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Boeing moves to preserve cash and draws down $13.8bn loan

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Via Financial Times

Line chart of Share price, $ showing Coronavirus  has compounded woes for Boeing shareholders

Boeing lost close to a fifth of its market value on Wednesday as the aircraft manufacturer took measures to preserve cash in the face of a coronavirus pandemic that has caused turmoil in the aviation industry and threatens to further weaken its balance sheet.

The company, already dealing with the costs of the grounding of its 737 Max aircraft, has tapped the full amount of a $13.8bn loan arranged barely a month ago, according to people familiar with the arrangement.

Boeing also instituted a hiring freeze and limited overtime for all employees except for those working to return the Max to service and on “other key efforts” to support customers, according to a memo from Boeing’s top two executives. It also restricted travel and discretionary spending to activities critical to the business.

The plane maker’s stock fell 18 per cent to below $200 for the first time since July 2017 and has now more than halved since the day in March 2019 when the Max suffered its second deadly crash, triggering a worldwide ban on its use.

“The year ahead is shaping up to be as challenging for our business as any in the recent past,” David Calhoun, chief executive, and Greg Smith, chief financial officer, wrote in a message to employees.

“On top of the work of safely returning the 737 Max to service and the financial impact of the pause in Max production, we’re now facing a global economic disruption generated by the Covid-19 coronavirus.”

Bar chart of Biggest one-day share price falls, % showing Boeing shares fell by the most on record following loan drawdown

Boeing turned to its banks in January to help deal with the escalating costs of the Max crisis. It has put the bill at $18.6bn from compensation to airlines that have been disrupted by the grounding, greater expense over the jet’s production life cycle, and the cost of continuing to pay workers during a production shutdown. The figure does not include any legal costs related to the deaths of 346 people.

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The loan, originally set at $13bn from a syndicate of more than a dozen banks including Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Morgan Stanley, has now been increased to $13.8bn and drawn down in full. One person familiar with the decision said it was made “out of an abundance of caution”. News of the draw down was first reported by Bloomberg.

Boeing’s stock had already dropped sharply as the coronavirus inflicted financial damage on its airline customers.

Airlines have cut flights and slashed their guidance and the International Air Transport Association estimates the disease could cost the industry $113bn this year. Scott Kirby, the president of United Airlines, said on Tuesday that revenues could fall as much as 70 per cent this spring.

Some Boeing investors are concerned that capacity cuts could prompt airlines to delay aircraft deliveries in the second half of the year, squeezing cash flow for the manufacturer, said Peter Arment, an analyst at Robert W Baird.

While Boeing has sufficient liquidity if the Max returns to service by mid-year, the company was spending a lot of cash in the first half of the year, he added. “It’s a little bit of a perfect storm at the moment because we don’t have clarity on Covid-19 and its impacts, and we’re still waiting for that positive news — that we do expect — on 737 return to service.”

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