2024 05 23 155212
Boeing has changed its outlook and expectations for 2024. CFO Brian West has walked back prior projections of a recovery in the second quarter and positive cash flow in the second half, as the reality now looks quite different. Boeing’s second quarter will likely be worse than their first quarter, in which nearly $4 billion in cash was used. A $9 billion-plus cash deficit will be tough to overcome in the second half, and Boeing will likely use net cash for their full 2024 fiscal year.
With the company facing multiple issues and teetering on the edge of a junk rating from the major agencies, can the company raise additional cash through bond sales at reasonable rates? Will it be able to do this without losing its investment-grade credit rating? Our view, given the number and severity of problems, is no.
CAAC, China’s aviation regulator, has asked for additional documents related to the certification of batteries in the 737 MAX cockpit voice recorder, precluding deliveries of 737 MAX from inventory headed to China. This comes shortly after deliveries were restarted, and negatively impacts cash flow since final payments are made on delivery.
Boeing’s quality issues continue contributing to cash flow issues, as the company cannot materially increase production rates without explicit FAA approval. The company will submit a comprehensive safety and culture plan to the FAA by June 30th. With the FAA administrator stating that Boeing will face a “long road” on safety issues, we don’t expect the ramp-up that Brian West is factoring into his second-half projections to be as quick or as large as the company has anticipated.
West said the plan is “not a finish line” and Boeing looks forward to continued engagement with the FAA. “We view this as a long-term investment that’s good for the company, good for our customers, and good for the industry.”
West indicated, “Our operational and financial performance is going to get better, and it’s going to accelerate as we go through the third and fourth quarter, and that will be the benefit of all the work we’re doing right now.” West also indicated that he is still optimistic that Boeing can close a deal for Spirit AeroSystems in the second quarter to re-integrate its largest supplier in-house. He indicated “nothing is off the table” for financing the deal. Still, the company wants to maintain its investment-grade credit rating. According to Moody’s, another poor quarter may not make that a possibility, which is teetering on the edge of junk.
The Bottom Line
This type of announcement has been typical for Boeing. Everything is going along well at Boeing until suddenly, it isn’t. We’ve seen this game for years, from delays in the development of the 787 and cost overruns to the delays in the 777X we are seeing today. While Boeing is still providing 2025 guidance for the 777X certification, many industry experts are now projecting that to move to the right, which will not make Emirates, its key customer for that model, at all happy with further delays.
Boeing is facing five investigations, the FAA, NTSB, SEC, DOJ, and US Congress, has quality or delay issues with each of its major programs, including the 737 MAX, 787, KC-46A, and 777X, and is cash flow constrained. It has moved from a leadership position in the market to a clear number two and is facing a leadership crisis with current CEO Dave Calhoun a lame duck after announcing his resignation by year-end. The company is basically in a turnaround situation, with problems building over two decades of poor management decisions, from not investing in new aircraft to wasting $43 billion in stock buybacks that yielded no tangible benefits.
Whether Boeing is too big to fail may be answered later this year. If Boeing can’t pull out of its cash flow slide in the 3rd and 4th quarters, it will be in a precarious financial position. The turnaround at Boeing needs to happen sooner rather than later. Still, it is difficult to overcome 27 years of misguided management decisions since the McDonnell-Douglas merger and cultural change overnight.
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