Boeing says it might have to shut down 737 Max production
Boeing CEO Dennis Muilenburg warned investors Wednesday that the company might need to further slow or temporarily halt its 737 Max production.
Boeing has continued to build the 737 Max, its bestselling jet, although at a slower pace. The plane has been grounded since mid-March because of two fatal crashes that killed more than 300 people.
Boeing hopes to get approval for the plane to fly again sometime early in the fourth quarter. Muilenburg said any further delays in approval to fly the 737 Max again could jeopardize its production. A further slowdown or temporary shutdown of 737 Max production is “not something we want to do, but an alternative that we have to prepare for,” Muilenburg told investors on a conference call. He said the company needs to prepare for that “to make sure we’ve covered all scenarios.”
It is unclear when the 737 Max will be allowed to return to service. Boeing is working on a software fix to a safety system which is believed to have caused the two crashes. But it says it won’t be able to present that fix to aviation authorities until September at the earliest, and it hopes to have a certification flight in October.
After the certification flight, Muilenburg said Wednesday he believes regulators will approve the 737 Max for flight in a matter of weeks. So it’s possible the plane won’t be cleared to fly again until at least late this year.
Boeing executives would not say when it will decide to slow or halt production if its timeline to return to service is not met. Boeing said the uncertainty about the return to service means it still can’t give guidance on future results.
Because of the grounding, Boeing reported its largest loss ever — a $3.7 billion adjusted loss in the second quarter. The company said any slowdown or halt in production could lead to even more losses. The slower pace of 737 Max production has already increased Boeing’s production costs by about $1.7 billion.
The company had already warned investors that it would take a $5 billion profit hit from its inability to deliver the 737 Max to its customers.
Boeing’s $3.7 billion adjusted loss compares to a $2.4 billion profit Boeing earned last year. Boeing’s results did not include a cost of litigation related to the two crashes. The company announced it will set up a fund to distribute $100 million to the families of victims. But it also said it took a $201 million hit to profit last quarter primarily for a litigation reserve.
The company was helped by better results from its defense and services business. Earnings from defense, space and security business more than doubled, increasing $600 million. Its commercial aircraft unit reported a $4.9 billion loss as revenue plunged by $9.2 billion.
In addition to the 737 Max issues, the company also warned Wednesday that it may not be able to deliver its newest aircraft, the 777X, by the end of next year, as it had hoped. Previously disclosed problems with the jet’s General Electric (GE) engine means that target for the first delivery is at “significant risk.”
Boeing also burned through about $1 billion in cash in the quarter. But Boeing said it had nearly $10 billion in cash and securities on hand to help it weather continued losses. It was able to issue new debt during the quarter to help increase its cash reserves.
Boeing said it will take several quarters for Boeing to deliver all its undelivered 737 Max planes once it receives approval for the plane to fly again. Because Boeing gets most of the money from its customers at the time of delivery, that new guidance suggests that Boeing will face reduced revenue well into 2020, even the best case scenario for getting the plane back in the air late this year.
New orders for other commercial aircraft have also fallen sharply during the crisis.
The loss and warning of a possible shutdown of 737 Max production sent shares of Boeing (BA)down nearly 3%. Most of that decline took place after the comment about the possible shutdown. But the warning on results last week and the fact that the loss was actually a bit less than some Wall Street estimates kept the drop in shares from being worse. Shares of Boeing(BA) are actually up more than 12% since the start of the year, although they are down since the second fatal crash in March.