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Boeing leaders outline plans to address the airplane quality crisis

By Dominic Gates, The Seattle Times
Published: February 1, 2024, 8:08am

SEATTLE — Last year ended better for Boeing than Wall Street had projected, yet when the jet maker released earnings details Wednesday, the healthy cash flow didn’t seem to matter much.

Boeing lost $2.2 billion in 2023, the fifth loss in five bad years, but the narrowest loss since 2019. A few weeks ago, that could have been taken as a sign that in 2024 Boeing might finally make it back into the black again. Not now.

Engulfed at the outset of the new year by crisis and facing a new financial reckoning from a midair fuselage blowout in January, Boeing CEO Dave Calhoun Wednesday acknowledged that reality and dwelt little on last year’s earnings.

“While we often use this time of year to share or update our financial and operational objectives, now is not the time for that,” Calhoun wrote in a message to all employees. “My focus remains on the Alaska Airlines Flight 1282 accident and the actions we are taking as a company to strengthen quality at Boeing.”

Financial analyst Rob Stallard of Vertical Research wrote in a note to investors that “Boeing’s world changed on January 5 when the Alaska Airlines door blew off, and so anything before that date is now of less relevance.”

In a teleconference with analysts from the Renton 737 MAX assembly plant, Calhoun said inspections have been completed on 129 of the 171 MAX 9s that were grounded after the Jan. 5 blowout, and the planes are back in service.

And he spoke optimistically of learning from this latest in a long line of quality lapses.

“Boeing will get better. I am confident in that,” Calhoun said. “We will address everything that needs to be learned from the accident. And we’ll move forward.”

A crisis moment

The door-sized plug that blew out on the Alaska 737 MAX 9 at 16,000 feet during a flight from Portland to Ontario, Calif., leaving a gaping hole that frightened passengers, has hit Boeing’s reputation and caused immediate operational and financial damage.

According to people familiar with the work, the door plug had been opened and then improperly reinstalled in September by Boeing mechanics on the Renton final assembly line.

Four bolts that prevent door plug movement were not reinstalled and, over the course of just over two months in service, vibrations on landing and take off gradually shifted the door off the stops that held it in place while pressurized, the people said.

“If bolts aren’t in place, it’s a miss,” Calhoun said in an interview with CNBC Wednesday morning. “And it may involve one or two or three or four players.”

During the earnings teleconference, Calhoun said he believes the National Transportation Safety Board investigation into the Alaska Flight 1282 incident “will narrow quickly.”

The Federal Aviation Administration last week blocked Boeing from making its planned MAX production rate increase above the current 38 jets per month until it is satisfied Boeing has its manufacturing quality under control.

Calhoun said the MAX supply chain will continue working to the previous ramp-up schedule, building a buffer of parts inventory while Boeing pauses the planned final assembly increases.

“It’s good for us if some buffers get developed and some of the more stressed suppliers get ahead of the game,” he said.

And under pressure from lawmakers in the U.S. Senate, Boeing this week withdrew a request to the FAA for a safety exemption on the forthcoming MAX 7 model that means the certification and entry into service of both that variant and the follow-on MAX 10 will be significantly delayed.

Calhoun credited U.S. Sen. Tammy Duckworth, D-Ill., with persuading him to drop the exemption request after he met with her for 90 minutes last Thursday.

“I was not expecting when I met with Senator Duckworth the conversation that we had,” he related, praising “the passion and the argument” that she presented to him.

For the MAX 7 or the MAX 10 to be certified to enter service, an exemption was needed because of a defect in the design of the MAX’s engine anti-ice system. If not turned off when a plane emerges from icy air, the system can overheat and potentially damage or even break up the front portion of the pod around the engine.

Calhoun said he told Duckworth Boeing’s engineers could probably devise a fix for the design flaw in about nine months. Her response was that then he should wait for that.

He said he went home for the weekend, thought about it, discussed it with Bob Jordan, CEO of MAX 7 customer Southwest Airlines, and decided it was “the right thing to do for aviation.”

Having dropped the exemption petition, Calhoun said “we’ll step up resources, we will step up whatever testing is required” to get a fix for the engine anti-ice system.

“We will throw more engineers at it,” he said. “We’re going to put more work into it and accelerate it.”

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Yet once Boeing engineers come up with a solution, it must be tested and certified by the FAA as meeting requirements — a lengthy period of scrutiny that Boeing cannot control.

This means the MAX 7 won’t be certified to enter service with Southwest until well into next year. And certification of the MAX 10, which began FAA flight tests only in December, is then many months behind that schedule.

The slowdown in the MAX production ramp-up will reduce Boeing’s cash flow. And Boeing must also compensate airlines for the losses incurred during the three-week grounding of the MAX 9s. Alaska has said it will ask for at least $150 million.

However, because it’s unclear how long the FAA-mandated block on the ramp-up will last, Boeing on Wednesday could not put a figure on the expected financial hit.

No guidance possible on prospects

Not yet in a position to determine the full implications, Boeing decided to postpone any guidance on financial or operational performance for 2024, projections it normally provides with the first earnings release of the year.

However, although the outlook for 2024 is now fuzzy, Chief Financial Officer Brian West said the long-term targets for 2025 and 2026 are unchanged, indicating Boeing hopes this crisis can be behind it by then.

Boeing previously said by 2025 or 2026 it planned to ramp up production to 50 MAXs and 10 widebody 787 Dreamliners a month and to achieve $10 billion in annual free cash flow, which is cash generated minus expenditure on equipment.

“We’re still confident in the goals we laid out for 2025/26, although it may take longer in that window than originally anticipated,” West said.

For the short term, Calhoun spoke of how it will take “demonstrated action” rather than talk to provide reassurance to the public, airlines, the FAA and lawmakers.

“We will simply focus on every next airplane while doing everything possible to support our customers, follow the lead of our regulator and ensure the highest standard of safety and quality,” he told employees. “We will go slow, we will not rush the system and we will take our time to do it right.”

Calhoun referred to the steps Boeing has initiated since the incident to try to strengthen quality controls in its factories and throughout the supply chain by adding more inspections and oversight by its own employees, regulators and airline customers.

“This increased scrutiny — whether from ourselves, from our regulator, or from others — will make us better,” he told employees.

On CNBC, he said since the incident on Alaska Flight 1282, Boeing has added more than 50 inspection points — at both its factory in Renton and its supplier Spirit AeroSystems of Wichita, Kan. — in the process around installing the door plug that blew out and more than 100 inspection points overall inside the Renton final assembly plant.

“I am absolutely convinced that we’ve got this plug completely under control,” Calhoun said. But beyond that, Boeing must now fix its quality control throughout its supply chain.

He said this “will require an enormous investment on our part in terms of people and engineers and interactions” with suppliers.

“Our full focus as a company is to make certain that we never have a safety escape again, learn everything we can from the accident, learn everything we can from the FAA’s audit,” he said on CNBC.

In his message to employees, the CEO expressed his belief in the company’s ability to get through the challenge.

“We have a serious challenge in front of us,” Calhoun told employees. “I want to be clear that we still have every confidence in our recovery. I have confidence in you.”

As for the 2023 earnings results, Boeing lost $2.2 billion or $3.67 per share, a substantial improvement from the loss of $5.1 billion or $8.30 per share in 2022.

In the fourth quarter, the loss was $30 million or 4 cents per share, compared to a loss of $663 million or $1.06 per share in the same quarter of 2022.

In the Commercial Airplanes division, in addition to the MAX program ramping up to 38 jets per month, the 787 Dreamliner assembly line in North Charleston, S.C., was up to five jets per month.

The Defense division lost $1.7 billion in 2023, an improvement from the loss of $3.5 billion the previous year, though Boeing had another $139 million write-off in the fourth quarter for cost over-runs on three fixed-price military development contracts.

And in 2023, Boeing generated a flood of $4.4 billion in free cash flow, up from $2.3 billion the previous year.

That cash on hand cut its net debt from $40 billion to $36.3 billion. And West said Boeing will in the next few days pay off $4 billion of the $5 billion in debt that is nearing maturity.

Some positives for Boeing

Last week, United Airlines CEO Scott Kirby made clear his displeasure with Boeing over the grounding of his fleet of MAX 9s. Afterward, United approached Airbus to see if it can get some early slots for the competing A321neo, adding doubt as to whether it will take all the MAX 10s it has on order.

Asked on CNBC to comment on United’s move, Calhoun said “I am going to work my tail off, and our team will, to satisfy Scott Kirby.”

Despite the improved financial trajectory, analyst Stallard of Vertical Research told investors Boeing’s “immediate fate is arguably in the hands of the FAA.”

Likewise, Nick Cunningham, an aerospace analyst with Agency Partners in London told investors that “so much of even the near future is contingent on the actions of others.”

“Boeing seems to have lost much of its agency in its current circumstance,” Cunningham wrote.

Aside from the ominous shadow of the current quality crisis, the earnings teleconference did disclose some positive details that suggest progress on other matters.

The executives said 787 Dreamliner production continues to increase. And in Everett, 777X production has restarted after a long pause.

West said Boeing’s inventory of parked planes, many requiring extensive rework before they can be delivered, is now down to 200 MAXs and 60 Dreamliners. And he said he expects most of those to be cleared and delivered this year.

Because the rework on those aircraft is so labor intensive, Boeing has to run a big disassembly and reassembly operation in parallel to its building of new jets. Finally getting rid of those aircraft will lift a huge financial burden.

Of the MAXs, about 140 have been parked since the MAX was grounded five years ago in the wake of two fatal crashes and most are for airlines in China and India.

This month, China has finally and quietly begun to take its first deliveries of new MAXs since that 2019 grounding.

Another 25 MAXs are still being repaired because of defects found last year. The remaining 35 are mostly MAX 7s and a few MAX 10s that cannot be delivered until certified.

Since the Alaska Airlines incident, Boeing’s share price had dropped from $258 at the start of the year to about $200.

The better-than-expected fourth quarter financial results along with the positive pronouncements on the 2025/26 targets boosted the stock. Shares closed up $10.60, or 5.3%, at $211.04.