Boeing Stirs Fears of Cash Crunch with $9 Bn Tab for 737 Max

Boeing Stirs Fears of Cash Crunch with Tab for 737 Max at $9 Billion and Rising (excerpt)

(Source: Bloomberg News; published Oct. 24, 2019)

Boeing Co.’s $9.2 billion tab for the grounded 737 Max is combining with sales pressures on two wide-body models to put the planemaker in cash-conservation mode.

The cash drain will peak next year when the jet is flying again and production starts to shift into a higher gear, Boeing Chief Financial Officer Greg Smith said Wednesday. That will coincide with a factory slowdown for the 787 Dreamliner and the 777, eroding revenue from the company’s top two long-distance models.

The evolution of the company’s business strategy will depend largely on the financial fallout from the best-selling Max. But stabilizing 737 production and reducing debt will be the priorities, outweighing Wall Street goodies such as share buybacks or any spending on developing new jetliners.

Boeing posts second straight quarter of negative free cash flow

“Look, considering the circumstances of where we are, obviously that cash profile is more challenging than it was,” Smith said on Boeing’s quarterly earnings call.

306 MAXes in storage thru Oct. 24, plus 387 grounded = 691 on the ground at the moment. Credit @AeroimagesChris

— Scott Hamilton (@LeehamNews) October 25, 2019

Boeing consumed $2.9 billion in free cash during the third quarter as it continued to churn out narrow-body Max jets, which the company can’t deliver because of a global flying ban imposed in March after two fatal crashes that killed 346 people. That’s the most the company has burned through in at least a quarter-century, and a $7 billion swing from $4.1 billion in cash generation a year earlier. (end of excerpt)

Click here for the full story, on the Bloomberg News website.

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DALLAS, Texas --- The grounding of the Boeing 737 Max has lasted far longer and, as Southwest Airlines and American Airlines can attest, more expensive than airlines ever expected.

The CEOs of both airlines say they are talking to Boeing about compensation for damages running into the hundreds of millions — and counting.

Southwest has had an all-Boeing fleet since it began flying 48 years ago, but that could change. CEO Gary Kelly said the Southwest board has directed him to study whether the airline should start buying planes from other aircraft makers, which would almost certainly be Boeing's European rival, Airbus.

“We put our future in the hands of Boeing and the Max and were grounded,” Kelly said on CNBC.

That has cost Southwest $435 million in operating income since March when the Max was taken out of the air by regulators after a second fatal crash. American put its cumulative Max-related loss at $540 million.

American Airlines Chairman and CEO Doug Parker said he is in early talks over compensation.

“We feel highly confident that the losses that American Airlines has incurred won't be incurred by American shareholders, but will be borne by the Boeing shareholders,” Parker said on a call with analysts and reporters.

Parker and Kelly both repeated that their airlines maintain their full faith in Boeing's ability to fix the plane, and they are eager to put them back into service.

Boeing said this week that it still expects approval this year from the Federal Aviation Administration for changes it is making to flight software and computers on the Max. Kelly said “everything has to go pretty perfectly” for Boeing to hit that target. Southwest has taken the Max out of its schedule until early February. American and United, the only other U.S. carrier with Max jets, are aiming for a January return.

Airlines are getting a lift from strong travel demand and a decline from year-ago fuel prices.

Dallas-based Southwest earned $659 million in the third quarter, up 7% from a year ago, despite taking a $210 million hit in operating income from the Max grounding. Adjusted earnings were $1.23 per share, easily beating analysts' average expectations for $1.09, according to a survey by Zacks Investment Research.

Revenue rose 1% to $5.64 billion despite a 3% reduction in passenger-carrying capacity due to the Max grounding. A closely watched figure, revenue for each seat flown one mile, rose about 4%.

Southwest Airlines Co. shares rose $2.53, or 4.8%, to $55.77 in afternoon trading after beginning the day up nearly 15% this year.

Shares of American Airlines Group Inc. were up 79 cents, or 2.8%, to $29.08 and began the day down 12% this year.

Fort Worth, Texas-based American reported third-quarter profit of $425 million, a 14% increase. American, however, lowered the top end of its forecast for full-year profit.

American is coming off a dreadful summer for flight delays and cancelations caused not only by the Max but also a caustic fight with unions over stalled contract negotiations. The company sued two unions and convinced a federal judge to agree that some aircraft mechanics conducted an illegal work slowdown this year, idling an unusually high number of planes at times. After a five-month break in negotiations, contract talks resumed last month.

American's problems have triggered speculation about a change in management. On Thursday, the normally laid-back Parker gave an unusually forceful promise that next year will be better than this one because American will get its Max jets back and settle the labor dispute.

“Nice to hear the renewed vigor,” J.P. Morgan analyst Jamie Baker told Parker.

“Doug, whatever coffee you had this morning, I'd like some of it,” said Stifel analyst Joseph DeNardi.

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