GE's Cash Flow Slowed by Boeing MAX Grounding
August 01 2019 - 7:20AM
Dow Jones News
By Thomas Gryta
Just as General Electric Co. says it is making progress on some
of the conglomerate's thorniest problems, the extended grounding of
Boeing Co.'s 737 MAX jet is now putting a fresh strain on its
finances.
GE, a longtime aerospace supplier and major buyer of commercial
planes, warned Wednesday that the grounding could drain as much as
$1.4 billion from its cash flow this year as its factories produce
fewer engines for the aircraft and cannot get fully paid for them.
The MAX jet is powered exclusively by LEAP engines made by GE in
partnership with France's Safran SA.
"When Boeing delivers the airframes, we will get paid for those
engines. It's just a delay in cash timing," said Jamie Miller, GE's
outgoing finance chief.
For now, that means GE didn't take in an expected $600 million
in the first half of the year and won't take in another $400
million per quarter in the second half if the plane remains
grounded.
"$400 million per quarter is what is likely to happen if we do
not see a return to service," GE Chief Executive Larry Culp said.
GE's revised financial forecast for the full year, which calls for
cash flow between $1 billion and negative $1 billion, reflects the
MAX delays.
GE has slowed production this year of the engine model used in
the MAX. The project is a major driver of growth for the company's
aviation unit, which accounted for $3 billion of GE's roughly $5
billion in industrial profits in the first half of the year. The
LEAP, which is also used on Airbus SE jets, has attracted more than
17,000 orders. GE also makes avionics and other parts for the
MAX.
"GE is heavily tied to Boeing's narrowbody fortunes," said John
Inch, an analyst at Gordon Haskett, an investment research firm. He
said once the single-aisle MAX is approved to fly again, Boeing may
need to discount the price of the plane and that could mean less
money for GE as well.
"You could have emerging issues in the long-term aviation story
that everyone presumes is rock solid," he said.
The aviation unit, which is now GE's largest by revenue, has
propped up the conglomerate's results in recent years as GE has
struggled with deep losses in its core power division and finance
arm. Those troubles have forced GE to slash its dividend and pursue
plans to sell off major business units.
Boeing has said it hopes to restart MAX deliveries in the fourth
quarter, but some government and industry officials don't expect it
to carry passengers again until next year. The MAX has been barred
by regulators from commercial flight since March after two fatal
crashes over the past year.
With hundreds of finished jets piling up on tarmacs, Boeing in
April slowed monthly production of its 737 jets to 42 from 52.
Boeing executives recently warned they might further slow or halt
production if regulators don't approve the plane's return to
service by the end of this year.
"We're at a lower level of production than we thought we would
be at this point in the year, for obvious reasons," Mr. Culp said
Wednesday. He declined to comment on the ramifications of another
slowdown or complete halt in MAX production.
Spirit AeroSystems Holdings Inc., which makes the fuselages and
other parts for the MAX, said Wednesday that 200 workers have taken
voluntary retirement as part of efforts to cut costs by 5% to
counter the impact of the production cut. Boeing said it has made
no staff cuts as a result of the MAX grounding.
GE is also is one of the aircraft maker's top customers. The
company's finance arm operates one of the world's biggest
jet-leasing companies, known as Gecas. That business owns 29 MAX
planes, with 25 of those rented to customers who are obligated to
continue making payments during the grounding, according to a GE
securities filing.
Gecas has made pre-delivery payments for 150 more of the planes
and financing commitments to buy another 19 under
purchase-leaseback contracts with airlines, the filing shows. At
the end of 2018, Gecas owned or had on order more than 1,850
aircraft, according to a regulatory filing.
Overall, GE had $2.1 billion worth of MAX jets with no
impairment charges incurred in the first half as the company
expects the planes will ultimately be delivered and return to
service.
Meanwhile, Boeing recently pushed back the expected first flight
of its 777X long-haul jetliner, blaming problems with GE's new
engine for the plane. GE said it has redesigned a part that was
wearing out faster than expected and is working with Boeing on the
issue.
"The scheduled flight is obviously disappointing given how well
the aircraft has been performing in preflight tests and that we are
on track on non-engine activities," Dennis Muilenburg, Boeing's CEO
said last week. "The engine issue has added significant risk to the
schedule."
Boeing now hopes to fly the 777X next year and deliver the first
ones by the end of 2020.
--Doug Cameron contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
August 01, 2019 07:05 ET (11:05 GMT)
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