GE's 737 MAX Problem Gets Bigger -- WSJ
The Boeing production halt is likely to hit cash flow at
company, which makes the jet's engines
By Thomas Gryta
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 (December 18, 2019).
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
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 reduced GE's quarterly cash flow by
$400 million. 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
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
"It is going to create a significant cash drag for GE," said
John Inch, an analyst at Gordon Haskett. He added, though, that
"one engine program cannot make or break the fortunes of this
GE is expecting to get $21 billion in cash from selling
biopharmaceutical assets and it intends to use proceeds to pay down
debt weighing on its balance sheet. GE also has a safety net from
$20 billion in credit lines syndicated through 36 banks that expire
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."
Southwest Airlines Co. earlier Tuesday said it was removing the
737 MAX from its flight schedule through April 13 as the airline
sees uncertainty around the timing of the aircraft's return to
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.
Nick Heymann, a William Blair & Co. analyst, projected on
Monday that the suspension could cut GE's quarterly cash flow by
more than $2 billion. On Tuesday, he revised that estimate and said
a slowdown in engine production during the MAX shutdown could help
offset the pain because GE would be making fewer engines without
getting paid. The amount of cash going to suppliers and tied up in
inventory would drop, and thus reduce the ongoing hit to quarterly
GE hasn't disclosed whether it will change its engine production
during the MAX shutdown.
Boeing's stated plan to focus on delivering the roughly 400
planes that are in storage, rather than making more planes, will
benefit GE, said Jeff Sprague, analyst with Vertical Research,
because the engine maker will get payments on those deliveries
before production starts back up.
"The longer term question is whether the MAX suffers lasting
reputational damage that shifts share to Airbus," Mr. Sprague said
in a note to clients, referring to Boeing rival Airbus SE.
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's A320neo
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 email@example.com
(END) Dow Jones Newswires
December 18, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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