After multiple highly publicized issues with Boeing’s Max line of airplanes, Wall Street’s eyes were locked on the company’s earnings report Wednesday. The good news was the struggling aerospace and defense giant managed to beat analysts’ earnings per share and revenue forecasts in the first quarter. But the bad news? The bar was set quite low—and Boeing is slowing airplane production in hopes of restoring its reputation.
“Near term, yes, we are in a tough moment,” CEO David Calhoun said in a memo to employees Wednesday, following the earnings report.
Boeing lost $1.13 per share on revenues of $16.6 billion in the first quarter, beating consensus estimates for a $1.76 loss per share and $16.2 billion in revenue. The company also narrowed its loss from $425 million a year ago to $355 million in the first quarter. However, Boeing still burned through $3.9 billion in cash. That was less than Wall Street’s pessimistic consensus estimate for a quarterly cash burn of $4.5 billion, but still not good news for investors.
Boeing’s revenues also fell 8% from a year ago in the quarter, marking the first revenue drop at the company in seven quarters. The slowdown came after Boeing delivered just 83 commercial airplanes in the first quarter, 36% fewer than a year ago, leading commercial airplane unit revenues that are critical to Boeing’s performance to sink 31% year over year to $4.65 billion.
The drop in aircraft deliveries was largely the result of Boeing’s decision to move forward with a slower manufacturing pace. After a series of mishaps, Calhoun, who announced in March he would step down from his CEO role at the end of the year, said Boeing will need to slow manufacturing, even if it means a “difficult” period for the company financially, in order to ensure quality for customers.
“Lower deliveries can be difficult for our customers and for our financials. But safety and quality must and will come above all else,” he wrote. “We are absolutely committed to doing everything we can to make certain our regulators, customers, employees, and the flying public are 100% confident in Boeing.”
The delivery slowdown comes after the Federal Aviation Administration (FAA) imposed a production cap of just 38 737 Max aircraft per month on Boeing, following the blowout of a door panel on an Alaska Airlines flight over Oregon more than three months ago—as well as two 737 Max crashes in 2018 and 2019 which killed 346 people. But Reuters reported last month that Boeing 737 Max production has been even lower than the FAA requires in recent months, citing unnamed industry sources. Calhoun said he was “leaving no stone unturned” as he attempts to correct Boeing’s safety and quality issues with this slower production schedule in Wednesday’s memo to employees.
The move to a slower production pace is already impacting Boeing’s commercial airplane unit margins, however. The unit saw its margins drop to negative 24.6% in the first quarter, compared with a negative 9.2% a year ago.
Despite margin and reputational issues as a result of Boeing’s recent mishaps, Calhoun told employees that demand for the company’s aircraft remains “incredibly strong.” To his point, Boeing managed to land 131 gross orders in the first quarter, and its order backlog stayed strong at 5,591 planes, worth roughly $44 billion—despite consumer fears about flying on some of Boeing’s most popular models.
As Fortune previously reported, this sustained demand is largely the product of an aircraft market dominated by just two major players—Airbus and Boeing. It’s essentially a “duopoly,” according to analysts, and that prevents big drops in demand during periods of distress.
Still, after Boeing’s latest earnings report, Wall Street analysts had more questions than answers, and many remained cautious. Bank of America global research analyst Ronald Epstein maintained his “neutral” rating on Boeing, noting that there are still questions around the CEO transition, Boeing’s potential acquisition of Spirit AeroSystems, and how long a turnaround will take for Boeing after multiple brand-damaging events.
“We think the company will be able to continue to benefit from the robust global air-travel demand environment and, in the long run, benefit from improved quality assurance,” he wrote. “In the short to medium term, however, there are risks due to disruptions related to management changes, multiple government investigations, and the potential acquisition of Spirit AeroSystems.”
Boeing has been in talks for months to buy Spirit AeroSystems, an aerostructure (aircraft frame) manufacturer that makes the 737’s fuselage and was spun off from Boeing roughly two decades ago. Calhoun told CNBC it’s “more than likely” the companies will reach a deal in the second quarter, but some analysts have questioned its potential price tag.
With a number of big questions still in the air, Boeing’s stock dropped nearly 3% on Wednesday after its earnings release, despite topping analysts’ earnings per share and revenue forecasts in the first quarter.
