Boeing Crashes: $43 Billion in Share Buybacks Turn Into Existential Threat

Ed.'s note: Maybe the plan here all along was internal sabotage to collapse Boeing?

Is Boeing Done For? What Charts Say After 64% Fall
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Source: Wolf Street

by Wolf Richter  •  Mar 11, 2020  •  181 Comments

Of immediate concern is how much cash Boeing is burning due to the 737 MAX fiasco and now the coronavirus, and how much cash it can pile up to avoid a liquidity crisis.

Boeing's shares [BA] came unglued, plunging 18.1% today, after having already plunged over the past four weeks. Since February 12, shares have crashed 46%, and since the peak on March 1, 2019, 57%:

Today's plunge came after a flurry of disclosures and leaks in the morning about Boeing, including:

• Sources said that Boeing is planning to draw down entirely and much quicker than expected its new credit facility of $13.825 billion as early as Friday, apparently worried that banks might freeze the credit facility later, and banks did during the Financial Crisis.
• Boeing disclosed that it had negative net orders of -28 aircraft for the first two months of 2020, with cancellations of the 737 MAX exceeding orders for all models;
• It imposed a hiring freeze to "preserve cash™

Trying to forestall a liquidity crisis.

Of immediate concern is how much cash Boeing is burning to deal with the 737 MAX fiasco, and how much cash it can pile up to avoid a liquidity crisis.

Back in October 2019, Boeing obtained a new credit line of $9.5 billion, which about doubled the size of its existing credit line. Credit lines serve as liquidity backup that a company can draw down when it needs cash. Then in February, it obtained another loan facility, this time a two-year "delayed-draw term loan" for $13.825 billion from a consortium of banks, led by Citibank. This type of loan allows Boeing to wait drawing the money until it needs it.

Boeing initially drew $7.5 billion on this new credit line and was expected to draw any other amounts way down the road, as needed to deal with the 737 MAX fiasco. But the disruptions from the coronavirus have been thrown on top of its existing 737 MAX fiasco.

Now Boeing is expected to draw the remainder of the line as early as Friday, sources told Bloomberg. According to one of the sources, Boeing is drawing down the rest of the loan as a precaution due to market turmoil.

This means that Boeing is worried the banks might freeze the unused portion of the credit facility and make the cash unavailable, as banks had done during the Financial Crisis, when companies found that access to their credit lines was suddenly blocked just when they needed the cash most urgently.

The cash pressures on Boeing are enormous.

There is the plunge in revenues from stalled sales and deliveries of the grounded 737 MAX, and the cash drain from working with its suppliers for the 737 MAX program to keep them afloat.

Then there are the settlements with airlines, such as Southwest and American Airlines, over the grounded 737 MAX in their fleets, where Boeing pays the airlines. The amounts of the individual settlements have remained confidential, but in its annual report, released on January 31, Boeing spelled out its estimates for the combined amounts: $8.2 billion.

This came in two lumps. In Q2 2019, it "estimated potential concessions and other considerations to customers for disruptions and associated delivery delays related to the 737 MAX grounding, net of insurance recoveries," at $5.61 billion. Then in Q4 2019, it estimated an additional $2.62 billion, for a total of $8.2 billion.

Negative new orders in 2020 so far.

Boeing also disclosed today just how awful its new orders look: During January and February, Boeing received net new orders of negative -43 orders for the 737 MAX, driven by a flood cancellations. It received only one order (from FedEx) for its 767, and 17 orders for its 787. This includes the conversion by Air Lease Corp of nine 737 MAX orders into three 787 orders; and the conversion by Oman Air of ten 737 MAX orders into four 787 orders.

Please go to Wolf Street to read the entire article.
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Source: Moon of Alabama

March 12, 2020

A Year After The Second MAX Crashed Boeing Is Faced With Ruin

On top of the damage that misguided shareholder value policy caused to Boeing's will now come the effects of an unprecedented pandemic. Together they may well signal the end of a once great company.

On March 10 2019 Ethiopian Airlines Flight 302 crashed shortly after taking off in Addis Adaba. All 157 people on board died. It was the second crash of a Boeing 737 MAX airplane six month after Lion Air Flight 610 had crashed and killed all 189 people on board.

Exactly a year ago Moon of Alabama published its first piece about the MAX. At that time all MAX planes were grounded except in the United States. We described Boeing's shoddy implementation of the plane's maneuvering characteristics augmentation system (MCAS) and concluded:

Today Boeing's share price dropped some 7.5%. I doubt that it is enough to reflect the liability issues at hand. Every airline that now had to ground its planes will ask for compensation. More than 330 people died and their families deserve redress. Orders for 737 MAX will be canceled as passengers will avoid that type.

Boeing will fix the MCAS problem by using more sensors or by otherwise changing the procedures. But the bigger issue for the U.S. aircraft industry might be the damage done to the FAA's reputation. If the FAA is internationally seen as a lobbying agency for the U.S. airline industry it will no longer be trusted and the industry will suffer from it. It will have to run future certification processes through a jungle of foreign agencies.

Congress should take up the FAA issue and ask why it failed.

The MAX was developed and built as cheap as possible and not as safe as possible. Boeing cut corners and deceived its customers and regulators. Its management had only one thing in mind - the stock price of Boeing and its so called shareholder value.

All MAX planes, the 400 that existed at that time plus the 400 Boeing has since built are still grounded. The accident investigation reports for the Lion Air flight and the Ethiopian jet (pdf) make it clear that Boeing's penny wise but pound foolish MCAS implementation was the root cause of both accidents.

A reasonable fix for MCAS, which was first promise for April 2019, is still not working. A re-certification of the type is still months away. After pressure from the European regulator EASA additional fixes will have to be applied to wire bundles under the cockpit which in case of a short circuit could cause another crash of a plane.

There are still dozens of open court cases and criminal investigations against Boeing. It will have to pay more billions of dollars for compensations.

During the first two months of this year total orders for Boeing commercial planes were negative. There were 25 more cancellations, or conversions of multiple MAX orders to fewer 787 order, than total new orders. During the same time its competitor Airbus won net orders for 274 commercial jets.

Since a year ago Boeing's share price has dropped from $440 in February 2019 to today's opening price of $160 per share. The company has developed a serious cash flow problem. It is now drawing down all credit lines it has with its banks. It is cutting all noncritical spending, instituted a hiring freeze and limits overtime.

The commercial airline business is not the only part of Boeing which is in deep trouble. Its military and space programs have similar problems.

Please go to Moon of Alabama to read the entire article.
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