It’s almost always bad news when a statement from a prominent company hits late on Friday. For those who missed Boeing Co.’s release at 4:30 p.m. New York Time ahead of a three-day weekend for the bond market, Boeing laid out the ugly truth of blowout operating losses at its commercial aircraft and defense businesses during the third quarter, which combined for about $6.4 billion.
Stock traders pounced on the news, and Boeing’s shares fell about 2% in a matter of minutes. The cooler heads that know Boeing is too important to fail quickly prevailed, and shares rebounded to its previous close in just a few hours. Regardless, Boeing is in dire financial straits that will trickle down to suppliers with more aircraft delays, compounded by the monthlong strike of 33,000 machinists in the Seattle area. The company announced it will slash 10% of the workforce to help mitigate the financial situation, but that will be just a stopgap. Longer term, broad moves will be needed, such as exiting the space business. But the more immediate need is to end the strike and return to producing high-quality aircraft, and Boeing needs a little financial breathing room for that. Certainly, the Defense Department could ease some of Boeing’s pain by renegotiating fixed-price contracts that are strangling the company.
Boeing’s cash burn is alarming because the company only has liquidity of $10.5 billion, and losses will accelerate as the labor strife drags on. Boeing would be facing a financial cliff if one of the main credit rating companies — S&P Global Ratings, Moody’s Ratings and Fitch Ratings — decides to cut Boeing to junk, driving up its borrowing costs and making a turnaround that much more difficult. Still, equity investors seem poised to help with a sale of new shares.
Boeing said in the news release that the overall third-quarter cash-flow loss was $1.3 billion, mitigated by the profitable global services unit, and the unadjusted earnings per share loss was $9.97, or a net loss of about $6 billion. The net loss includes $5 billion of charges the company announced, with $2 billion at defense and space programs and $3 billion for adjustments to the 777 and 767 aircraft programs. That excludes the 787, which is being assembled at a nonunion factory in North Carolina, and the 737, the company’s biggest cash earner that’s shut down by the strike.
The alarm bells become more shrill when looking at losses at each business group. The commercial airplanes unit had sales of $7.4 billion and an operating margin of negative 54%, Boeing said, which equates to a $4 billion operating loss. Sales at the defense, space and security division were $5.5 billion with an operating margin of negative 43.1%. That’s an operating loss of $2.4 billion.
It’s clear that the cash burn isn’t just at the airliner business and that the strike isn’t the only problem Boeing faces. Still, the strike is keeping the company from moving forward on any of its commercial airplane initiatives. At stake is the health of the aerospace industry because the longer the strike lingers, the more suppliers will suffer.
The large ones, such as Honeywell International Inc. and RTX Corp., can absorb the shock. The small shops that make highly specialized parts at low volume rates will be hurt the most. This weakens the whole aerospace industry.
Boeing pushed back the first delivery for the wide-body 777-9 to 2026 and the 777-8 freighter to 2028. The company will also stop making over time the freighter version of the 767 wide-body aircraft and produce only the military version of the plane that refuels aircraft. Suppliers will have to adjust to these new schedules and probably don’t have a lot of confidence this will be the final shake-up because they’ve suffered delays before.
This is how the problem ripples through the aerospace industry: Small machine shops are forced to lay off longtime employees who may never return, undercutting the institutional knowledge of workers who help build high-quality parts. The supply chain was just beginning to heal from a dearth of experienced employees, who during the pandemic were laid off or called it quits. These small so-called metal benders, or companies that actually make parts, are the foundation of the manufacturing sector. Many of the large sellers of aerospace components, like Honeywell, outsource manufacturing jobs to these small outfits.
The market chatter on Monday will be around Boeing’s financial viability and the amount of an equity offering that’s needed to give the company enough solvency to get its aircraft factories cranked up. Both investors and Boeing know that the company must wrap up its labor strike before any of the many gears of this process can begin to roll. It’s all about the execution because Boeing has customers that are wanting anxiously to pay for and take delivery of planes.
One thing the Defense Department could do to help, and what most reasonable people should see as fair, is to renegotiate its fixed-price contracts. No one had expected the inflation-rate spike and pandemic-related challenges that have turned those agreements into money pits. Perhaps that would give Boeing monetary breathing room to resolve the labor contract.
Why should the military give Boeing a break? Well, the company’s mess goes beyond being just a Wall Street financial problem. Boeing isn’t similar to some retailer that couldn’t change with the times and instead became a nostalgic brand for people who shop at the lower-priced, better-stocked competitor that killed it. There are several producers of fighter jets in the US, but no other company in North America makes airliners. It’s not hyperbole to say Boeing is a national security imperative.
Europe’s commercial planemaker, Airbus SE, is poised to gobble up market share once it resolves the snags from a faulty part on RTX’s jet engine. China has started its commercial-aircraft program, with the Comac C919 already in service. Judging by what the Chinese did to industries like steel, shipbuilding, electric cars and solar panels, don’t underestimate their plans to dominate commercial aerospace as well (and for now on the backs of foreign suppliers including General Electric Co. and Honeywell). Brazil has Embraer SA, which makes regional passenger aircraft and corporate jets. Embraer has a great reputation for making high-quality aircraft, and some airlines would love to see Embraer make a large airliner.
On top of company’s financial losses and the aircraft delays, Chief Executive Officer Kelly Ortberg dropped the bad news of the layoffs to its employees to address “this very challenging time at Boeing.” These actions, though, like a Band-Aid to cover an open gash across the stomach, aren’t going to stop the bleeding of cash. These tough moves certainly won’t raise employee morale during one of the most critical periods of Boeing’s 108-year corporate life. It needs to end the strike and start delivering planes regularly again, and it could use some financial breathing room to do it.
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