Boeing suspends earnings forecast on grounding of 737 Max
Boeing abandoned its 2019 financial forecast as executives grapple with one of the worst crises in the planemaker's century-long history.
The previous outlook doesn't reflect the grounding of the 737 Max jetliner following two deadly crashes, Boeing said in an earnings statement Wednesday. The company also said it hadn't repurchased shares since mid-March after spending $2.3 billion on its stock in the quarter. The second accident in five months occurred March 10 in Ethiopia.
Boeing's first-quarter results were weighed down by $1 billion in extra cost as the world's largest aircraft manufacturer slowed 737 production after commercial flights of the best-selling Max model were suspended six weeks ago. The company also booked charges to revise training for pilots and update the Max's software, which has been linked to both disasters.
Investors will look to the company's conference call for additional information on Boeing's strategy for dealing with the financial aftermath of the global grounding. While first-quarter earnings trailed analyst estimates, the real focus for investors is on Boeing's effort to contain the damage to its reputation and the lucrative 737 program, the company's biggest source of profit.
"Everything is going to be 737 Max, when it is back in the air, when do deliveries resume," said George Ferguson, an analyst at Bloomberg Intelligence. "I don't think we'll get a concrete answer today."
The shares rose 1.2% to $378.51 before the start of regular trading in New York. Through the close on Tuesday, Boeing had fallen 11% since the crash in Ethiopia, the biggest drop on the Dow Jones industrial average. That accident and an October disaster in Indonesia involving the 737 Max took 346 lives.
Chief Executive Dennis Muilenburg and Chief Financial Officer Greg Smith will discuss Boeing's results and response to the 737 Max crisis in a call slated for 10:30 a.m. in New York.
The manufacturer has redesigned software linked to the Ethiopia and Indonesia crashes, and is expected to submit the changes to the Federal Aviation Administration soon. But convincing regulators - and passengers - of the Max's safety will be a complicated task.
While the Max's indefinite grounding drags on, Boeing's management team is focusing on conserving cash and tamping down costs. The company has temporarily slowed its 737 final assembly line by 19% to build only 42 planes a month, the first such factory slowdown since the Sept. 11 terrorist attacks disrupted air travel in 2001.
The rate cut was abrupt - such moves are typically flagged a year in advance. Blunting the blow somewhat, Boeing is picking up the bill as suppliers such as Spirit AeroSystems Holdings Inc. continue work at the previous production pace of 52 planes a month.
The changes to 737 production didn't take effect until mid-April, so the full impact on cash and profit will first be reflected in second-quarter earnings. But since the measure was announced in late March, it had to be incorporated into first-quarter profit margins for Boeing's commercial division.
Operating profit for the commercial-airplane unit was 9.9% of sales for the first quarter, compared with 11% a year earlier. Boeing's defense division had a 13% operating margin during the latest quarter, while the services unit posted 14 percent.
Robust sales at the defense and services divisions helped Boeing withstand the pressure from the Max grounding, as did a production increase for the 787 Dreamliner, another source of cash. Still, there's a risk that investors will lose patience if regulators are slow to allow flights of the 737 Max, a key source of cash for Boeing.
The Max's devastated safety record and production miscues for other aircraft such as a military tanker threaten another selling point for investors looking at Boeing, said Carter Copeland, an analyst with Melius Research. After the 787's early stumbles, the Chicago-based plane maker began a systematic campaign to root out risk in an effort to protect shareholders from negative surprises.
"The 737 Max crisis represents a pivotal point on this journey and could materially shape the views of the investment community on BA long after the earnings implications are well understood," Copeland wrote in a note to clients this week, referring to Boeing by its ticker symbol.