Boeing abandons outlook and sees $1 billion in extra costs due to 737 Max debacle

BANGALORE, INDIA/SEATTLE/PARIS – Boeing Co. on Wednesday abandoned its 2019 financial outlook, halted share buybacks and said lowered production due to the grounding of its fastest-selling 737 Max jet after two fatal plane crashes in five months had cost it at least $1 billion so far.

The world’s largest planemaker is facing one of the biggest crises in its 103-year history following the disasters on Lion Air in Indonesia on Oct. 29 and another on Ethiopian Airlines on March 10, which together killed all 346 on board.

Chicago-based Boeing is now reckoning with a blow to its reputation and the financial cost of getting the planes back in the air. It met sharply lowered Wall Street profit estimates, largely due to stopping deliveries of the 737 Max jets and a slowdown in production.

The production slowdown alone has cost it $1 billion so far, the company said, because the lower rate means the plane-maker has to pay more for parts, which are priced according to the volume Boeing buys.

Boeing also booked unspecified charges related to developing a Max software fix and pilot training. Chief Executive Dennis Muilenburg told analysts on a conference call that Boeing has confidence in its software fix and expects a certification flight with the U.S. Federal Aviation Administration in the “near term” after completing more than 135 test and production flights.

“The timing of return to service for that Max will continue to be paced by ongoing work with global regulators and our customers,” Muilenburg said. “If there’s something that we can do to make airplane development programs or the certification process better and safer, we will pursue it.”

A fuller picture of how Boeing plans to repair its image with the flying public and stem further financial damage will not emerge until the end of the second-quarter as 737 production cuts did not begin until mid-April.

Investors are also looking for details on how the Max crisis will hit development of Boeing’s all-new 777X twin-aisle jetliner and a potential new midmarket airplane, known in the industry as NMA, which is central to its fight with arch-rival Airbus SE in the lucrative longer-haul market and also is expected to lay the industrial foundation for an eventual 737 replacement.

Muilenburg said the company did not see any changes to the underlying certification process for 777X in light of the Max reviews, and continues to work “in parallel” on plans for NMA, although he stressed the 737’s return was a higher priority.

Boeing said on Wednesday it sped up production of its 787 Dreamliner to 14 aircraft per month from 12 in the first quarter, while the 777X remained on track for flight testing this year with delivery in 2020.

Boeing shares rose 1.5 percent.

The crashes caused regulators worldwide to ground the 737 Max and triggered investigations into the aircraft’s development by federal transportation authorities and the U.S. Department of Justice.

Although safety experts have raised some questions over crew performance in both crashes, attention has focused on anti-stall software known as MCAS, which Boeing has acknowledged was a common link in the separate chains of events leading to both crashes.

Muilenburg insisted on Wednesday that “there was no surprise or gap or unknown here or something that somehow slipped through the certification process.”

“We know exactly how the airplane was designed. We know exactly how it was certified,” he said. “We’ve taken the time to understand that. That has led to the software update that we’ve been implementing and testing and we’re very confident that when the fleet comes back up, the Max will be one of the safest airplanes ever to fly.”

Boeing cut production of the jets following the Max grounding to 42 aircraft per month, down from 52, and its operating cash flow in the first quarter was around $350 million lower than a year earlier.

Reuters reported on Tuesday that Boeing told some 737 Max owners it was targeting U.S. Federal Aviation Administration approval of its software fix as early as the third week of May and the ending of the grounding of the aircraft around mid-July as it resumes building 52 aircraft per month.

Boeing also took an impairment charge at its Boeing Capital financing unit and removed 210 aircraft from its order backlog to reflect concerns about customer credit quality.

It did not disclose the name of the airline involved but the move came days after India’s Jet Airways halted operations after lenders rejected a plea for emergency funds.

Boeing said it would issue a new financial forecast when it has more clarity around the issues surrounding the 737 Max. In January, it said it expected full-year revenue of $109.5 billion to $111.5 billion and core earnings per share between $19.90 and $20.10.

The company repurchased $2.3 billion of its shares in the latest quarter, all of which occurred prior to mid-March. Boeing bought back $9 billion of its stock last year.

First-quarter operating cash flow declined to $2.79 billion, from $3.14 billion, missing the Wall Street’s average estimate of $2.82 billion.

Revenue fell 2 percent to $22.92 billion, below analysts’ average estimate of $22.98 billion.

Excluding certain items, Boeing said its core earnings fell to $3.16 per share, in the quarter from $3.64 per share, a year earlier. That matched analysts’ average estimate.