When it comes to coverage of Boeing Co. (BA), public attention has remained largely fixated on the 737 MAX crisis, which appears at last to be approaching its end. With the next-generation passenger aircraft cleared to fly by the Federal Aviation Administration on Nov. 18, many analysts and investors have been breaking out the proverbial champagne.
Unfortunately, while Boeing's 737 MAX regulatory troubles seem to at last be mostly in the rearview mirror, the financial wounds inflicted by the groundings, and the subsequent wave of order cancellations, have yet to heal. Moreover, the impact of the coronavirus pandemic, which effectively crippled the airline industry earlier this year, has further wounded Boeing's finances.
With its balance sheet creaking under the strain of a massive debt burden, Boeing has started to consider selling stock in order to shore up its finances.
Debt levels looking dangerous
As I discussed previously, Boeing was a key advocate for the April bailout of the aerospace and airline sectors. However, the venerable aerospace company ultimately opted to not take any federal bailout cash. Instead, it went to the bond market to raise much-needed funds. On April 30, Boeing announced it had successfully completed a $25 billion bond offering.
While Boeing's decision to go to the bond market rather than partake in a federal bailout was meant to demonstrate the company's financial health and resilience, it also increased its – already considerable – leverage. Even before the latest debt raise, Boeing's debt levels were on the rise, having more than tripled over the previous two years to $38.9 billion. As analyst Ben Kramer-Miller observed on April 29, this resulted in Boeing's interest expenses climbing from $102 million in the first quarter of 2018 to $262 billion in the first quarter of 2020.
Based on Boeing's third-quarter financial statements, which were published on Oct. 28, the company's total debt now stands at $60.96 billion. Factoring in $10.56 billion in cash and cash equivalents, Boeing's net debt amounts to $50.4 billion.
Stock sale may secure some succor
Boeing's debt burden has become dangerously large by any metric. Renewed sales of the 737 MAX may help to ameliorate some of the financial pain, but there are plenty of issues weighing on the company's core business besides its next-generation flagship passenger aircraft. Of particular concern is the 787 Dreamliner program, which has suffered from anemic demand. On Dec. 4, Boeing announced that it would cut 787 production to five per month, the third time the company has slashed production plans this year.
With its business under so much pressure, Boeing has begun to seek a means of reducing some of the burden on its strained balance sheet. Already overloaded with debt, Boeing's options in the credit markets are limited. Consequently, it is now considering a return to the equity market, as Chief Financial Officer Greg Smith informed analysts at a Credit Suisse investor conference on Dec. 4:
"When it comes to capital deployment, it will be all about paying down that debt. We'll continue to invest in the business, but we've got to get this debt balance down. And we'll look at every opportunity to do that in the most efficient way, including equity."
Boeing has been caught in the unenviable position of being forced to deal with the burden of historically high leverage at the same time it must contend with historic commercial aircraft and airline industry disruption. An equity raise could help the company weather both issues, as well as regroup ahead of a post-pandemic turnaround effort.
My verdict
Unsurprisingly, Boeing's stock slid in response to the news that dilution may soon be on the menu. But it is hard to see any workable alternative for the company that has faced harsh losses in 2020 and is likely to struggle in the face of continued volatility in the commercial aircraft market.
In my assessment, a stock offering would relieve some of the immediate strain on Boeing, but it will take sustained effort and improvement on a range of fronts before it can even hope to return to pre-737 MAX crisis performance.
Disclosure: No positions.
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