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Boeing expects 737 Max crisis costs to reach $18.6bn

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Via Financial Times

Boeing has placed the total cost of the 737 Max crisis at $18.6bn, more than double its previous estimate as it accounts for payments to airlines, reduced profits over the plane’s production cycle and expenses tied to halting manufacturing. 

The Chicago manufacturer on Wednesday reported a full-year loss of $636m on $76.6bn in revenue — its first annual loss in more than two decades as it grappled with the fallout from the grounding of its bestselling jet. For the fourth quarter, it recorded $17.9bn in revenue and a loss of $1bn. 

The company reported a $2.33 core loss per share, omitting certain pension items. Analysts had expected core earnings per share of 17 cents. The unadjusted loss per share for the fourth quarter was $1.79.

Boeing shares were up about 3 per cent in pre-market trading in New York. “Announcing all of these negative items today removes major overhangs on the stock,” Peter Arment, an analyst at Robert Baird, said in a note. “This quarter’s kitchen-sink report is a step in the right direction for the BA stock.”

Boeing’s projected costs have ballooned since it forecast last year that the grounding of the jet would cost it $9.2bn. Since then it has stopped production and stretched to mid-year its estimate of when federal regulators might clear the Max to return to the skies.

The plane maker now anticipates $8.3bn in payments to airlines for not delivering the jets and $6.3bn in costs over the Max’s entire production cycle, according to an investor presentation on Tuesday. Boeing also expects $4bn in “abnormal production” costs that include payments to suppliers and keeping Max workers on the payroll elsewhere in the company while the assembly line in Renton, Washington, is shut down. 

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Boeing has struggled since regulators grounded the Max 10 months ago following two plane crashes within five months that killed a total of 346 people. A flight control system triggered by a single sensor was implicated in the disasters after it repeatedly pushed the noses of the planes downward. Fallout from the crisis led to the ouster of chief executive Dennis Muilenburg, who was replaced by board veteran David Calhoun.

The economic damage has rippled beyond Boeing. On Wednesday, General Electric forecast lower revenue and profits in 2020 partly because of the grounded jet.

Mr Calhoun dismissed the idea of rebranding the Max during an interview with CNBC on Wednesday.

“I’m not going to market my way out of this,” he said. “This plane will recover with the flying public when airline pilots step on it, fly it, like it, and by the way, based on all the test flights we’ve had to date, which are many, they do.”

Credit rating agencies have downgraded the aerospace manufacturer’s debt, though it remains investment grade. The company, which recently secured a $12bn loan, reported $27.3bn in debt at the end of the fourth quarter. Although the company bought back $43bn worth of shares between 2013 and the first quarter of 2019, a person familiar with the matter said that after the Max returns to service, Boeing will prioritise paying down debt over repurchasing shares. 

Boeing plans to restart production of the Max slowly, according to the person familiar with the matter. How soon share buybacks resume hinges on the production rate.

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Additionally, the company took a $410m charge in connection with the failure of its unmanned commercial spacecraft, the Starliner, to dock at the International Space Station. It has also confirmed that it would cut production of the 787 Dreamliner from 12 to 10 a month.

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