift. Which is hardly what Boeing would be doing here.

Boeing has been selling products which are either dangerous (737MAX) or don't work the way they are supposed to (KC-46). The company made a very tidy sum doing business like this and decided to buy back its shares instead of either saving for a rainy day or funding R&D.

Now, instead of eating a large slice of "humble pie", Boeing is taking the, "Too big to fail and too big to jail.", approach to it business. The hubris of Mr. Calhoun is remarkable - in his mind it's still about rewarding shareholders even if this means that the $60 billion bailout (which translates to every US citizen - man, woman and child - investing $181 in the US aviation industry) ought to be provided without any "strings" attached.

Any responsible "investor" in Boeing (which is how the US government ought to see itself) would demand that Mr. Calhoun and the entire board of Boeing be fired before they would receive a penny. Getting the company back to the basics of building good airplanes is the only long term way forward for Boeing.
I have a hard time dropping the blame into Mr. Calhoun's lap. The seeds for this go back to Mr. Stonecipher, a devout disciple of Jack Welch. Much of business's current fixation on immediate, short term, shareholder value focused behaviours have long since pushed research and initial investment to less capable start-ups and fiscal conservatism out the window.
Mr.Welch's actions, short sighted as they are, were only a response to the desires of the owners of GE, to sell high. For that demand, we all have to look in a mirror.
I have to agree with GWROBLE. Boeing has to be held accountable for the actions the company has taken for the last 20 years; whether it be for the good, the bad, or for the ugly.

The good includes the development and delivery of the 787 product, despite the issues of integration of new technologies with aviation.

The 767 tanker called the KC-46 is the bad. This airframe being adapted to the tanker role is almost 40 years old. Its a venerable airframe that helped to pioneer the ETOPS 120 to Europe. It has flown successfully for almost all the trunk airlines of the United States on a variety of routes. Proven. The bad: Boeing put this airplane, which was non-FADEC, against an airframe that was not only FADEC, but also completely FBW. They adapted a design proven, but old.

There is no reason to embellish about the ugly. Boeing is in no position to beg and chose who or how it gets the financing it needs to manage its day to day business at this point. People are in quarantine the world over right now, but they are going to want to fly again, there is no doubt about that. But they are going to want to fly with airlines they trust on airplanes they can count on. Boeing needs to restore both the perceived, but also the real trust in the world. There’s the old saying “if it ain’t Boeing, I ain’t going.” It would break my heart to hear its inverse.