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Boeing squeezes production over 737Max, $900m damage

By Wole Oyebade
25 October 2019   |   4:15 am
American plane manufacturer, Boeing, has squeezed wide-body production over losses on account of embattled 737Max plane model.


American plane manufacturer, Boeing, has squeezed wide-body production over losses on account of embattled 737Max plane model.

The manufacturer recently increased its estimate of 737Max financial damage by $900 million as it reported a 51 per cent slide in its third-quarter profit.

The Chicago-based plane maker said it would reduce the production rate of the 787 Dreamliner to 12 a month from 14 for about two years, starting late next year with its backlog on the wane, citing trade tensions with China that have held up expected orders, and it now expects to make the first delivery of its delayed 777X in early 2021.

Boeing did not announce layoffs or a further reduction or freeze in 737 production, as some observers had expected, due to the continued halt in deliveries of the 737 Max since March following two deadly crashes.

It also said it still expects to receive approval by the end of this year from U.S. regulators for revisions to the flawed flight control system that precipitated the crashes, allowing the plane to return to service.

Boeing raised its accounting tally by $900 million of additional costs it will book to produce 737 aircraft due to a lower production rate, which will remain depressed longer than the company previously had expected given the slipping of the timetable for the plane to return to service. Boeing said it expects to gradually raise output from 42 planes a month to 57 by late 2020.

The raised production cost estimate brings the total costs to Boeing from the 737 Max crisis to over $9 billion. In the second quarter the company booked a pretax charge of $5.6 billion to account for the compensation it will provide its airline customers and lessors over the grounding of the plane and delays in deliveries.

Boeing didn’t raise its compensation estimate this quarter, despite the Max’s expected return date slipping from the company’s prior target of early in the fourth quarter, but CFO Greg Smith warned on a conference call that the figure could increase.

Boeing previously said its production slowdown would cost it another $1.7 billion on top of $1 billion in costs related to the Max’s grounding it had booked in the first quarter.

Boeing earned $2.05 billion in the third quarter, down 51 per cent from the same quarter a year ago.

Core earnings per share of $1.45 trailed the consensus analyst estimate of $2.07, but given the difficulty of forecasting Boeing’s results due to the Max disruptions, analyst Robert Stallard of Vertical Research Partners said in a note that the wide variance wasn’t a surprise.

The company continued to haemorrhage cash due to the loss of income from deliveries of the Max, with a free cash outflow of $2.89 billion. Revenue fell 21 per cent to $19.98 billion due to a 41 per cent slide in revenue from its core commercial airplanes business to $8.2 billion. The weak results in the commercial business were partially offset by robust defense and services sales.

On Tuesday the company fired Kevin McAllister, head of the commercial aircraft division, following criticism of his handling of the Max crisis, as well as other problems on his watch, including quality issues with 787s produced at its South Carolina factory and the forthcoming 777X, which suffered a failure of a cargo door in stress testing and has seen its first test flight delayed to next year amid problems with its General Electric engines.