Boeing jumps after job, output cuts reveal plan for virus era

Boeing Co. soared after executives outlined a road map to survive the worst downturn in aviation history, and assured investors that the company has the means to make it through. If all goes to plan, the aerospace titan will be generating cash again by next year.

The U.S. planemaker is shrinking its workforce by about 10%, or about 16,000 jobs, to conserve cash. Work will slow in its factories, with 787 Dreamliner output cut for a third time in successive quarters. Boeing expects to restart production of the grounded 737 Max this quarter at a gradual pace as key customers like Southwest Airlines Co. curb growth ambitions.

The unprecedented collapse in air travel spurred by the Covid-19 outbreak is forcing Boeing into a fight for its life as passenger totals plunge 95% in the U.S. alone. Addressing investors’ worst fears, Chief Executive Officer Dave Calhoun and Greg Smith, his top lieutenant, emphasized that the company has the balance-sheet strength and access to capital to withstand the pandemic and global recession.

The executives “gave confidence that they’re going to come out on the other side,” said Robert Spingarn, an analyst with Credit Suisse Group AG. “So, solvency isn’t an issue.”

The shares advanced 5.9% to $139 at the close in New York. Boeing has plunged 57% this year, the worst drop on the Dow Jones Industrial Average.

Long Recovery

Any rebound will be slow and uncertain. Once a prodigious cash generator, Boeing posted a record cash drain in the first quarter. S&P Global Ratings cut the company to BBB-, the lowest investment grade level, citing the impact of Covid-19.

“Earnings and cash flow over the next few years are likely to be lower than we had previously expected due to the impact of the coronavirus on aircraft demand, with the pace of recovery in air travel still highly uncertain,” S&P said.

While rival Airbus SE is also consuming cash at an alarming rate, Boeing faces added financial strain and uncertainty because of its best-selling Max, which has been banned from the skies for more than a year after two deadly crashes.

But there were glimmers of promise in Boeing’s first-quarter results, even for a company that repeatedly underestimated the magnitude of the Max crisis over the past year. While the manufacturer burned through $4.7 billion, the total was $1.1 billion less than the free-cash outflow expected by analysts.

Boeing provided “some sense of a path to normal,” with conditions improving in recent weeks as government aid started flowing to airlines, Citigroup Inc. analyst Jonathan Raviv said in a note to clients. Boeing and its suppliers still need to raise capital, “but the situation appears to have calmed since last month.”

‘Worst-Case’ Avoidance

The company sees 737 Max deliveries resuming in the third-quarter, roughly in line with its previous forecast that the grounding would be lifted in midyear. That would bolster cash while reducing inventories that have ballooned to $80 billion.

“The draconian, worst-case fears haven’t come to pass,” Canaccord Genuity analyst Ken Herbert said in an interview. “But we’ll see how much of this was kicked down the road.”

The aircraft manufacturer provided a partial glimpse of the financial fallout to come from the Covid-19 outbreak, with a series of accounting charges stemming in part from factory shutdowns that began in late March and lingered well into April. That impact has worsened in the second quarter as consumers around the globe were urged to stay at home.

Boeing reported about $2.1 billion in fresh charges tied to the virus, a troubled aerial tanker program and the beleaguered Max. The total estimated program costs for the Max are now approaching $20 billion on the slower-than-expected ramp.

Job Cuts

Looking ahead, Calhoun will try to forge the most extensive revamp at Boeing since the 9/11 attacks. For all the stock gains as he addressed Wall Street, the downsizing signals a diminished future for the company.

Lower production will slice into profit margins for aircraft programs and drag on the jetliner division. Some defense programs, which rely on resources from the commercial-plane unit, also will take a hit to profitability. Its scrapped venture with Embraer SA leaves Boeing with a smaller portfolio to counter Airbus’s lineup.

“We’ll be a smaller company for a while,” Calhoun said.

For now, cutting expenses is paramount. The job losses will be done through voluntary layoffs, employee turnover “and involuntary layoffs as necessary,” the CEO said. The commercial-jet division, services operation and headquarters staff are in line for a 15% employment drop, with the cuts falling hardest on white-collar workers. The defense and space divisions will largely be spared.

“I know this news is a blow during an already challenging time,” Calhoun told employees. “I sincerely wish there were some other way.”

The aviation industry won’t return to 2019 levels for about three years and will take years after that to get back on a growth track, Calhoun said. But Boeing is confident that sales will eventually come back as airlines swap older models for newer, more efficient designs that spew less air pollution into the atmosphere and cut down on fuel costs.

‘White Tails’

In the meantime, Dreamliner output will fall to 10 planes a month this year from 14, and then be gradually reduced to seven a month by 2022. The combined production rate for the 777 and 777X jets will slide to three a month next year.

The near-term rate cuts for the 787, a crucial source of cash, were less than many analysts had anticipated given the collapse in long-range flying. Herbert, the Canaccord Genuity analyst, said he was “a little surprised” that Boeing was waiting until 2022 to reset production seven jets a month.

“We’ll see how many white tails they’ll make,” he said, using an industry term for jets built without a buyer.

Boeing hasn’t decided just yet whether to close down the model’s assembly line in Everett, Washington, and move all work to a plant in South Carolina that also makes the carbon-fiber jets, Calhoun told reporters. The company continues to expect that 787 sales to China will pick up, with some potential “upside” if a U.S.-China trade deal comes to fruition.

‘All Unknown’

Production of the 737 Max will start slowly at first and will gradually rise to 31 planes a month next year. The company didn’t say when it expected output to return to the pre-grounding rate of 52-jets a month.

It remains to be seen whether Boeing and Airbus can place all the jets they plan to build next year, Spingarn said.

“Boeing has sounded pretty confident in the past and had to revise down expectations,” he said.

Calhoun stressed that the U.S. manufacturer is basing its strategy and planning on “intense” talks with customers.

“But remember, the customers don’t have great visibility, either,” Spingarn said. “All of this boils down to the same vague number—how long does the virus depress air travel? It’s all unknown.”