Tuesday, February 7, 2023
Feb. 7, 2023

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Pitching investors, Boeing projects short-term pain, then stability


Boeing on Wednesday lowered Wall Street expectations on jet deliveries and the cash Boeing will generate in the next couple of years while offering hope of a full recovery in three to four years.

In an attempt to steady the expectations of Wall Street, Boeing CEO Dave Calhoun on Wednesday projected that recovery from the company’s challenges won’t come until 2025 or 2026 — and that only then Boeing will generate the full gusher of cash it’s been projecting but that has been slow in materializing.

And Calhoun said Boeing will not deliver to airlines its next all-new commercial jet until the middle of the 2030s, implying that no such plane will be launched for development until late this decade. Anything sooner, he said, is “not going to happen.”

“I don’t think we’re gonna even get to the drawing board this decade,” he added.

Calhoun delivered an energetic and emotional presentation before an audience of analysts and investors gathered Wednesday for an Investor Day conference at Boeing’s jet delivery center in Seattle.

With Boeing’s leadership hunkered down for the past three years, this was the first investor day conference since before the MAX crashes. Calhoun called it “a bit of a coming-out party for us.”

He recounted the “existential” threats the company has had to overcome in the past three years: the impact of the two deadly 737 MAX crashes and the extended grounding of that airplane; the collapse of air travel with the COVID-19 pandemic; and the long halt to 787 Dreamliner deliveries over quality defects.

Hailing what he called “a turnaround, a comeback … through one of the most tumultuous moments in industrial history” that threatened Boeing’s survival, Calhoun said, “I feel like we’ve mitigated these existential moments we’ve had to face.”

When Boeing finally achieves production stability “sometime in 2025 or 2026,” Calhoun said, free cash flow — the cash left after paying operating costs and expenditure on equipment — will then reach about $10 billion per year.

Boeing had a $4.3 billion outflow of cash in 2019, another $20 billion outflow in 2020, and a $4.4 billion outflow last year. This year, it finally projects reaching positive free cash flow again of between $1.5 billion and $2 billion.

“While that goal of ‘$10 billion and stable’ isn’t all that sexy, it feels good to us,” Calhoun said in closing. “That’s exactly where we want to be … And it’ll be amazing.”

Supply chain issues and rework

Much of the nearer-term pain is down to supply chain delays as large and small aerospace suppliers struggle to rehire and train new employees after letting too many go during the pandemic.

Yet Calhoun expressed confidence that Boeing will slowly get those problems sorted out.

“The risks that we have faced and overcome in the last couple of years prevented us from confidently projecting anything … The risks were coming at us from sort of everywhere,” he said. “The supply chain risk that’s upon us … is minuscule relative to the others. So I believe it’s all manageable.”

Another pressure point for Boeing itself is the huge amount of work needed to clear its remaining inventory of completed but parked airplanes: 270 single-aisle 737 MAXs and 115 widebody 787 Dreamliners.

About 138 of the MAXs are for Chinese airlines who show no signs of taking them amid political tension between the U.S. and China. Boeing has begun to remarket those planes.

Some of the MAXs have been in storage for three years and are now earmarked for a different airline than the one that originally ordered them. These are taking months to prepare for delivery.

“It takes as many or more hours for us to prepare [a MAX for] return to service as it does to assemble it in the first place,” Calhoun said.

And he said that though the defects in the 787 fuselage were “minute ,” they nevertheless “required the most aggressive rework.”

Stan Deal, CEO of the Commercial Airplanes unit, said the rework on each 787 is “actually greater than the assembly hours” it took to build the plane originally.

That rework is taking up space in the factory that is limiting the pace of the ramp up of newly built 787s.

Guidance lower for next year

It was left to Boeing Chief Financial Officer Brian West, speaking after his boss, to lay out the colder financial projections immediately ahead.

West said free cash flow next year will be between $3 billion and $5 billion, considerably below Wall Street expectations, which before the most recent quarterly report projected a result in the range from $5 billion to $8 billion.

And he said Boeing’s defense and space unit, which in the third quarter wrote off a massive $2.8 billion on troubled fixed price contracts — most substantially on the KC-46 tanker and Air Force One programs — will continue to be a heavy cash drain in 2023, on the order of $500 million to $1 billion.

Calhoun conceded that at this point, having accumulated a total of $6.85 billion in write-offs since 2014, Boeing will take an overall financial loss on the tanker program.

“Unfortunately, we know that we will not recover the enormous investment we made over these last bunch of years,” he said.

West said that the plan for full recovery by 2025-2026 targets the production of about 50 MAXs per month in Renton, about 10 mid-size widebody 787s per month in North Charleston, South Carolina, and about four large widebody 777/777X jets per month in Everett.

Adding in 767 freighters and tankers and 737-based P-8 anti-submarine military planes brings Boeing to a projection in that time frame of producing and delivering 800 airplanes a year — back to the number of jets delivered in 2018, before the grounding of the MAX launched the crisis Boeing has faced ever since.

West told the investors that would restore Boeing to “the cash juggernaut you’re all familiar with.”

Next year, counting both newly-built airplanes and those taken out of storage, West said Boeing expects to deliver 400 to 450 MAXs, or between 33 and 38 of those jets per month, and 70 to 80 Dreamliners, about six planes per month.

Putting Boeing’s plan to build 50 MAXs per month by 2025 or 2026 into perspective, rival Airbus says it is progressing toward a production rate for its competing A320 jet family of 65 aircraft per month in early 2024, rising to 75 per month in 2025.

Another MAX production glitch in October

Yet those promised delivery figures highlight the starkly lower current jet delivery rates, which have varied widely month-to-month.

Commercial Airplanes boss Deal revealed yet another bump in the road Wednesday when he told the audience that quality problems hit 737 MAX production last month.

Deal said Boeing delivered only 23 MAXs in October, down from 36 the previous month and the lowest monthly figure since February.

“At the last moment, our quality management system caught two defects in the fuselage,” Deal explained. He said the defects were discovered at Spirit AeroSystems, which makes the 737 MAX fuselages in Wichita, Kansas.

Deal added that, despite this new glitch, Boeing will recover its deliveries to around 30 MAXs per month at the end of the year.

Deal also revealed one more delay: Boeing now expects the largest and last 737 MAX model, the MAX 10, will not be certified to carry passengers until the end of 2023 or early 2024, he said.

The smallest model, the MAX 7, is expected to be certified early next year.

Certification of both planes depends upon Congress giving Boeing an extension to the deadline beyond which the manufacturer would have to substantially upgrade the MAX flight control systems to meet new safety standards.

A week ago, Boeing reported a $3.3 billion net loss in the third quarter due to the huge defense-side write-offs.

After that shock, Boeing’s leadership on Wednesday seemed intent on persuading investors to be patient.

Setting lower, more realistic financial targets for the next couple of years will reduce the chances of another shocking quarterly failure to meet Wall Street expectations, which invariably tanks the stock price.

The promise is that recovery will come — eventually, several years away but still in sight.

The market reacted favorably Wednesday, with Boeing shares closing at $147.41, up $4.03 or 2.8%.

“It’s not like we don’t assume risks ahead,” Calhoun said. “But these risks feel to me a lot more manageable than the risks we had in the rearview mirror.”

He insisted that Boeing can achieve the targets laid out Wednesday even if the current world geopolitical tension continues to block jet deliveries to China.

“We don’t have to have the return of China as a customer to do what we’re talking about here,” Calhoun said. “We are not turning our backs on [China] in any way, shape or form and won’t. But we’ve de-risked this guidance to deal with it if the geopolitical thing just doesn’t resolve itself.”

“We feel like we’re in control of all the variables that matter,” he concluded. “We believe the plan that we have out here and the guidance that we have provided is doable.”