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Boeing's $5.6bn 737 Max hit surprises some investment analysts

Financial analysts have expressed surprise at the scope of the 737 Max-related charge Boeing will take in the second quarter, though they find optimism in Boeing's intention to maintain 737 Max production at the current rate.

"We believe the $5.6 billion charge to compensate airlines is considerably higher than most expected," writes JPMorgan in a 19 July investor update.

The bank had thought the financial impact would not be more than $5 billion.

"Essentially, Boeing is establishing a $5.6 billion reserve that it will run down over several years as it negotiates and then executes settlements, customer by customer," says JPMorgan's update.

A report issued the same day by Canaccord Genuity calls the $5.6 billion figure "substantially more than had been expected".

"There are likely other charges still [to] be finalised for passenger compensation, other costs associated with the restoration of the Max brand and other considerations," it adds.

Another investment bank, Morgan Stanley, called Boeing's charge "in the range of our recent estimates", in a 19 July research update.

Boeing announced on 18 July it expects a negative revenue impact of $5.6 billion over several years due to "considerations to customers for disruptions related to the 737 Max grounding and associated delivery delays".

Airlines have said they intend to seek compensation from Boeing for being unable to operate aircraft and for delivery delays. Analysts say compensation could come in the form of aircraft services, revised payment terms or rescheduled delivery slots.

Boeing will take the entire $5.6 billion as a revenue reduction in the second quarter, which will slash its second quarter after-tax earnings by $4.9 billion, says a media release.

The company will issue its second quarter financial results on 24 July.

Boeing also says it has no plans to cut production to less than 42 aircraft monthly; news, analysts welcomed.

"We expect investors will be relieved that Boeing maintained a production rate" of 42 aircraft monthly, says JPMorgan's note. "The market was highly concerned about the impact of a production cut at suppliers."

Boeing reduced production in April, shortly after the grounding took effect, from 52 to 42 aircraft monthly.

Analysts worried another rate cut would further disrupt the supply chain by forcing suppliers, including 737 fuselage maker Spirit AeroSystems, to also reduce production.

Spirit has kept making 52 fuselages monthly amid the grounding through an arrangement with Boeing. That deal has minimised the grounding's financial impact on Spirit, which heavily relies on 737 work.

"It now appears that, barring an additional setback on the programme timing, [Boeing] will maintain its pull from [Spirit] at 52/month to minimise the potential disruptions," Canaccord says.

Asked about supplier production rates, Boeing says, "We’ll work on any inventory management plans on a case-by-case basis with suppliers. The impact of this temporary slow-down may be different across the supply chain".

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