737 MAX crisis throws Boeing for a loss for 2019, but stock price rises out of relief

Boeing 737 MAX
The first 737 MAX 8 plane undergoes final assembly at Boeing’s Renton plant in 2015. (Boeing Photo)

Boeing doubled its estimate for the financial effect of the 737 MAX crisis today and recorded a net annual loss for the first time since 1997 — but the company’s stock price rose nevertheless, reflecting market sentiment that the worst may be over.

An additional $9.2 billion was set aside to cover projected costs associated with the aftermath of two catastrophic crashes involving a 737 MAX 8 jet in Indonesia in 2018 and the same model in Ethiopia in 2019. That brought the total projected cost to $18.4 billion.

The costs are coming in the form of lost deliveries and concessions because of the worldwide grounding of all MAX jets, as well as increases in production costs. Boeing expects to incur further costs in 2020 that will factor into the $18.4 billion, primarily due to production snags. Even though 737 MAX production is being temporarily suspended, Boeing is keeping its workforce intact. (Boeing’s suppliers, however, have announced thousands of layoffs.)

Because of the costs to date, Boeing reported a net loss of $636 million for 2019, compared with a $10.5 billion profit for 2018. Profits in other business divisions, including space and defense as well as services, couldn’t fully make up for Boeing Commercial Airlines’ $6.7 billion loss.

The narrow-body 737 MAX isn’t the only airplane line facing challenges: Boeing said the production rate for its wide-body 787 Dreamliner would be cut back from 14 to 12 airplanes per month in late 2020, and was likely to be further adjusted to 10 planes per month in early 2021. The company said the rate could return to 12 planes per month in 2023, based on projections focusing on the Chinese market.

Boeing’s final frontier is also facing a challenging year: Last month, Boeing’s CST-100 Starliner space taxi failed to get to the International Space Station as intended during its first uncrewed orbital test. In today’s quarterly financial report, the company said it’s taking a $410 million pre-tax charge to provide for the possibility that it’ll have to conduct a do-over of the uncrewed test before proceeding to crewed missions.

NASA and Boeing are currently evaluating the data collected during December’s uncrewed orbital test flight, and the space agency is expected to decide within the next month or so whether another uncrewed flight will be required.

“We recognize we have a lot of work to do,” David Calhoun, who took over as Boeing’s president and CEO this month, said in a statement. “We are focused on returning the 737 MAX to service safely and restoring the longstanding trust that the Boeing brand represents with the flying public.”

Calhoun said the company was “committed to transparency and excellence in everything we do.”

“Safety will underwrite every decision, every action and every step we take as we move forward,” he said. “Fortunately, the strength of our overall Boeing portfolio of businesses provides the financial liquidity to follow a thorough and disciplined recovery process.”

During a conference call with analysts, Calhoun said he was “optimistic about the future.” So were investors, at least in the short term. The company’s share price rose more than 2% when the markets opened today. Update for 1:55 p.m. PT Jan. 29: Boeing’s share price ended the trading day up 1.7% over the previous close, at $322.02.

“You have to give Boeing CEO Dave Calhoun credit for trying to get ahead of the MAX crisis,” Peter Atwater, president of Financial Insyghts, observed in a tweet. “It still comes down, though, to passenger confidence and that will be self-determined.”

Analysts noted that Calhoun was using a “kitchen sink” strategy — that is, getting the bad news out there in one fell swoop rather than glossing over it. For example, last week Boeing downgraded its expectations for the 737 MAX’s recertification, resetting the time frame to mid-2020. In response, the Federal Aviation Administration said it could act sooner than that. Such a dynamic reverses the overly optimistic tack that was taken by Calhoun’s predecessor, Dennis Muilenburg.

Boeing also is cutting costs by pulling back from some programs, such as the Phantom Express space plane development effort that was put on hold last week.

Other programs are moving ahead briskly. In today’s report, Boeing highlighted progress on the 777X program, which recorded its first test flight on Saturday and seems on track for first deliveries in 2021; awards from NASA for 10 Space Launch System core rocket stages and up to eight Exploration Upper Stages; and contracts for the remanufacture of 47 AH-64E Apache helicopters as well as upgrades to the NATO Airborne Warning and Control System fleet.

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