Boeing’s second-quarter earnings will include a $4.9 billion after-tax charge to cover some actual and estimated future expenses linked to the 737 MAX grounding, while a reduced production rate is driving up 737 costs and lowering margins, the company said July 18.
The after-tax charge reflects “an estimate of potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays,” the Chicago-based company said. It will reduce Boeing’s Q2 revenue and pre-tax earnings by $5.6 billion. It also will leave the company with a quarterly net loss.
“While the entire estimated amount will be recognized as a charge in the second quarter, the company expects any potential concessions or other considerations to be provided over a number of years and take various forms of economic value,” the company added.
Boeing is recording the charge assuming that regulatory approval clearing the MAX fleet to return to revenue service “in the US and other jurisdictions” will begin “early in the fourth quarter,” the company said. “This assumption reflects the company’s best estimate at this time, but actual timing of return to service could differ from this estimate,” it added.
Boeing is working on flight-control software modifications that regulators must approve before the MAX returns. Boeing’s latest estimate has it presenting a package to FAA for approval sometime in September. FAA is expected to take at least several weeks to review the package, and other regulators also plan to conduct reviews.
Boeing’s Q2 charges also assume that the 737 production rate will rise from its current 42/month rate to 57/month in 2020, “and that airplanes produced during the grounding and included within inventory will be delivered over several quarters following return to service.”
Two fatal MAX accidents in five months—Lion Air flight 610 in November 2018 and Ethiopian Airlines flight 302 in March—followed by the global grounding of its 380-aircraft fleet in mid-March has led to myriad expenses for Boeing and affected operators. The company halted MAX deliveries just after the grounding, resulting in lost revenue from customers and added expense to store undelivered aircraft.
In April, Boeing cut its 737 production rate—which had been gearing up to rise to 57 later this year—from 52/month to 42/month. This, Boeing said, increased estimated 737 “accounting quantity” production costs by $1.7 billion for the next 3,100 aircraft, “primarily due to higher costs associated with a longer-than-expected reduction in the production rate.” The costs will reduce the 737 program’s margin “in the second quarter and in future quarters,” Boeing added.
Boeing froze financial guidance in the wake of the MAX grounding and has offered little financial-related insight on its ramifications. It has set up a $100 million fund to support families of the 346 passengers and crew killed in the two crashes.
Boeing also is incurring a wide variety of expenses stemming from the crisis that are not included in the Q2 charge. Among them: the cost to develop and implement upgrades to the MAX and any judgments or legal expenses linked to lawsuits.
Boeing has said that compensation that will make up the $4.9 billion in charges could take many forms, ranging from advantageous order-book shuffling to providing aftermarket services to affected customers for reduced rates.
Some airlines have been reporting financial ramifications of not having their MAXs. Most acknowledge that they have no idea how high their costs will climb because they are not sure when the aircraft will return to their schedules.
“The MAX grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks,” Boeing president and CEO Dennis Muilenburg said in the company’s July 18 statement.
Boeing reports its Q2 earnings on July 24. The company’s full-year 2018 revenue was $101.1 billion, including $60.7 billion from its Commercial Airplanes division.
Source: ATW
