The problems continue to mount for Boeing Corp. (BA, Financial). The ongoing drama surrounding the 737 MAX has cast an unsightly pall over the company’s commercial aircraft division, as well as putting a strain on its finances. Furthermore, the woes facing the 787 have revealed that the problems go deeper than faulty autopilot and pilot-support software. Things will likely get much worse before they get any better.
Stuck on the ground
Given the grounding of the 737 MAX, financial pain was always to be expected. However, Boeing’s issues are not likely to be resolved by a quick decision from the Federal Aviation Administration (FAA) or other regulators. Indeed, while Boeing continues to insist that the aircraft will be back in service during the fourth quarter, many operators are not convinced. Southwest Airlines Co. (LUV, Financial), for example, does not expect to see its fleet of 737 MAX back in the air until February – at the earliest. With foreign regulators also looking askance at the aircraft, Boeing’s confidence in an early return to service seems rather overoptimistic.
Even Boeing insiders are sounding less confident about the imminent return of the 737 MAX to service. While CEO Dennis Muilenberg still says that he is hopeful for an early 2020 recertification, he admitted last week that the 737 MAX may not fly before 2021.
The continued uncertainty surrounding the 737 MAX has caused some operators to trim or cancel their orders. This was reflected in Boeing’s third-quarter earnings, which saw a decline in its order backlog to $470 billion – down 4.3% year-over-year.
Weakening order book
While the woes facing the 737 MAX were widely anticipated by the market, Boeing’s third-quarter report also revealed a concerning dropoff in demand for its 787 Dreamliner.
The larger passenger aircraft was mired by technical issues throughout its lengthy development, but it seemed to have turned the corner in the last year. Yet, according to Boeing’s latest guidance, it will cut production of 787 aircraft from 14 units per month to 12, beginning in late 2020.
While hardly the end of the world, and not nearly so severe a threat as that posed by a protracted 737 MAX grounding, this new guidance suggests that Boeing is facing broader demand headwinds in its commercial aircraft business. The firing of Boeing’s head of commercial aircraft appears to have done little to assuage broadening concerns about the crucial industry vertical.
Worrying balance sheet
Boeing’s problems would not be so severe if it had not spent the past several years weakening its balance sheet. Much of the company’s excess cash has been passed on to shareholders via generous stock buybacks.
Boeing has also been piling on liabilities, adding $5.5 billion in debt to its balance sheet during the third quarter – up 33% from the previous quarter. The cash balance, meanwhile, climbed only slightly, while cash flow turned negative for the second quarter in a row.
While Boeing has opted to halt bonuses and buybacks until the 737 MAX is flying again, much of the damage cannot be undone, as it was the product of years of myopic focus on increasing its share price.
Verdict
Thus far, the market has been willing to discount much of the ugliness at Boeing, but investors cannot ignore the problems forever.
Boeing has a long way to go before it can hope to hold the level of public and consumer trust it once enjoyed.
Disclosure: Author is short Boeing.
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