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Boeing profit plummets as 737 Max crisis deepens

Boeing’s profit in the third quarter fell by more than half as the company continues to suffer from fallout following the global 737 Max grounding.

As a result, the company was forced to raise debt to ensure liquidity through one of the biggest crises in its 103-year history.

The Chicago-based aircraft manufacturer also said on 23 October it will shift the timeline for its next-generation 777X into 2021 and slow production of its flagship Dreamliner 787. Both schedule changes are significant blows to the company as it struggles to return to normalcy following two fatal accidents and an ensuing scandal around certification of its 737 Max aircraft.

Profit fell 53% to $1.2 billion for the third quarter of 2019 from $2.3 billion for the same period a year earlier. The 737 Max crisis was responsible for the lion’s share of this decline, the company says on a 23 October earnings call. Boeing delivered just 62 commercial aircraft during the quarter, down 67% from 190 in the same period a year ago.

Company-wide revenue fell to $20 billion during the quarter from $25.1 billion in the same quarter a year earlier. Revenue for the commercial airplanes division fell to $8.2 billion from $14.1 billion, a decline significantly impacted by the 737 Max grounding, the company says.

The manufacturer also says it increased debt to support liquidity during the time that the aircraft was not being delivered.

“We raised additional debt, increasing the balance by $5.5 billion to help shore up the liquidity position as we work through the current Max challenges,” chief financial officer Greg Smith says on Wednesday’s quarterly earnings call.

“In addition to the Max, our financials, particularly cash flow, will be impacted by the decrease in the 787 production rate and timing of 777 due to lower cash from pre-delivery and delivery payments,” he adds. The company’s debt at the end of the third quarter totaled $24.7 billion, up from 19.2 billion at the beginning of the quarter.

737 MAX RE-ENTRY TIMELINE

Executives on Wednesday repeatedly said the company’s future success depends on the timeline for the Max's return to service.

Boeing executives say the company continues working under the assumption it will be re-certificated by the Federal Aviation Administration (FAA) and returned to service during the fourth quarter of 2019. It plans to gradually increase 737 production to 57 monthly by late 2020 from its current rate of 42 monthly.

Chief executive Denis Muilenburg detailed the additional steps and processes which have been implemented to get the aircraft flying again. He says the company will focus on safety above all else.

So far, Boeing has conducted more than 800 flight tests amounting to more than 1,500 flight hours, he says. The jet maker has completed a “dry run” of the certification flight test it will conduct with the FAA. It expects more of these flights to take place in the coming weeks.

“We are making steady, daily progress, performing against our plans,” Muilenburg says. “We want to make sure it is safe and will take the time to get it right.” That said, Muilenburg warns that global certification “may be a phased approach and the timing may vary across jurisdictions.”

Last week, the European Union Aviation Safety Agency (EASA) said the earliest it could see the aircraft returning to service would be January 2020. Several airlines, including Southwest Airlines - the world’s biggest operator of 737 aircraft - and Air Canada, have taken the plane out of their fleet’s schedules until mid-February.

To smooth the 737 Max's re-entry into service, Boeing says it is closely coordinating with aircraft safety regulators around the world.

“We have engaged with several dozen regulators around the world and ultimately it will be their timeline,” he adds. “Our interest is on the safe return and we will continue to work with the FAA and continue to coordinate with other regulators.”

Boeing halted 737 Max deliveries after the March grounding. Once the aircraft is cleared to re-enter service, Boeing expects to deliver already-produced aircraft over several quarters and that “the majority” will be delivered in the first year. “Bringing all of those stored aircraft up to fleet operations will be a multi-quarter effort,” Muilenburg says.

The company’s backlog for 737 is about 4,400, ensuring sustainable long-term growth once the aircraft is re-certificated, Boeing says.

777X DELAYS

Boeing’s timeline for the 777X next-generation aircraft has also slipped, showing troubles with the 737 Max are causing company-wide challenges. First flight is now expected “early in 2020,” and the first delivery has been pushed to the beginning of 2021. That is an aggressive timeline, according to aviation industry analysts.

Problems with the GE Aviation GE9X engine prompted Boeing to push the timeline out. The 777-9 had originally been due to fly in 2018 and the first aircraft was scheduled for delivery to launch customer Emirates by June 2020, with up to nine shipments in close succession. Emirates has 150 777Xs on backlog.

Currently, the total number of 777X orders stand at 344 aircraft.

DREAMLINER PRODUCTION SLOWDOWN

Another victim of the company’s current crisis, as well as global economic uncertainty and trade wars, is Boeing’s flagship 787.

Muilenburg notes the current economic climate has swayed the manufacturer to reduce its production rate to 12 aircraft yearly from 14 for about two years beginning in late 2020.

“The lack of orders from China has put pressure on the production rate and it was appropriate for us to make an adjustment,” Muilenburg says. “We continue to monitor the current global trade environment, and we have to be very disciplined about it.”

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Muilenburg adds the company has not yet come to a decision about developing a new mid-market aircraft. He stresses the priority remains getting the 737 Max back flying, with other programmes secondary. “We are continuing to drive forward with our efforts but we are still not at a decision point. We are still looking at a middle of the next decade entry into service timeframe and will make a decision when we are ready.”

Boeing’s Commercial Airplanes division booked net orders worth $5 billion during the quarter, including orders for twenty 787s for Korean Air, eight 787s for Air New Zealand and six 777 freighters for China Airlines. Commercial Airplanes backlog included nearly 5,500 airplanes valued at $387 billion.

MANAGEMENT SHUFFLE

On Tuesday, Boeing made the first management reshuffle in the wake of the Max crisis, replacing chief commercial officer Kevin McAllister with Stan Deal, a Boeing veteran. Deal’s role as chief executive of Boeing Global Services will be taken by Ted Colbert, former chief information officer.

Boeing reported its third quarter results the same day that Indonesian investigators placed blame for the 29 October 2018 crash of Lion Air 610 squarely on the shoulders of the Boeing Company for the malfunction of the company’s Maneuvering Characteristics Augmentation System (MCAS) on the 737 Max aircraft. 189 people died in that crash.

A second 737 Max aircraft, operated by Ethiopian Airlines, crashed on 10 March, killing 157 people. That lead to the worldwide grounding of the new single-aisle aircraft three days later. It is widely suspected that MCAS also contributed to that accident.

Muilenburg and other Boeing executives will be in Washington, DC next week to testify before the House Transportation Committee about the 737 Max and the MCAS system.

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