Question

Explain whether the grounding of the Boeing 737 max aircraft would affect the financial statements of airlines, such as Southwest, United and American Airline, that have acquired Boeing 737 max aircraft.

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Answer 1

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The Boeing 737 MAX groundings have had a deep financial effect on the aviation industry and a significant effect on the national economy of the United States. No airline took delivery of the MAX during grounding. Boeing slowed MAX production to 42 aircraft per month until in January 2020, when they halted until the airplane is reapproved by regulators. Boeing has suffered directly through increased costs, loss of sales and revenue, loss of reputation, victims litigation, client compensation, decreased credit rating and lowered stock value. In January 2020, the company estimated a loss of $18.4 billion for 2019, and it reported 183 canceled MAX orders for the year.

In February 2020, the global coronavirus pandemic and the resulting travel bans created further uncertainty for Boeing. In March 2020, news that Boeing was seeking a $60 billion bailout caused a steep drop in its stock price, though Boeing eventually received $17 billion in funds from the coronavirus stimulus. Its extensive supply chain providing aircraft components and flight simulators suffered similar losses, as did the aircraft services industry, including crew training, the aftermarket and the aviation insurance industry. Its customers, the airlines and aircraft lessors, had their operations and strategic plans severely disrupted. By the end of July 2020, Boeing's net orders for the 737 MAX were down by 836 aircraft in 2020

Boeing initially hoped that flights would resume by July 2019, but on June 3, CEO Dennis Muilen burg revised this to the end of 2019, with no firm timeline. On July 18, Boeing reaffirmed a return to flight during the fourth quarter of 2019, but noting that the date could still slip. In September 2019, Muilen burg suggested a phased return around the world because of the regulatory divisions regarding recertification. Later that same month Boeing told its suppliers that the plane could return to service by November. On November 11, 2019, Boeing revised this to a resumption of deliveries in December 2019 and commercial flights in January 2020. In January 2020, Boeing said it was not expecting recertification until mid 2020.

In the second quarter of 2019, Boeing reported a record quarterly loss of $2.9 billion, as it provisioned $4.9 billion for airlines compensation. Its inventory had grown by $6 billion, its stock market value had dropped by $62 billion and its share price lost 25% between March and August 2019. Including the knock-on cost for airlines and the supply chain, the groundings were costing $4 billion per quarter. At the time of the grounding, Boeing's annual revenue was $100 billion, 60% of which came from sales of airliners. The 737 MAX represented a third of sales to airlines. The company had a 10% profit margin, for an annual profit of $10 billion. It employed 137,000 people in the United States and paid $45 billion to 13,600 domestic suppliers, which employed a further 1.3 million people, accounting for about 1% of the American workforce. In the first quarter of 2020, Boeing is seeking financial bailout of $60-billion against further disruptions caused by the global coronavirus pandemic.

A special board meeting on October 20, 2019, discussed the financial effect of the groundings, amid speculation of possible staff reductions. Staff in the US and the UK were not to receive their 2019 Christmas bonuses. New CEO Dave Calhoun will receive a multimillion-dollar bonus if he achieves a key milestone of returning the MAX to service.

Development of the Boeing New Midsize Airplane has been postponed to prioritize resources on returning the MAX to service. In July 2019, Boeing desisted from a $60 billion Pentagon procurement to replace land-based nuclear missiles. Some analysts said that Boeing's ability to pursue big military projects is reduced because of the financial cost of the groundings.

Boeing now pegs the financial impact of the 737 Max grounding at $18.6 billion, including estimated costs associated with concessions to customers and disruption to the now-halted production line. ... Boeing posted a fourth-quarter net loss of $1 billion, reversing a $3.4 billion net profit one year earlier.

Boeing increased its estimate of the financial damage of the grounding of the 737 MAX by $900 million as it reported a 51% slide in its third-quarter profit and acknowledged stresses in its wide body business, where it has enjoyed a sizable lead over competitor Airbus.

The Chicago-based plane maker said Monday morning it will 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.