Commercial aerospace manufacturer Boeing reported what many in business media have concluded as its worst quarterly financial performance ever, principally from the ongoing global grounding of the global 737 MAX fleet. The outlook presents continued challenges that will likely extend for many months to come.  Boeing 737 MAX 8

Following up on the manufacturer’s disappointing Q2 operational aircraft output report, the anticipated report of financial performance was not any better. The company reported a noteworthy $2.9 billion loss as the cost impacts for the global grounding crisis continue to manifest. The loss was the largest in Boeing history and prospects for continue costs loom large. The company booked a $4.9 billion charge in the quarter directly related to ongoing grounding related costs.

Revenue managed to come in slightly above market expectations due to recognition n of some defense aircraft shipments as being credited to commercial.  That stated, the quarterly revenue number of $15.8 billion represented a 35 percent year-on-year decline. If it were not for acceleration of booking deals in the company’s defense sector, the revenue number would have been lower.

Boeing indicated that the production slowdown thus far is expected to cost $1.7 billion, which will reportedly be spread out into future years under Boeing quite unique program-based accounting system.  The incremental costs in the Q2 quarter reportedly do not include litigation related costs, nor compensation to accident victims which has been reported to be a $100 million fund for families and communities.

Last week, Boeing indicated that it expects the 737 MAX to be re-certified for service in the United States and some other counties by October. Industry and media reporting indicates a less optimistic forecast, more attuned to early 2020 at this juncture. It appears that Boeing has not convinced global regulators that all issues with the aircraft have been addressed.

 

777X Program Delay

To add more disappointment, Boeing indicated that the planned launch of the 777X will be pushed out to 2020 because of identified issues with the aircraft’s engines being developed by General Electric.  Boeing warned that “there is significant risk” to its plans for first delivery in late 2020 because of the ongoing engine design challenges.

 

Pressures Mount and the Production Suspend Card is Played

To little surprise, the internal and customer pressures are mounting for Boeing. The aircraft’s launch customer, Southwest Airlines, has now extended the grounding status of its existing 737 MAX aircraft to all of 2019 and announced it is permanently suspending services at Newark Airport as a result of the extended Max groundings.  American Airlines anticipates $400 million in additional charges, again as a consequence of grounded aircraft. European budget carrier Ryanair’s CEO, reporting on the airline’s quarterly performance today, indicated that the prolonged grounding could lead to restricted growth and job cuts in 2020. Ryanair expected to have 58 of the aircraft by the summer of 2020. In responding to analyst questions regarding what fleet number the airline was planning to, CEO Michael O’Leary indicated; “It may well move to 20, it could move to 10, and it could well move to zero if Boeing don’t get their s____ together pretty quickly with the regulator.

To add more of a sense of urgency to global regulators and 737 MAX airline customers, Boeing CEO Denis Muilenberg indicated: “Should our estimate of the anticipated return (October) change, we might need to consider possible further rate reductions or other options including a temporary shutdown of the Max production.” The CEO added: “a temporary shutdown of production line could be more efficient than a sustained lower production rate because it would reduce storage rates.

According to a report from the Seattle Times (Paid subscription or free metered view) , the above statement caught analysts somewhat as a surprise, not anticipating that a production suspension was on the table. The report indicates; “Typically, Boeing has ramped up production in careful increments of about 5 aircraft per month and has taken at least a year between the increases to ensure a smooth and stable transition in both supply chain and its own assembly lines.” The notion of transitioning from temporary full suspension back to 52 aircraft per month in a short period of time does have precedence.

While Supply Chain Matters can accept such thinking, our belief is that the production suspension card has more to do with placing added pressure on global regulators to accelerate the aircraft’s recertification process and return to global operational service. It is likely the only card that Boeing can play to counter mounting global-wide concerns.

At the same time, as observed by Ryanair’s CEO, Boeing had better redouble efforts to work closely with global regulators to assure entities that no stone has been left unturned in reviewing this aircraft’s operating systems, especially its flight control systems.

This is indeed the most significant corporate crisis for Boeing and its supply network partners.  With the close of Q2, the outlook remains challenging in terms of leadership and regaining trust among airline customers and the flying public. This is likely a long road ahead.

 

 

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