Boeing’s 2020 Results

News

Boeing issued its 2020 annual report and financial results today. As expected, they are not pleasant. Because of the twin crises of the MAX and the pandemic, 2018 represents the last “normal” baseline year for Boeing, as shown in the highlights below:

The MAX crisis had a major impact on performance in 2019 and 2020 with the pandemic impacts felt in 2020. Comparing 2018 to 2020, revenues dropped by $42.9 billion or 42.5%, earnings dropped by $24.76 billion and cash flow performance decreased by $33.73 billion when the two years are compared. Backlog fell by $130 billion during the same period, reflecting the MAX crisis and the ability for customers to walk away from orders for the MAX and delayed 777-X.

Analysis

The financial picture at Boeing is not pretty, and unlikely to markedly improve soon. The company’s debt increased by $36.28 billion in 2020 alone, moving from a very manageable $13.85 billion in 2018 to $63.58 billion in 2020. The overhang of 737 MAX aircraft produced during the grounding has begun to move, but most analysts believe it will take through the end of 2022 for the company to deliver the 450 aircraft in inventory. This negatively impacts the ability to produce additional aircraft in high volumes until those aircraft can be absorbed by the market, which itself is slowly recovering from the global pandemic. As a result, we do not expect Boeing to reach its planned 737 rate of 31 new aircraft per month before the 4th quarter of 2022, and do not believe that the 737 MAX will ever reach previously planned levels of 60 per month given the reduction in backlog and tainted reputation of that aircraft.

The 777X has been delayed again, with entry into service not scheduled until 2023. That delay gives customers the right to walk away from prior commitments. The 777X order book was not robust prior to the schedule change, and has fallen to dangerously low levels that bring the viability of the program into question.

Continuing quality problems are plaguing the flagship 787 program, which stopped deliveries last October, and the KC-46A tanker which still does not meet the requirements outlined by the Pentagon. Correcting those issues will require concerted action and cash flow that Boeing currently cannot generate from its operations. As a result, our outlook remains unfavorable for the remainder of 2021.

Insight

The Boeing Company is an institution in the United States and one of the companies that is felt to be “too big to fail.” Nonetheless, the company is failing with its commercial aircraft product lines, whether through safety concerns with the 737 MAX, continuing quality problems with the 787, delays and low demand for the 777X, and continuing substandard performance of the KC-46A tanker.

The financial results, in particular the increase in debt, might have been avoided had management not spent $43 billion on share buybacks during the prior six years. Management probably wishes it had kept that $43 billion today. The company stopped the practice in 2019, but only after share prices plummeted leaving the company with no meaningful gain from its expenditure.

As we all expected, Boeing’s 2020 was a year that everyone would like to forget. But it also put Boeing in a hole that will be difficult for the company to extract itself from. Without cash generation, the company will need to borrow to complete a badly needed new program to fill the segment of the market it abandoned after 757 and 767 passenger aircraft production ceased. Its major competitor has taken a significant share of that market and will likely gain the mantle of market leadership from Boeing through the end of this decade.

New aircraft development programs have been described as “bet the company” decisions during good times. Having to borrow money to complete new aircraft makes the decision on NMA and FSA even more risky.

The rest of the 2020s will be a decade of uncertainty and recovery for Boeing, with the key question being can they make it all the way back to 2018 levels before the middle part of the decade. Even if they can from a market perspective, the additional debt burden and pending legal costs remaining from the MAX could mean it will be later in the decade before they financially recover.