Boeing Facing a ‘Defining Moment’, says CEO, as Planemaker Reports $3.4 Billion Loss
The grounding of the Boeing 737 MAX is hitting the plane-maker where it hurts most: in its results.
The troubled aviation giant reported a $3.4 billion quarterly loss on Wednesday, primarily as a result of the rising costs associated with the grounded airliner.
Overall the firm registered $15.8 billion in sales across the quarter, a fall of 35% from the same period in 2018, largely because Boeing stopped delivering the MAX after its March 13 grounding.
The figures also reflect an announcement by Boeing on July 18 of compensation totaling $4.9 billion for airlines who operate the MAX.
The company is now facing a “defining moment” of its history, Boeing CEO Dennis Muilenburg, said Wednesday.
“We remain focused on our enduring values of safety, quality, and integrity in all that we do, as we work to safely return the 737 MAX to service,” he said.
So what do you need to know?
1. There’s no clear timeline to bring the 737 Max back
Clearly, the first, last and only priority for Boeing is to get the 737 Max back in the skies. Until that happens the plane-maker will continue to suffer.
“It’s absolutely fundamental. There’s no ifs and buts about it,” says aviation expert John Strickland, from JLS Consulting. “They have to get it right.”
But there’s currently no confirmation about when this will happen. Boeing’s second-quarter statement mentions the “uncertainty of the timing” surrounding the aircraft’s return to service, adding “development and testing is underway and we will submit the final software package to the FAA once we have satisfied all of their certification requirements.”
Even when the MAX is certified by the likes of the FAA and EU Aviation Safety Agency, the software behind the Boeing fix will then need to be fitted to every MAX that’s currently parked around the world.
“When you’ve got several hundred aircraft and you’ve got to have engineers who physically have to get on board the aircraft, it’s going to take some time,” adds Strickland.
“You’ve then got to test what’s been done and the pilots for these airlines have to get training.”
It’s not clear yet clear what this training will involve, but Boeing has suggested a computer-based, desktop training approach. Some pilot unions are unhappy with this, however, and are making the case for simulator training. As with everything since the crashes of Lion Air Flight 610 in October 2018 and Ethiopian Airlines Flight 302 in March—with the loss of 346 lives—a lot remains unclear.
2. There’s a cash flow problem
What can be perceived with crystal clarity, however, is that Boeing is currently suffering from a major cash flow problem and it’s mainly resulting from the MAX.
“Buying a plane is a bit like buying a house, in that you make stage payments,” explains aviation analyst Chris Tarry. “What tends to happen is that you agree on a price and sign a contract that could be four, five, or six years before delivery.
“As the delivery date approaches you then start making progress payments and by the time the aircraft is delivered, you have probably paid 25% to 30% of the list price—not the discounted price.”
With zero MAX’s currently being delivered, the plane-maker is, therefore, taking something of a double financial hit.
3. The 737 Max is the biggest problem—but not the only one
The 737 MAX is also a key aircraft for Boeing—four out of five of the firm’s order backlog are 737s. The company’s latest 20-year forecast also predicts that single-aisle airliners will account for 74% of commercial transports ordered worldwide over the next 20 years.
Currently, the 737 is the only single-aisle jetliner Boeing manufactures. Meanwhile, it’s also suffering teething problems with both its new NMA (New Midsize Airplane), which was expected to appear at the Paris Air Show in June, and the long-haul 777X—the successor to the enormously successful, long-haul Boeing 777—which is yet to be test-flighted.
“All the management time is principally being taken up on fixing the MAX,” says Strickland.
4. But Boeing still has orders
Yet the situation is not quite so bleak as it seems. Despite the financial hit of the MAX, Boeing still owns a bulging order book. While confidence in the 737 is at an all-time low—around 20% of U.S. travelers will avoid the plane in the first six months of it’s return, according to a study from consultant Henry Harteveldt—it’s not the case that airlines can simply switch from one manufacturer to another because the long lead times on orders makes this impracticable.
Put simply: there are only two big plane makers out there and both Boeing and Airbus have more than enough orders to keep them going.
“There is nobody else,” adds Strickland. “Not even the manufacturers of successful regional aircraft. Embraer in Brazil is going to become part of Boeing, while Airbus has bought the regional jet program of Bombardier in Canada.”
So, while they’re currently in a state of flux—and financial hardship—Boeing remains big and strong enough to ride out the storm, the analysts say. All it has to do is fix the 737 MAX.
“Not just because of the importance of the program, but also because of their own reputation,” says Strickland. “And to maintain that credibility they’ve had for the best part of a century.”
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