Boeing’s Max crisis meets coronavirus

Boeing Co.’s 737 Max crisis has entered a new phase.

Wednesday brought the revelation that Air Canada is cutting its order for the grounded plane by 18%, marking a major cancellation by a large Western airline in the wake of two fatal crashes and a much-prolonged return to service. This likely won’t be the last: Airlines’ cancellation options increase when a plane has been idled for a year, and the Max is coming up on that anniversary this week.

At a time when the coronavirus outbreak is damping demand for travel and sparking a raft of canceled flights, the last thing many carriers are going to want right now is extra capacity. Separately – although hardly unrelated – Boeing is planning to draw down the full amount of a $13.825 billion loan obtained last month as early as Friday as a precaution amid the turmoil surrounding the epidemic, people familiar with the matter told Bloomberg News. Boeing is also limiting discretionary spending and overtime payments and pausing some hiring in an effort to conserve cash.

For the first six months after Boeing’s Max jet was grounded across the globe, the company’s equity investors for the most part were pricing in relatively minimal long-term financial and reputational damage. That started to change as it became clear the reality was much darker. Boeing’s timelines for the plane’s return were way too optimistic. The concessions owed to frustrated customers have grown and are likely to continue to balloon, the accounting charges tied to production cutbacks have piled up and the legal bills are anyone’s guess. But the true financial penalty may be that the crisis has eroded Boeing’s cash cushion just when it needs it the most.

The bond market, which had remained relatively level-headed throughout Boeing’s troubles, is now starting to sound some alarms as well.  The cost to insure the company’s debt against default for five years widened 120 basis points on Wednesday to 280 basis points, the highest going back 11 years, according to ICE Data Services. That level, up from just 60 basis points on Feb. 20, implies a greater than 16% chance of default over the next five years. As for Boeing’s bonds, block trades Wednesday in its debt due in 2030 cleared at an average yield spread 278 basis points above benchmark Treasuries. That’s up from just 208 basis points on Tuesday and more than double what it was as recently as last week.

To be fair, the moves in Boeing’s bonds and related CDS were part of a broader sell-off in triple-B corporate securities. The company isn’t a complete outlier: Investment-grade energy companies like Apache Corp. and Hess Corp., and even retailers like Kohl’s Corp. and Macy’s Inc., saw similarly large swings in their CDS. In a broader economic slowdown, Boeing will hardly be the only one with a deteriorating bottom line. But it’s nevertheless eye-opening, and the coronavirus outbreak seems like a perfectly targeted attack. If Boeing thought it was too costly to tap the public markets back in January, when it first sought the loan, it’s even more expensive now.

Boeing is already facing a significant curtailment in advance payments from customers on its Max, for which it has temporarily halted production. That’s left it dependent on wide-body jets for cash flow, a precarious position to be in at a time when demand for planes capable of ferrying huge groups of people over international waters has been soft and is about to drop even more sharply. And Boeing has had to announce two cuts to the production rate for its 787 Dreamliner amid a dearth of orders from Chinese airlines. It’s worth mentioning that many airlines had shifted orders for the grounded Max jet to wide-body models. Will they still keep those?

Max cancellations and delivery deferrals further push out the prospect of getting cash-flow help from that model in the near term. In addition to Air Canada, Gulf discounter Flydubai, the second-largest customer for the single-aisle jet, is reportedly seeking concessions from Boeing on price and delivery schedules for a 251-plane order. Southwest Airlines Co. CEO Gary Kelly said in a video message to employees this week that he still aimed to take deliveries of the Max beginning in the third quarter, but the airline has to “maintain all options,” according to the Wall Street Journal. There were already doubts about whether Boeing could ever ramp back up to its pre-crash goal of 57 Max jets a month, even several years from now. The coronavirus will likely throw a further wrench in those plans not just for Boeing but for its supply chain. The company has been financially propping up suppliers such as Spirit AeroSystems Holdings Inc. and has promised payments for Max engines regardless of the pace of plane deliveries to General Electric Co. and Safran SA’s CFM joint venture.

The draw-down of the loan is a sign of the times for Boeing: It needs cash and it’s clearer than ever it’s not going to get what it needs from the commercial jet business.