Boeing To Cut More Jobs, Conserve Cash Amid Pandemic, Internal Struggles
Boeing will cut more jobs and ramp up its cash-preservation strategy as it continues to streamline operations and minimize financial damage exacerbated by the global airline downturn, company executives said Oct. 28.
The company’s revised workforce plan will see it have 130,000 employees by the end of 2022, reflecting 30,000 voluntary and involuntary cuts compared to before the COVID-19 pandemic. In April, Boeing announced plans to cut 10%, or 16,000 employees, this year, with its Commercial Airplanes and Global Services commercial businesses bearing the brunt of the reductions.
“Regretfully, the prolonged impact of COVID-19 causing further reductions in our production rates and lower demand for commercial services means we’ll have to further assess the size of our workforce,” CEO Dave Calhoun said in a message to employees. Boeing did not detail plans for the additional reductions.
Cash-related moves include funding retirement plans with Boeing stock instead of payments “for the foreseeable future,” CFO Greg Smith said on the company’s third-quarter (Q3) earnings call Oct. 28. The move will “preserve” about $1 billion in cash over the next 12 months, he added. Boeing plans to reduce office space by as much as 30%, cutting real estate expenses.
“We have reduced discretionary spending, including reducing or deferring research and development and capital expenditures,” the company said.
Boeing also will look at refinancing nearly $4 billion in debt maturing in the fourth quarter—part of its $61 billion debt balance it held Sept. 30. The company ended the quarter with $27.1 billion in cash and “marketable securities” after lowering its cash burn to $5.1 billion in the quarter, improvements over Q2’s $5.6 billion. It also had $9.6 billion in “unused borrowing capacity.”
Boeing posted a net loss of $466 million, or $0.79 per share, in Q3 as revenues fell 29% to $14.1 billion, led by a 56% drop in Boeing Commercial Airplanes (BCA) business unit revenues. Its non-generally accepted accounting principles (GAAP), or “core,” net loss was $754 million, or $1.39 per share.
“We currently expect 2021 cash flow to be much improved from 2020 driven mainly by deliveries and inventory burn down associated with 737 and 787 programs,” Smith said. “And we anticipate the cash profile to continue to improve further from ’21 to 2022. While we’re still aiming to turn cash positive in late 2021, the recovery and the continued elevated virus cases make the path much more challenging. Based on what we know today, it’s looking more likely that we will be cash flow positive in the 2022 time frame.”
Analysts viewed the results as better than expected, considering the company’s woes combined with the global pandemic’s ramifications.
“While losing money and burning through over $5B in three months is hardly good news, at least it wasn’t worse than this,” Vertical Research Partners’ Robert Stallard wrote. “While tax clearly helped the [profit-and-loss statement] in the quarter, the [free cash flow] burn was also sequentially better than Q2, and there were no further cuts to BCA build rates. So compared to the last two quarters, we’d call this a relatively boring quarter from Boeing.”
BCA revenues dipped to $3.6 billion as deliveries declined from 62 in the year-ago quarter to 29 last quarter. The MAX grounding and 787 quality issues, which prevented aircraft from being delivered as planned, accounted for the drop. Its operating margin was -38.1%.
Boeing’s Defense, Space and Security arm (BDSS), while providing an overall staunch level of support for the wider company, also continues to be hit by the effects of the pandemic and charges related to continuing issues with the KC-46A tanker. Although offset by a contract extension from NASA for the International Space Station, a U.S. Air Force order for eight F-15EX fighters and an Army contract for nine MH-47G Block II Chinook helicopters, the sector’s earnings were impacted by a $67 million charge for performance issues on the tanker program.
Despite the continuing headwinds, Calhoun is optimistic that the KC-46A is finally poised to turn the corner.
“The tanker has been a drag on us for like three or four years in every way you can think of with respect to investors,” he said. “But we are beginning to clear the hurdle with our customer with respect to its performance in their fleet and their need for that tanker. So that whole relationship, I believe, will begin to transition next year. I believe it will become a strength in our franchise.”
While Calhoun also warns there will be pressure on defense spending as a result of the COVID-19-related spending by governments, the company says the medium- to long-term outlook remains positive. “This is a year of transition in particular for the development programs like the T-7A [trainer] and the MQ-25 and [U.S. Presidential VC-25B] aircraft. Once those get out of development and start to move their way into production, you’ll see modest growth associated with that,” Smith adds.
BDSS Q3 revenues decreased to $6.8 billion, down from $7 billion for the same period in 2019. But the overall backlog remains high, with around $62 billion in orders, of which 30% is from customers outside of the U.S. The KC-46A charge helped drop the unit’s operating margin 1.6 points to 9.2%.
Global Services Results
Boeing Global Services (BGS) revenue fell 21% to $3.7 billion, reflecting steady headwinds from a struggling global commercial airline business. Government services volume increased, and “now is the majority of that business,” Calhoun said. “It continues to go quite well. So I do expect some growth in that.” BGS generated 59% of its Q3 revenues from government work, tipping its year-to-date ratio to 53% of the total.
Boeing said BGS operating margin fell 7.1 points to 7.3% as a result of the dip in commercial business and severance costs.
Executives reiterated that the key to a financial turnaround remains on the commercial side, with the 737 program leading the way. The company has not delivered a 737 MAX since March 2019, when the fleet was grounded following two fatal accidents within five months. Global regulators are close to approving changes to the model that address the issue linked to the accidents. Boeing is confident the approval will come by January, cleaning the way for deliveries—and final delivery payments—to resume.
“As you bridge to an improved cash flow, which it will be, as we see it today, in 2021 over 2020, 737 MAX is the single biggest contributor,” Smith said. “Getting return to service, starting to deliver off the ramp, and then ... informing our production rates and then ultimately, the marketplace and what the recovery looks like, that’s going to be the single biggest driver.”
Boeing shaved planned production rates in July on its 737 ramp-up, 777, and 787 programs. Those monthly rates—31 by 2022 on the 737, two on the 777 next year, and six on the 787 next year—remain in place, but it will continue to monitor the airline industry’s recovery, particularly the widebody sector, for signs of prolonged weakness.
The company sees global passenger traffic returning to 2019 levels “in around three years,” Calhoun said, with recent historical growth rates of 4-5% annually returning several years later. This roughly aligns with IATA’s most recent outlook.