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ANALYSIS: 737 Max grounding costs Boeing $1 billion

Boeing is pulling its fiscal 2019 guidance and pausing share buybacks to save cash amid a dip in its first-quarter revenue, the worldwide grounding of the 737 Max and scrutiny of its safety processes.

The manufacturer generated $22.9 billion in revenue during the first quarter ending on 31 March, down 2% year-on-year as Boeing delivered 50 fewer 737 aircraft during the quarter than originally planned. The 737 Max groundings cost the company $1 billion because of labour costs to update flight control software that has been linked with two fatal crashes of those aircraft, along with costs of storing the aircraft and slowing production.

Boeing will publish revised fiscal 2019 guidance “at a later date,” Boeing chief executive Dennis Muilenburg says during an earnings conference call on 24 April, calling these “challenging times” for the company with the ongoing Max groundings.

“Our first order of business is the safe return to service of the 737 Max,” Muilenburg says. “We know it will take time. We have to earn and re-earn the trust of the flying public.”

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The company reported $2.1 billion in net profit for the first quarter, down 13% year-on-year. Operating profit was $2.35 billion, down 18% from the previous year. Its operating cash flow for the first quarter decreased 11% year-over-year to $2.78 billion, placing pressure on the manufacturer to conserve cash amid the uncertainty of how long Max deliveries will be delayed.

Boeing in January had forecast it would generate $110 to $112 billion in revenue for 2019, which would have been 10% more than in 2018. Factors related to the Max that will shape Boeing’s 2019 financial results are the return to service timeline and conditions for the aircraft, delivery ramp-up, the rate of acceptance into service and the rate of production for the aircraft, Boeing chief financial officer Greg Smith says during the call.

“We expect our financial results to continue to be adversely impacted until we safely return the 737 Max to service, ramp up production rates and resume deliveries to customers,” Smith says.

Airlines operating the 737 Max have removed the aircraft from flight schedules. American Airlines and Southwest Airlines, for example, have said they expect cancellations of 737 Max flights through August.

The company has been running different scenarios to minimise costs during the groundings and to prepare for when the ban is lifted. Boeing cut its goals for 737 Max monthly production to 42 aircraft from 52 on 5 April.

Boeing reported a backlog worth $487 billion including 5,600 commercial aircraft valued at $399 billion. It handed over 149 commercial aircraft during the first quarter, down 19% year-on-year. New commercial aircraft orders during the first quarter included an IAG order for 18 777X aircraft, 20 787s ordered by Lufthansa, and 10 787s ordered by Bamboo Airways. Revenue for the commercial aircraft division shrank 9% to $11.8 billion compared with that quarter in 2018. Its operating profit declined 17% year-on-year to $1.8 billion.

SAFETY SCRUTINY

US lawmakers and regulators around the world have sought answers about the safety certification and training processes for the 737 Max following two fatal crashes within five months during which 346 people died. Investigators studying Ethiopian Airlines flight 302 and Lion Air flight 610 are concerned about flight control software created by Boeing for the 737 Max aircraft to prevent it from stalling. If pilots were not trained to use this software, called the Manoeuvring Characteristics Augmentation System, it could have made it difficult to maintain altitude.

The US Senate Committee on Commerce, Science and Transportation has launched an investigation into allegations that inadequate training of Federal Aviation Administration safety inspectors caused the agency to improperly evaluate that software on the Max.

Boeing is coordinating with the FAA and is nearly ready to begin the certification process of the software fix, following 135 test and production flights of the update on 737 Max aircraft, Muilenburg says.

“That’s our responsibility, we own that,” he says. “I personally had the chance to fly on two of those test and demonstration flights.”

Muilenburg says “we remain confident in the fundamental processes” of Boeing safety certification but an internal committee formed by the company will analyse ways to improve safety certification in addition to reviewing how it designs and builds aircraft.

The FAA is also facing scrutiny for allowing Boeing to certify the 737 Max flight control software. The agency says it is reviewing how it outsources safety certification to companies instead of doing the process in-house. Outsourcing can be a necessity, Acting FAA Administrator Dan Elwell says, because the agency would need 10,000 additional workers and $1.8 billion in new funding to assume all responsibilities for aircraft certification.

DEFENSE AND MRO REVENUE OFFSET GROUNDING COSTS

Increased revenue from Boeing defense, space, MRO supply chain logistics and training support divisions offset some of the costs of the 737 Max grounding.

Boeing Global Services generated $4.6 billion in revenue during the first quarter, up 17% year-on-year from $3.9 billion, driven by new contracts for the MRO services division including P-8 Poseidon aircraft training for the UK Royal Air Force. Boeing formed Global Services in 2017 by merging formerly disparate services units, leading to an operating profit of $2.5 billion in 2018, up 12% from the previous year.

The Defense, Space and Security division of Boeing increased its revenue by 2% year-on-year to $6.6 billion, raising its operating profit by 12% during that period to $847 million. Contracts awarded during the first quarter include orders for 78 F/A-18 aircraft and 19 P-8 Poseidon aircraft for the US Navy. New orders worth $12 billion, 31% of which came from customers outside the US, raised the order backlog to $67 billion.

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