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Feb. 7, 2023

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After Boeing reports huge $3.3B loss, Alaska Airlines orders more MAXs

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Oct. 26—Boeing reported a $3.3 billion net loss in the third quarter as management wrote off a massive $2.8 billion on defense-side programs, most notably another substantial charge on the Air Force tanker program.

Half an hour after Boeing reported the loss, Alaska Airlines softened the blow when it announced it is exercising options to purchase 52 Boeing 737 MAXs, the biggest Boeing airplane order in Alaska’s 90-year history.

While that news will buoy Boeing, it was a bad news day otherwise.

For the commercial airplanes division, Boeing dampened expectations on production and delivery rates for the 737 MAX, due not only to supply chain issues but to a standstill on China deliveries as well.

On a teleconference with Wall Street analysts about the financial results, Boeing CEO Dave Calhoun said he thinks “it won’t be till we get to the sort of end of next year before we can really make sizable rate increases.”

As for deliveries to China, Boeing has given up waiting and has begun to re-market the 138 MAXs built for Chinese airlines, nearly half of the 270 MAXs still in storage since the grounding.

Given the political tension between the U.S. and China, Calhoun said he is “clear-eyed about the geopolitical risks” and expressed pessimism about any movement from the Chinese airlines.

“I have not gotten a single signal … they’re going to take deliveries in the near term,” he said.

On the defense side of the business, the mounting multibillion-dollar charges show no signs of abating.

Boeing registered losses on the fixed-price development contracts in its defense business, including $1.2 billion on the KC-46 tanker for the Air Force and $766 million on Air Force One.

Boeing also wrote off $351 million on the MQ-25 aircraft carrier tanker drone for the Navy, $285 million on the T-7 jet fighter trainer for the Air Force, and $195 million on the Commercial Crew space contract for NASA.

Combined with $8.8 billion in accounting charges in previous quarters, these programs have now racked up $12.1 billion in write-offs.

And Boeing noted that the defense-side losses were exacerbated “by unfavorable performance on other programs.” The mature programs on the defense side, such as the F-15 and F/A-18, merely broke even.

In an interview on CNBC Wednesday morning, Calhoun said the losses were driven by “a rough and tough supply chain world with a lot of pauses, a lot of interruptions.”

Those supply chain glitches have slowed production and brought higher manufacturing costs.

Calhoun said this may continue for the next 18 months.

“We’re not going to get better, we’re going to accept the world as it is,” Calhoun told CNBC.

He added that Boeing will in the future avoid fixed-price defense contracts in favor of contracts that cover whatever costs are incurred plus an added profit. Specifically, he said it was a mistake to bid a fixed price on Air Force One and “it’s not our intention to ever do so” again.

In a note to investors after the earnings results came out, Nick Cunningham, an analyst with London-based Agency Partners, commented on Boeing’s constant flow of big accounting losses.

“Every quarter one hopes that the program specific bad news has come to an end, but then we get another installment,” Cunningham wrote. “Maybe this is It? Probably not.”

The tanker program alone has now reported write-offs for four straight quarters. The cumulative total of charges to that program since 2014 now stands at $8.95 billion.

A boost from Alaska Airlines

The Alaska order comes as the airline emerges from the pandemic downturn and plans for aggressive fleet growth starting next year.

The airline ordered three different jet models: the MAX 8, MAX 9 and still-to-be-certified MAX 10.

Market pricing data from airplane-valuation firm Avitas suggests that, after standard discounts, the order is likely worth about $2.7 billion.

The newly ordered MAX jets, set for delivery between 2024 and 2027, will expand the airline’s confirmed 737 MAX fleet from 94 to 146.

Alaska said it has also negotiated future purchase options for an additional 105 MAX jets through 2030.

“This investment secures aircraft to optimize our growth through the next decade,” Alaska Airlines CEO Ben Minicucci said in a statement.

By the end of next year, Alaska expects to take delivery of another 43 MAXs and will at that point have retired all the Airbus jets inherited from its merger with Virgin America. It will then be operating an all-Boeing fleet again.

Boeing stock fell with the news of the earnings losses, rose on the Alaska news, then fell sharply again after Calhoun’s earnings teleconference with Wall Street analysts.

Production ramp-up will be slow

On the call, Calhoun and CFO Brian West laid out how MAX production is currently constrained mostly by engine maker CFM having capacity to deliver engines for only 20 airplanes per month.

The holdup is upstream from the engine makers. Their suppliers of aviation-quality metal forgings and castings are facing labor shortages and cannot ramp up quickly because of the training needed.

Currently, Boeing is delivering MAXs at a rate in the low 30s per month, of which around 20 are newly built and eight to 10 are planes taken out of long-term storage. West drastically lowered the expected number of MAX deliveries this year from about 500 to 375.

He said that in the new year, Boeing expects to increase production to 31 MAXs per month, bringing total deliveries above 40 per month.

Cunningham of Agency Partners commented that the 38-per-month production rate Boeing once expected to reach by year-end “now seems remote.”

Another issue is Boeing’s controversial request for a deadline extension from Congress to get the two latest MAX models, the MAX 7 and MAX 10, certified to carry passengers by federal regulators.

Calhoun said he’s “not just hopeful but confident” of getting that extension, because, he said, “this is the safe answer.”

Opinion is divided over that. Some experts argue the extension should be denied to force Boeing to upgrade the aging crew alerting system on the MAX. The union representing the 15,000 pilots at American Airlines is in this camp.

But both the largest pilot union, the Air Line Pilots Association, and the Southwest Airline Pilots Association argue it would be safer to keep a common cockpit between the MAX and the prior 737 model.

West said Boeing built 13 of the MAX 7 models last quarter in anticipation of winning the necessary certification to deliver them as is.

Extension or not, everything points to delays in production and deliveries.

Likewise, the 787 Dreamliner program faces similar constraints from supplier slowdowns and a halt to China deliveries. Boeing has 115 Dreamliners in storage since the extended delivery halt over quality problems.

“We expect most of these airplanes to be delivered over the next two years,” West said.

Boeing stock closed for the day at $133.79, down $12.86 or 8.8% from Tuesday’s close.

Financial results lower than low expectations

For the quarter, Boeing’s net loss of $3.3 billion, or $5.49 per share, came on lower than expected revenue of $16 billion. This compares to a net loss in the third quarter of 2021 of $132 million, or 19 cents per share, on revenue of $15.3 billion.

The Defense and Space division reported a net loss from operations of $2.8 billion on revenue of $5.3 billion, an operating margin of minus-53%. As Reuters first reported Tuesday, Boeing last week created a new position of chief operating officer for the division. That looks like a move to try to tighten control of its industrial operations and stem the losses.

Steve Parker, head of Boeing’s bomber and fighter programs as well as its St. Louis defense plants, was promoted to the new role, reporting to Defense and Space chief Ted Colbert.

The Commercial Airplanes division headquartered in the Puget Sound region also suffered a loss in the third quarter.

But that was due to the previous issues with its major jet programs. The division at least had no new negative surprises.

Commercial Airplanes reported a net loss from operations of $643 million on revenue of $6.3 billion, an operating margin of minus-10.3%.

Most of the loss came from previously announced abnormal manufacturing costs, with $303 million from the earlier lengthy halt to 787 production, $188 million from the extended grounding of the 737 MAX and another $111 million from the continued pause on 777X production.

Calhoun told CNBC market demand for commercial airplanes is robust, as evidenced by Alaska’s order.

“Demand is not the problem for the Boeing company or for our industry,” he said. “Our job is to get that supply chain under control.”

Boeing finally resumed 787 deliveries in August after a 15-month hiatus. It delivered a total of nine in the quarter. It also delivered 88 Renton-built 737 MAXs, though deliveries continue to be much slower than hoped for.

Calhoun said the biggest hold up is slow supply of jet engines. GE, which makes the engines for the MAX, is struggling with a labor shortage, having laid off thousands of workers during the pandemic.

Emphasizing good news among the negative quarterly earnings figures, Boeing pointed to the $2.9 billion in free cash flow generated in the quarter, easily beating Wall Street expectations. S&P Global Market Intelligence had projected free cash flow would be just over $1 billion. However, the cash result was swelled by a hefty tax refund of $1.5 billion that accounted for most of the difference.

The cash-flow figure — the cash left after paying operating costs and expenditure on equipment — has recently been the financial datapoint highlighted by Boeing to convince investors looking for signs of recovery.

Boeing will use the cash to pay down debt and later to start paying shareholders. The company reduced its net debt in the third quarter to $42.9 billion, down $2.9 billion from the previous quarter.

Calhoun bristled on the conference call at the suggestion that this focus on generating cash might be shortsighted. He insisted it doesn’t mean the company isn’t investing enough in future projects.

After a big net cash outflow of $3.7 billion in the first half of the year, the financial data released Wednesday indicates that tax refund will help Boeing achieve its target of positive cash flow for the full year.

However, the news delivered in the teleconference served to lower cash flow expectations for next year.

Rob Stallard of Vertical Research Partners told investors that additional costs to fix the issues in Boeing Defense will likely fall heavily in 2023, while the slower ramp-ups of the MAX and the 787 will also reduce expected cash flow next year.

“Boeing management continues to state that the company is in turnaround mode, ” Stallard wrote. “But we’d say that the arc of recovery remains extremely elongated.”

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