Will Boeing Survive?

Will Boeing Survive? Boeing (BA) is one of the titans of industry. This company plays in aviation and defense, commercial and military, supporting customers that span over 150 countries. Boeing is big business. However, that business is under stress.

Normally, air travel is fairly resistant to different pressures. A company like Boeing has contracts in place that provide some level of predictable income even when the economy is poor, but this is a different time. COVID-19 is changing everything.

“Our commercial airplane deliveries in the second quarter reflect the significant impacts of the COVID-19 pandemic on our customers and our operations that included a shutdown of our commercial airplane production for several weeks,” says Greg Smith, CFO and Executive Vice President of Enterprise Operations.

“The diversity of our portfolio including our government services, defense and space programs will continue to provide some stability as we navigate through the pandemic and rebuild stronger on the other side.”

The problem is that demand for aircraft is zero, and Boeing was already facing a variety of challenges.

Aircraft Demand Is Zero

People just aren’t flying and that means that airlines don’t need new planes right now.

Boeing had zero orders in April and delivered just six planes in March. At the end of April, the company had a total of negative 255 planesordered after a series of cancellations. By the end of May 2020, Boeing lost 602 orders.

The second quarter of 2020 rebounded towards the end, but Boeing delivered only 20 commercial airplanes in total during that period, bringing the year-to-date total to just 70. To give these numbers context, consider last year.

In the first half of 2019, Boeing delivered 239 aircraft, 90 of which were in the second quarter. Last year, the company’s 737 Max had 5,000 orders.

Boeing also posted margins and other markers of efficiency that surpassed its rivals. Its share price soared. Then, things started to unravel. The year 2019 was one of Boeing’s worst.

Can Boeing Survive?

In March 2019, the Boeing 737 Max was grounded after safety regulators in 42 countries, including the United States, banned the aircraft. That month, one of the 737 Max planes malfunctioned in Ethiopia. Before that, it was an October 2018 crash in Indonesia. In both cases, the vertical fluctuations and oscillations were the similar.

China was the first country to take action, but others quickly followed suit. At that point 340 of the 737 Max planes were registered as in use, comprising 8,600 flights per week.

Boeing is working to get the 737 Max back in the air, but the impact of the Max failure was adding to the company’s debt until at least 2021 – but that was before the pandemic.

COVID-19 increased pressure on the company. Boeing’s customers lost as 80% in revenue and some had to cancel scheduled aircraft deliveries.

With roughly half of the world’s commercial aircraft parked for lack of demand, Boeing just doesn’t have a market right now. Even if the company does get the 737 Max ungrounded, it will still have a rough road ahead.

People aren’t flying and won’t be for a while. Boeing will be lucky to shop 2/3 of what it had forecasted to deliver. Some analysts are expecting that Boeing will close 2020 with $60 billion in debt, which is four times what the company owed at the end of 2018.

Is Boeing Too Big To Fail?

With everything going on, Boeing has had to do some fancy footwork. The company cut its workforce by roughly 10% and it conducted a $25 billion bond offering – one of the largest in history.

The terms of the bonds ranged from three years to 40. Boeing experienced a strong response and issued a statement on the bond offering that said: “we do not plan to seek additional funding through the capital markets or the U.S. government options at this time.”

This bond offering came on the tail end of a $13.8 billion loan and less than a year after Boeing had a $5.5 billion issue in July 2019.

Boeing promises that it has “long-term viability” and just needs “short-term assistance” to get there.

Boeing also took other steps to save money. The company added over $8 billion to its cause by taking proactive steps to retain cash, such as walking away from an agreement to buy the jetliner component of Embraer, a plane manufacturer based in Brazil. Boeing suspended its dividend as well.

Overall, Boeing is pushing for $60 billion to help it weather the storm caused by the grounding of 737 Max and the downturn in flights stemming from the COVID-19 pandemic. Now, the company’s current liabilities are almost as much as its market cap.

Will A Government Bailout Save Boeing?

So far, the company has not tapped into government aid relating to the pandemic, but that could change. Executives at the airplane manufacturer are still weighing whether to apply for stimulus funds, especially now that government efforts to bolster the economy has thawed the credit markets. That said, there is only so much funding Boeing can expect to attract, especially with its existing obligations being so massive.

It might all sound dire, but don’t forget, this is Boeing. At a news conference in March, President Trump said, “ We have to protect Boeing.”  Evidently, Boeing can get government funds if it needs them. The bigger question is whether that would be enough.

Boeing is facing some real challenges. To manage these issues, the company has made some major organizational changes and formed a group devoted to lean operations – Enterprise Operations, Finance & Strategy.

This may help Boeing navigate the troubled waters, and there are some reasons to be encouraged. Boeing was able to resume airplane production at some of its facilities, putting roughly 27,000 back to work before May.

The company also announced that its second 777X plane successfully completed its first flight. Investors will need to balance their perceived risk versus their anticipated reward before opening a position in Boeing.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.