Arab Press

بالشعب و للشعب
Saturday, Feb 22, 2025

Boeing Goes From Bad to Worse as Coronavirus Crushes Air Travel

Boeing Goes From Bad to Worse as Coronavirus Crushes Air Travel

Boeing's problems are multiplying from the COVID-19 pandemic. The stock may trade at a steep discount to its early-2019 high, but investors should still stay away.

Boeing (NYSE:BA) had a terrible 2019, as its top-selling product, the 737 MAX, was grounded by safety issues last March. The company repeatedly missed self-imposed deadlines to get the 737 MAX recertified. As a result, Boeing delivered just 380 commercial jets last year: down 53% year over year. This caused the company to post a core operating loss of $3.4 billion and burn $4.3 billion of cash in 2019.

Conditions are far worse in 2020. The 737 MAX is still grounded, and now the COVID-19 pandemic has caused demand for new aircraft to shrivel up. Not surprisingly, Boeing's recent first-quarter earnings report was quite awful. Given that airline executives almost universally agree that it will take a long time for air travel demand to recover, Boeing's pain could continue for many years.

Another terrible quarter
The pace of Boeing's aircraft deliveries slowed again last quarter. The company delivered just 50 commercial jets, with the majority being 787 Dreamliners. As a result, the commercial airplanes segment reported a $2.1 billion operating loss. This included a $336 million charge to repair a substandard component on older 737 jets.

Boeing's defense business also lost money last quarter because of an $827 million pre-tax charge related to its troubled KC-46 military tanker program. The only bright spot was the services segment, which generated $708 million of operating income (up 8% year over year) on $4.6 billion of revenue. The net result was a $1.7 billion core operating loss, about two-thirds of which was driven by the one-time items discussed.

Investors should be far more concerned about Boeing's cash flow. Boeing burned through $4.7 billion last quarter: more than its full-year cash burn for 2019. Between compensation payments related to the 737 MAX grounding, delayed aircraft deliveries resulting from customers' distress, and Boeing's need to support its supply chain, cash burn will likely continue to exceed reported losses for most if not all of 2020.

This has forced Boeing to steadily increase its borrowings. It ended Q1 with $38.9 billion of debt and $15.5 billion of cash and investments. As recently as the end of 2017, Boeing had negligible net debt, with $11.1 billion of debt offset by $10 billion of cash and investments. It also had a pension deficit of $15.9 billion as of the end of 2019. If anything, that pension deficit is bigger now, because of a sharp plunge in interest rates and weak stock market performance year to date.

A (very) tough road ahead
Boeing's management recognizes that it will take a while for demand to return, especially for the wide-body jets that serve long-haul international routes. As a result, it is slashing 787 production by 50% by 2022 (from 14/month to 7/month) and cutting 777 family production from 5/month to 3/month next year. Boeing had previously announced plans to reduce 787 Dreamliner output to 10/month by early 2021, but it had intended to start increasing production again by 2023.

Boeing also expects to ramp up 737 MAX output more slowly than it had planned previously. It currently estimates that the production rate will reach 31/month by the end of 2021. Prior to the 737 MAX grounding, it was in the midst of boosting production to 57/month.

While Boeing is doing its best to cut costs, dramatically lower production rates will put pressure on profit margins and lead to much lower free cash flow than the $13.6 billion the company generated in 2018. (The commercial airplanes business accounted for 60% of Boeing's 2018 revenue and likely contributed an even greater proportion of its cash flow.)

Furthermore, the near-term pain will extend beyond the commercial airplanes division. With airlines retiring lots of planes and desperate to cut costs, demand is now plummeting on the commercial side of Boeing's services division. As noted above, the services business was the lone bright spot in Boeing's first-quarter earnings report.

Too much debt and a cloudy future
By the end of this year, Boeing is likely to have at least $35 billion of net debt, and its pension deficit could be close to $20 billion. And while management expects free cash flow to turn positive again next year, that would only be due to the one-time tailwind of delivering many of the 737 MAX jets assembled after the grounding last year and currently held in storage.

Boeing knows that it needs to solidify its balance sheet by repaying the debt it has incurred since the beginning of 2019. However, with free cash flow likely to remain weak for an extended period, that could take five years or more. Until then, the company's dividends and share buybacks will remain suspended.

Bulls might argue that Boeing stock has fallen by more than two-thirds since peaking last February and that even if it takes five years for conditions to return to normal, the stock is still a bargain.

However, this overlooks the risk that slower growth represents the "new normal" for the global aviation business. While people will eventually get over their fears of COVID-19, lenders that are getting burned yet again by airlines -- particularly overseas, as U.S. airlines have had fairly solid profit margins and balance sheets in recent years -- may hesitate to extend credit to airlines in the years ahead. Weaker airlines may be allowed to fail, and carriers that grew rapidly by offering unsustainably low fares could be forced to retrench. That could weigh on aircraft demand beyond 2025.

Thus, Boeing's annual free cash flow could remain well short of the all-time high of $13.6 billion reached in 2018 for the foreseeable future. Meanwhile, the aerospace giant continues to carry an $80 billion market cap. At that price, there simply isn't enough upside to justify taking the risk of buying Boeing stock today.
Newsletter

Related Articles

Arab Press
0:00
0:00
Close
The negotiation teams of Trump and Putin meet directly, establishing the groundwork for a significant advance.
Israeli Minister Urges Hamas to Surrender and Depart from Gaza.
Iran Considers Moving Its Capital Due to Urban Difficulties
Israel and Hamas Finalize Sixth Exchange of Hostages and Prisoners During Continuing Gaza Ceasefire
Leaders of BRICS to Gather in Rio de Janeiro for July Summit
Muhsin Hendricks, a trailblazing openly gay imam, was killed in South Africa.
Trump's special envoy for hostage affairs cautions Hamas against challenging Trump before Saturday's deadline.
Two British citizens apprehended in Iran amid escalating tensions.
Israel Issues Threat of Military Action as Hostage Negotiations with Hamas Continue
Hamas Coordinates Worldwide Solidarity Marches in Reaction to U.S. and Israeli Initiative
Israel Warns of Ending Gaza Ceasefire Due to Hostage Situation
King Abdullah II Dismisses US Proposal to Relocate Palestinians, Commits to Welcoming Gaza Children.
Lebanon Installs New Government with Hezbollah's Impact on Key Ministries
Report: Iran Attempted to Assassinate Trump During Election Campaign
U.S. Authorizes $7.4 Billion Arms Sale to Israel
Iran's Supreme Leader Rejects Nuclear Negotiations with the U.S.
UN Chief Denounces Trump's Gaza Plan, Cautions Against Ethnic Cleansing
Pressure Intensifies for a Free Trade Agreement between the UK and GCC in Light of Economic Difficulties
Israel to Withdraw from UN Human Rights Council Due to Accusations of Anti-Semitism
EU Reaffirms Gaza's Essential Role in Future Palestinian State Following Trump's Proposal
Iranian Currency Reaches All-Time Low Amid US 'Maximum Pressure' Initiative.
UN Reaffirms Ban on Deportation from Occupied Territories Amid US Gaza Proposal
Palestinians Fear Repeat of 'Nakba' Amid Ongoing Crisis in Gaza
UAE Aids in the Exchange of 300 Prisoners Between Russia and Ukraine
Egypt Seeks Global Backing for Two-State Solution Following US Proposal for Gaza Plan
Trump's Suggestion to 'Seize Control' of Gaza Represents a Significant Shift in US Policy
French President is the first EU leader to extend congratulations to the new Syrian President.
Tunisian President Appoints New Finance Minister Amid Economic Crisis
Trump Suggests U.S. 'Takeover' of Gaza, Prompting Global Worries
Trump's Proposal for Gaza Provokes Global Debate
President Trump Suggests Moving Gaza's Palestinian Population
Aga Khan IV, Spiritual Leader and Philanthropist, Dies at 88
Erdogan and Syria's Sharaa Talk About Collaboration to Counter Kurdish Militants
Trump Suggests U.S. Control of Gaza Strip Amid Ongoing Conflict
Trump Resumes 'Maximum Pressure' Strategy to Limit Iran's Oil Exports.
Ex-British Soldier Sentenced for Espionage on Behalf of Iran and Fleeing from Prison
Gazans in Egypt Reject Displacement, Struggle with Return to War-Torn Home
Queen Rania Urges Protection of Children’s Rights at Vatican Summit
Hamas Officials Ready to Begin Negotiations for Phase Two of Gaza Truce
Trump Expresses Caution Over Gaza Ceasefire as Netanyahu Visits Washington
Oman to Host 18th Indian Ocean Conference on Maritime Security and Trade
Emir of Kuwait Meets BlackRock CEO for Talks on Investment Opportunities
Queen Rania of Jordan Calls for Global Action on Children’s Rights at Vatican Summit
Egyptian President El-Sisi Invited for White House Meeting Following Jordanian King’s Visit
Queen Rania Calls for Protection of Children’s Rights at Vatican Summit
Israeli Military Operations Continue on Lebanon Border Amid Ceasefire Tensions
Israeli Hostage's Release Highlights Uncertainty Over Family's Fate
Israeli Military Operations Escalate in Southern Lebanon Amid Hezbollah Tensions
Zayed Award for Human Fraternity Announces 2025 Honorees
Kuwait Anticipates a 12% Increase in Budget Deficit for the 2025-2026 Fiscal Year
×