GE's 737 MAX Problem Just Got Bigger

Date : 12/17/2019 @ 1:23PM
Source : Dow Jones News
Stock : General Electric Company (GE)
Quote : 10.88  0.49 (4.72%) @ 1:00AM
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GE's 737 MAX Problem Just Got Bigger

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By Thomas Gryta 

General Electric Co. will likely take a significant hit to its cash flow from Boeing Co.'s decision to halt production of the 737 MAX jetliner, which has already dented the conglomerate's finances.

GE makes all of the MAX's engines through a joint venture with France's Safran SA. When Boeing in April cut monthly production of the plane to 42 from 52, it created a $400 million quarterly reduction in GE's cash flow. The suspension of production Boeing announced Monday, if prolonged, could reduce cash flow by much more as analysts warn that GE won't receive payments made as the planes are being built.

GE's management has flagged the problems around the MAX in regulatory filings and public comments, but it also has said the impact is temporary and cash flow would rebound as production ramps up.

"It is going to create a significant cash drag for GE," said John Inch, an analyst at Gordon Haskett. He added that "one engine program cannot make or break the fortunes of this company."

GE is expecting to get $21 billion in cash from selling biopharmaceutical assets and it intends to use proceeds to deleverage a stretched balance sheet. GE also has a safety net from $20 billion in credit lines syndicated through 36 banks that expire in 2021.

GE said it is working with customers and suppliers "to mitigate the impact of the temporary shutdown of the 737 MAX, while protecting the company's ability to accelerate production as needed in the future."

Nick Heymann, a William Blair & Co. analyst, projected that the suspension could cut GE's quarterly cash flow by more than $2 billion.

The final cost to GE is difficult to determine, according to analysts and people close to the company. GE makes other systems used on the MAX, and likely will negotiate with Boeing on the final outcome. There are also costs and other offsetting factors associated with its engine production.

"GE discloses insufficient financial information to be able to model any of this," Mr. Inch said.

Aviation is GE's largest business by revenue and its health is vital to the conglomerate's overall turnaround. GE struggled in recent years after deep losses in its core power division and finance arm forced the company to slash its dividend and pursue plans to sell off major business units.

As production of the LEAP engine that powers the MAX increases, sales and margins in the divisions are projected to rise in coming years. The LEAP is an option for customers buying Airbus SA's A320 NEO airliner but it is the only engine used on the 737 MAX. GE also has military programs and other engines in production, meaning it may temporarily shift resources to other programs. Meanwhile, it has a lucrative business servicing the thousands of GE engines already in use around the world.

Melius Research recently projected the commercial engines business would bring in almost $26 billion in revenue next year, or 28% of GE's total revenue. The firm predicts GE Aviation's total revenue to approach $35 billion for 2020.

The extended grounding has already strained GE finances, cutting cash flow by as much as $1.4 billion this year as factories produce fewer engines and GE can't get fully paid for them. The LEAP engine is a major growth driver for the company's aviation unit, which accounted for $4.8 billion of GE's roughly $7 billion in industrial profits in the first nine months of 2019. GE has more than 17,000 orders for the engine.

Write to Thomas Gryta at


(END) Dow Jones Newswires

December 17, 2019 08:08 ET (13:08 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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