Boeing, the American manufacturer is struggling. Now its problems come not only due to the 737 MAX crisis but even more so due to coronavirus. Crashing demand for air travel is pressuring airlines around the globe, which has led to a lack of new orders and deferred payments or deliveries. Boeing is urgently trying to preserve cash in an attempt to stay afloat.
Need for more cash
According to Bloomberg, by Friday Boeing is expected to fully drawdown a $14bn loan it took a month ago. It initially took $7.5bn of the loan and will now draw the rest of it. That loan is set to provide the firm with more financial flexibility to weather the 737 MAX crisis. It now seems that the financial flexibility is set to be further constrained by the demand crisis, not leaving much room for maneuver from Boeing.
Just over a year ago, when Boeing’s shares were booming and its order book was expanding rapidly. No one could predict what drastic changes in the next twelve months would bring. We were used to tens of orders coming in every month, both for the MAX and the widebody models. The reality in which Boeing is finding itself in nowadays is quite a different one.
At the end of February, Boeing’s net jet order book for the year stands at -25. So far in 2020, the firm has seen more cancellations than orders, while delivering 30 aircraft. Air Canada has cut its order by 11 aircraft, or 18% of the original deal. On the positive side, Oman Air converted its order for 10 MAXs into four 787 Dreamliners.
As a result of this information, Boeing’s shares fell 18% to $189, the lowest level since June 2017.
Other cash saving measures
In a memo seen by Simple Flying, Boeing’s new Chief Executive Officer, Dave Calhoun, said that:
“It’s critical for any company to preserve cash in challenging periods.”
Furthermore, Boeing is set to “freeze hiring” and does not rule out eventual layoffs if the situation was to worsen. It also asked to limit overtime on the 737MAX production line to critical as well as to limit travel and discretionary spending to business-critical activities only.
Analysts estimated last year that Boeing is burning through around $12bn of cash annually as a consequence of the MAX grounding. This was, of course, initiated by the fatal Ethiopian Airlines crash, which the first anniversary was just this week.
The cash-saving measures seem to be necessary, given that Boeing’s key clients – the airlines – are experiencing a host of problems themselves amid such a rapid decline in travel demand. Almost all carriers globally have cut capacity and some have initiated cost-cutting measures too, such as laying off staff or sending them for unpaid leave.
The coronavirus outbreak will have horrifying effects on the airline industry; the sector’s financial recovery won’t happen immediately. Airlines will seek to delay or cancel their orders, further constraining Boeing’s cashflow. We cannot rule out airline bankruptcies, which would significantly trim the demand for new Boeing aircraft in the short term.
Could we see Boeing run out of cash?
The aircraft manufacturer did not lay off any of its workers on the MAX production line, as it wanted to resume production at full scale after the aircraft becomes eligible to fly once again. That decision might prove Boeing to be very costly.
Boeing’s total debt reached $27bn in 2019 and, if we add the reported amounts from this year, its total debt is $41bn. Boeing ended 2019 with around $9 bn in cash, as well as $7 bn in short term debt, not to mention the liabilities and accounts payable to its suppliers ($35bn).
Additionally, in the 2019 Q4 presentation Boeing outlined that the 737 MAX production will cost an additional $4bn in 2020.
In the wake of the MAX and air travel demand crisis, Boeing’s other revenue streams such as defense and services become more important than ever. These will allow the manufacturer to fight through the hard times while remaining untouched. Even in a worst-case scenario of Boeing running out of cash, I would expect to see a rescue package coming from the US government, as the firm is simply “too big to fail”.