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Boeing hit with new industrial setbacks as 737 MAX crisis deepens

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Via Reuters Finance

(Reuters) – Boeing Co (BA.N) cut production of its flagship Dreamliner and delayed the arrival of a successor to its 777 mini-jumbo, piling new pressures on a rejigged senior management team on Wednesday as the continued safety grounding of its 737 MAX sliced third-quarter profits.

The world’s largest planemaker also said it was delaying plans to step up production on its money-spinning 737 line in the Seattle area, and would not hit a record-level 57 aircraft monthly until late 2020, months later than previously planned.

Despite the trio of industrial setbacks, Boeing shares were up 3.2% in morning trading as its steady estimate of a 737 MAX return in the fourth quarter appeared to be eclipsing the downside of the 787 production cut and other problems, an analyst said.

“The 787 cut appears to be mostly tied to China trade negotiations, which at least have the potential to improve over the next 12-months,” said Seaport Global analyst Josh Sullivan.

The profit slump and fresh setbacks capped a tumultuous week for the world’s largest planemaker, already in the eighth month of a deepening crisis over the grounding of its best-selling single-aisle following deadly crashes.

On Tuesday, the company ousted the top executive of its crucial commercial airplanes division, Kevin McAllister, in an unexpected management shakeup related to the MAX crisis that senior industry sources say puts Chief Executive Dennis Muilenburg squarely in the firing line in the event of further revelations or if the company fails to recover from the MAX crisis.

Muilenburg’s title of board chairman was stripped earlier this month.

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Muilenburg told analysts on a conference call that Boeing may consider cutting or halting 737 production if return-to-service assumptions change.

Muilenburg also expressed regret over instant messages, first published by Reuters on Friday, in which a former Boeing pilot describes erratic simulator behavior of software now linked to both crashes. The 2016 messages were sent months before the aircraft entered service.

Boeing has begun taking steps to increase safety oversight in its industrial operations and at the board level, he added.

Its timeline of a fourth quarter MAX return compares to a January target from European regulators, while major U.S. carriers United, Southwest, and American were all scheduling without the MAX until next year.

Boeing also said there was “no significant change” to estimated payments to airline customers related to the 737 MAX grounding, part of the $8 billion price tag Boeing has estimated for the MAX crisis.

FILE PHOTO: Aerial photos showing Boeing 737 Max airplanes parked at Boeing Field in Seattle, Washington, U.S. October 20, 2019. Picture taken October 20, 2019. REUTERS/Gary He/File Photo

On Wednesday, the U.S. manufacturer reported a 53% drop in quarterly profit and had a negative free cash flow of $2.89 billion in the quarter, compared with a positive free cash flow of $4.10 billion a year earlier.

Core operating earnings fell to $895 million or $1.45 per share, from $1.89 billion or $3.58 per share, a year earlier.

NEW SETBACKS

Muilenburg said the company was making good progress on testing the final software fix for the 737 MAX and developing related training materials, though the U.S. Federal Aviation Administration said on Tuesday that it will need at least several more weeks for review.

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The MAX has eclipsed work on a potential new mid-market airplane, Muilenburg said, and other industrial setbacks broadened pressure on the company’s new commercial leadership.

Boeing named veteran executive Stan Deal, who had been running its two-year-old Global Services Division, to the top job at commercial airplanes. Deal’s challenge to get the MAX back into service globally while simultaneously handling new aircraft deliveries and boosting 737 production is seen as one of the most formidable logistical challenges in the industry’s history.

After the 737 MAX safety ban in March, Boeing cut 737 monthly production from 52 aircraft to 42 and halted deliveries, cutting off a key source of cash and hitting margins.

It told suppliers in late July it planned to increase production from 42 to 47 single-aisle aircraft per month in October, return to the pre-crash rate of 52 aircraft per month in February 2020, and hit a record stride of 57 single-aisle jets per month in June 2020, industry sources said.

That schedule – now delayed by months – was contingent on winning regulatory approval early in the fourth quarter.

On Wednesday, Muilenburg said General Electric (GE.N) was making “good progress” addressing problems with its GE9X engine for 777X, and the aircraft was still on track for a first flight in early 2020. But Boeing was now targeting early 2021 for the first delivery of the 777X, and sees 3 total 777-program deliveries per month in 2020, verses 3.5 per month in 2019, Muilenburg said.

With the 777-8 and 777-9, Boeing aims to maintain its grip on the ‘mini-jumbo’ market by leap-frogging rival Airbus’ (AIR.PA) 365-seat A350-1000 and scooping up fresh orders following the demise of the A380 superjumbo.

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Citing global trade tensions and a lack of orders from China, America’s largest exporter was also reducing the 787 Dreamliner production rate to 12 airplanes per month for approximately two years beginning in late 2020.

Slideshow (2 Images)

Boeing faced additional uncertainty over future production rates for its Dreamliner earlier this month from lost business theoretically putting a hole in production after Boeing increased its build-rate to 14 aircraft per month from 12 at twin U.S. factories.

Boeing Chief Financial Officer Greg Smith said the company’s cash profile was more challenging than before, but long-term objectives unchanged. Boeing also said it does not anticipate share buybacks until 737 MAX returns to service.

Reporting by Ankit Ajmera in Bengaluru and Eric M. Johnson in Seattle; Additional reporting by Sanjana Shivdas in Bengaluru; Editing by Sriraj Kalluvila and Nick Zieminski


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