Boeing Plans to Take $5 Billion Hit -- WSJ
July 19 2019 - 3:02AM
Dow Jones News
By Andrew Tangel and Doug Cameron
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 19, 2019).
Boeing Co. will set aside about $5 billion to compensate
airlines that have suffered because of the prolonged grounding of
the 737 MAX plane.
Chicago-based Boeing also faces litigation seeking compensation
for families of the 346 people who died in two crashes, as well as
higher costs after curtailing production of the MAX following its
grounding by global regulators in March.
The costs and the potential timing of the MAX's return to
commercial service will be a key focus of investors when Boeing
releases earnings for the second quarter next week.
Shares in Boeing rose 2% after hours on Thursday from their
close at $361.11, erasing a 2% decline during regular trading.
Boeing said the $4.9 billion after-tax charge in the June
quarter was related to estimates for "potential concessions and
other considerations to customers for disruptions." It said the
charge, which takes into account taxes, would result in a $5.6
billion reduction in revenue and earnings for the quarter.
The company is expected to report sales of about $20 billion for
the second quarter and about $94 billion for 2019, according to the
consensus among analysts polled by FactSet. They had been
projecting a quarterly profit of $1.2 billion, meaning the charge
likely will result in a deep loss for the period.
Boeing also said it expects to award the concessions to airlines
over a number of years. Airlines likely will be compensated in cash
and a mix of other concessions including delivery timing,
discounts, and added features and services, a person familiar with
Boeing's plans said.
The company said its estimated future costs to manufacture the
737 would increase by an additional $1.7 billion due to a
production slowdown that has lasted longer than expected. The cost
increases come on top of $1 billion in additional production costs
announced in the first quarter.
That $2.7 billion in costs will be set against an undelivered
accounting block of 3,100 737 MAX jets, implying that Boeing
expects only a minimal dent in margins on a program that is
expected to drive profit for more than a decade. The 737 MAX 8
model carries a list price of $122 million, though airlines secure
discounts for big orders, with typical sales in the region of $60
million apiece, analysts said.
The company said its financial results assume a gradual increase
in monthly production from 42 planes currently to 57 next year. It
trimmed output from 52 aircraft in April, though most suppliers
have remained at that rate and were already preparing for a step up
to 57 this month.
Major U.S. airlines that fly the 737 MAX have taken the aircraft
out of their schedules through early November. Boeing said Thursday
its guidance assumed the plane would fly again early in the fourth
quarter. But government and industry officials now say it could be
2020 before the plane returns to passenger service, as aviation
regulators weigh various fixes to the aircraft's systems and crew
training.
U.S. carriers have said they are more focused on the plane's
safe return to flight than on specific conversations with Boeing
about compensation. But the grounding is also hitting their
profits. Airlines have canceled thousands of flights that the MAX
planes were expected to make, curtailing capacity during one of the
busiest travel seasons on record.
American Airlines Group Inc., which was planning to boost its
MAX fleet from 24 planes to 40 by the end of this year, said last
week that cancellations due to the grounding reduced its pretax
earnings by $185 million in the second quarter. American is
scheduled to report earnings next week.
"We've got a long history and a nice order book going forward.
I'm certain that Boeing will want to make sure that we are taken
care of appropriately," American Airlines President Robert Isom
said in May.
European budget carrier Ryanair Holdings PLC said Tuesday the
grounding will hurt its growth plans. The airline was expecting to
receive 58 of the 737 MAX200 variant by next summer but said it is
now planning its schedule based on at most 30 deliveries by May
2020. Ryanair said delays in receiving MAX jets will force it to
close some bases and make cuts at others this winter -- and to trim
its planned summer-season capacity growth in 2020 to 3% from
7%.
Boeing faces over 100 lawsuits in the U.S. brought by families
of victims of the crashes in Ethiopia and Indonesia. The company is
negotiating settlements with some. Some plaintiff attorneys are
pushing for a jury trial to air the details of the accidents.
Mediation talks in cases affiliated with the October crash of a MAX
operated by Indonesia's Lion Air were scheduled to begin this
week.
Separately, Boeing has pledged $100 million to support families
and communities affected by the Lion Air crash and the second fatal
crash in March of a MAX operated by Ethiopian Airlines. This week,
Boeing said it hired victim-compensation attorney Kenneth Feinberg
to distribute half of that fund to families who lost relatives.
--Alison Sider contributed to this article.
Write to Andrew Tangel at Andrew.Tangel@wsj.com and Doug Cameron
at doug.cameron@wsj.com
(END) Dow Jones Newswires
July 19, 2019 02:47 ET (06:47 GMT)
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