The 737 Max crisis amplified by the pandemic has cost Boeing, once a Wall Street favorite, a total of $5 billion, the company reported Wednesday.
Chief executive Dave Calhoun said in a video message to employees that the losses would be steeper in the commercial airplane division, based in the Puget Sound region of Washington state.
“Please know that we will do everything we can to minimize that impact, and as we take these steps, we will be as fair and transparent as possible — and absolutely honest and respectful,” Calhoun said in the video.
While the company can take advantage of a government aid program designed to help companies critical to national security, Boeing is riding out the crisis for now without government support. The company has until Friday to seek a cut of the $17 billion Treasury Department fund.
In conversations with reporters and investment analysts Wednesday, Boeing executives declined to offer details on potential government support. Showing a hint of optimism in an otherwise sobering earnings call, Boeing chief financial officer Greg Smith said economic conditions have improved drastically since the initial coronavirus market crash.
“We now have an ability to take a balanced approach because the capital markets are in much better shape than they were even two weeks ago,” Smith said.
The Boeing job cuts will put added strain on an economy already reeling from more than 26 million jobs lost because of the pandemic. The federal government reported Wednesday that fallout from the deadly novel coronavirus caused the U.S. economy to contract 4.8 percent from January through March. That’s the steepest drop since the financial crisis more than a decade ago.
Analysts said Boeing’s decision to cut the workforce not only underscores the severity of the crisis but also hints at a potentially rocky, unsatisfying recovery. As the twin crises at Boeing deepen, executives and industry analysts are pointing to a more permanent realignment in Boeing’s business.
“These layoffs are permanent,” said Mike Boyd, an aviation planning consultant who heads Boyd Group International. “Boeing has to shrink in size. The marketplace that they were selling to last year doesn’t exist anymore and it won’t exist for three years or more.”
The company’s 737 Max commercial jetliner has been grounded for more than a year after flawed flight control systems played a role in two deadly crashes that killed 346 people. The federal government launched criminal and civil investigations following the crashes, including an investigation into whether Boeing misled airlines about the training needed to fly the Max.
Boeing has been working on changes to the Max, including software fixes and an updated pilot training program, to win approval from the Federal Aviation Administration to return the plane to service. The company has said it expects that to happen during the third quarter of 2020, while emphasizing that regulators control the timeline.
The company fired its chief executive, Dennis Muilenburg, in December and stopped production of the Max in January. Still reeling from the Max crisis, the company took a hit months later as the pandemic caused a steep drop-off in air travel, leading to billions of dollars’ worth of canceled orders for Boeing jets.
Boeing had to close several of its plants across the country as employees began to fall ill from the virus. Last week, 27,000 Boeing employees returned to work in the Puget Sound region. A few thousand more returned to defense plants outside Philadelphia and Columbus, Ohio.
Bank of America aerospace analyst Ron Epstein said he thinks global air traffic probably won’t return to its previous peak until 2023 at the earliest. Air traffic within the country is down 95 percent, according to data maintained by the Transportation Security Administration. The decline far outstrips even the period after the September 11, 2001 terrorist attacks, according to historical figures maintained by the Bureau of Transportation Statistics.
Boeing will have to downsize even if it gets substantial government support, Epstein said.
“You have an end market that has been impacted in ways no one ever would have imagined,” Epstein said, “and Boeing is in the eye of the storm.”
Boeing executives estimate it will take two to three years for the company to recover from the covid-19 economic crisis. Even then, a global surplus in used jetliners could make airlines less eager to purchase new ones.
The company’s first-quarter financial report showed the toll of the combined losses from the Max grounding and the widespread impact from the coronavirus. Along with the quarterly loss of $1.7 billion, the company reported first-quarter revenue of $16.9 billion, 26 percent lower than the previous year.
With the dramatic decline of Boeing’s commercial aircraft division, government contracts have suddenly become the largest source of revenue for Boeing, a major shift from previous years. A new Boeing business unit focused on aircraft repair and technical services has held steady as the pace of government contracts has sped up, driven in large part by new Pentagon spending.
The company’s Arlington-based defense, space and security division was also resilient, although there are problems there too. That division experienced a slight revenue decline due to a $827 million charge for the KC-46A Tanker, the latest of several such charges. The company also fell behind schedule on its contract for the Air Force One presidential airplane, which executives attributed to challenge with having some engineers work remotely.
The company also announced production cuts across its commercial division to align resources more closely with expectations for significantly lower post-pandemic demand. Production of the 787 Dreamliner, which occurs at Boeing factories to the north of Charleston, S.C., will be scaled back from 14 per month to 10 per month, then gradually reduced to seven per month by 2022.
Calhoun noted the gravity of the news during a global pandemic that has cost millions of U.S. jobs.
“I know this news is a blow during an already challenging time. I regret the impact this will have on many of you. I sincerely wish there were some other way.”