Boeing is desperately trying to regain regulators’ confidence in the embattled 737 Max jet, which has been grounded for nearly 18 months after a pair of crashes killed 346 people. And the company is undergoing a painful transition toward what executives acknowledge will be significantly lower post-pandemic demand for new commercial jets.
Boeing executives estimated Wednesday that it will take three years for commercial air travel to return to normal. Analysts say purchases of new jets ― the core market for Boeing’s commercial business ― will probably be depressed until the second half of the decade.
“The reality is the pandemic’s impact on the aviation sector continues to be severe,” Boeing Chief Executive David Calhoun wrote in a letter to employees released Wednesday. “This pressure on our commercial customers means they are delaying jet purchases, slowing deliveries, deferring elective maintenance, retiring older aircraft and reducing spend — all of which affects our business and, ultimately, our bottom line.”
Boeing’s fall from grace has been years in the making.
In 2017 and 2018, soaring sales of the new 737 Max drove record profits and pushed the company’s stock price to historic highs. But the plane became a liability last year when faulty flight control systems were implicated in a pair of deadly plane crashes in Indonesia and Ethiopia. Regulators grounded the plane in March 2019 and still do not appear close to clearing it for flight.
With Boeing already in a state of severe vulnerability, the coronavirus presented a crisis unlike any in the company’s history. Pandemic-induced travel restrictions caused airport foot traffic to dive by more than 90 percent in April, driving many airlines to the brink of bankruptcy. Airlines and leasing companies have canceled or deferred hundreds of previously planned aircraft purchases as a result.
Boeing’s management team has taken aggressive steps to shrink the company accordingly. Over the past several months, the company has reduced its head count by about 10 percent through a mix of layoffs and voluntary buyouts. On Wednesday, Calhoun notified employees that more jobs would be eliminated, although he did not specify how many.
Boeing also plans to sharply scale back commercial airplane production. The company announced Wednesday that it will decrease its production rates for 777 and 787 widebody jets to just two and six jets per month respectively. It announced a slower ramp-up to the 737 production rate toward an eventual 31 per month by 2021.
And the company announced plans to end production of the 747, a pioneering jumbo jet that Boeing has produced since 1970. The company’s production line based in Everett, Wash., is to be wound down in 2022, although the company indicated that production rates will be unchanged until then. Boeing typically produces one 747 freighter every two months.
The production cuts mark a significant retreat for Boeing, which just two years ago could rely on soaring commercial aircraft sales to fund generous Wall Street dividends and underbid its rivals on high-stakes military deals.
Today, a quick look at Boeing’s balance sheet would suggest it is primarily in the government contracting business. Although its Arlington, Va.-based defense, space and security division has problems of its own, the simple fact that it sells to governments has insulated it from the turmoil in commercial markets. The company’s defense sales have been roughly flat in 2020.
All eyes are on the company’s newly installed chief executive Dave Calhoun, who has engineered shrewd moves to see the company through the crisis without bankruptcy or public assistance. Dennis Muilenburg, Calhoun’s predecessor, was fired for poor performance in the wake of the disastrous 737 Max grounding.
“When you look at the decisions these companies are making now they are going to have ramifications for years, and ramifications for after the pandemic," Bank of America aerospace and defense analyst Ron Epstein said in an interview.
Top managers at Boeing appear to be making decisions with an eye for survival rather than expansion, a far cry from the boom years of 2016 and 2017.
“Our industry is changing, our customers’ needs are changing, and we’re adapting,” Calhoun explained Wednesday in a call with analysts.
Under Calhoun’s leadership, the company walked away from a $17 billion federal assistance fund built into the Cares Act for businesses deemed critical to the country’s national security. Accepting federal help would have required Boeing to give the government an ownership stake.
Instead, executives have opted to raise cash on the private markets. Boeing cashed out the full amount of its $13.8 billion bank loan in early March when the crisis set in and later raised $25 billion in a massive debt sale. They also backed out of a long-planned $4.2 billion merger with the Brazilian aerospace manufacturer Embraer.
Although Boeing has enough cash on hand to support its operations for the foreseeable future, analysts are closely watching the company’s spending. Much is outside the company’s control.
“[Boeing’s] ability to get though this crisis is going to be dictated to some extent by how soon the coronavirus fades and air travel gets back to much higher levels,” said George Ferguson, an aerospace analyst with Bloomberg. “Because they are in such a vulnerable position, they have to be really careful about how they carve their course from here, because we don’t know when this crisis is going to end.”