Boeing earnings call: will Muilenburg be more forthcoming than McNerney?

Jan. 26, 2016, © Leeham Co. Boeing’s earnings call tomorrow could have additional revelations about the 777 production rate and how its cash flow is being Boeing Logoenhanced by continued maneuvering of advances and accelerated pre-delivery deposits (PDPs).

Whether it will or not remains to be seen. Under former CEO Jim McNerney, Boeing’s penchant for obfuscation was legendary among the aerospace analysts.

Dennis Muilenburg, who took the CEO title last summer in addition to his Chief Operating Officer position, has already shown he’s different than McNerney, evidenced by the surprise, early contract agreement with the engineers union, SPEEA.

Boeing last week announced a further rate cut, effective in September, for the ailing 747-8 program. Along with this came a pre-tax charge of nearly $900m.

Major questions to be answered revolve around the future production rate for the 777 and the cash flow.

Cash flow

Boeing’s commitment to shareholder stock buybacks and healthy dividends is taking a prodigious amount of cash. Coupled with the cost of building the 777X wing production plant in Everett and tooling for the new airplane, and development programs for the 737 MAX, KC-46A, the 777X and 787-10, Boeing’s cash flow requirements are immense.

This became a worry to analysts in 2014, and one, from Buckingham Research, issued a Sell on Boeing’s stock on cash flow and production rate concerns.

Boeing took major heat on the 3Q2014 earnings call over cash flow. The company then flummoxed analysts with much higher than expected 4Q2014 cash flow. It took analysts a full quarter to figure out Boeing was accelerating PDPs and getting higher-than-usual “advances,” or deposits, for aircraft orders. The reason: the evidence was buried in the SEC filings and Boeing’s Investors Relations was not especially forthcoming, analysts told LNC then.

UBS analyst David Strauss last year did a deep dive research into the issue.

Yesterday, Wells Fargo aerospace analyst Sam Pearlstein issued a general research note that included the following:

  • In Q4 2014, Boeing accelerated about $1.5B in advances from 2015. It appears that Q4 2015 could see a similar trend based on recent earnings reports from US airlines. In Q4, United (UAL) said it had roughly $300M in aircraft-related deposits that shifted to Q4 2015 from Q1 2016. Similarly, Alaska Airlines indicated that it pulled some deposits forward to Q4 2015 as “a favor to one of our manufacturers.” Lastly, all-Boeing airline Southwest (LUV) also saw its deposits increased $397M during Q4. It is not clear what concessions the airlines receive to pay pre-delivery payments earlier. The deposits could also be related to the UAL order of 40 737-700’s and LUV’s order of 33 737-800’s.

LNC is aware of at least two and possibly more lessors that also provided large advances in 4Q2015.

We also believe the United 737-700 deal for 40 airplanes, announced this month, is connected to advances. We understand this order was negotiated by the Finance department rather than Fleet Planning. If correct, Bombardier stood no chance of winning this order.

With United leasing in 39 used Airbus A319s from AerCap as these come off lease at China Southern Airlines and Spirit Air, Airbus didn’t participate in the contest for new airplanes.

777 Production rate

We take a look at the 777 production rates and new order requirements behind our Paywall today.

40 Comments on “Boeing earnings call: will Muilenburg be more forthcoming than McNerney?

  1. If Boeing feels authorised, motivated, compelled to sollicit changes forward of contractual PDP under existing Purchase Agreements (UAL, Southwest, Lessors …), then this is an emergence of hidden very adamant circumstances in Boeing’s cash-flow situation, because PDP are generally perceived to be the financially most constraining contract clause upon Buyer : you are asked to come up with cash payments before you get the cash benefits of the more advanced new aircraft ! These forward cash payments must be derived from exploitation of the older aircraft in the fleet, those that you intend to replace because they’ve made their time and are not cost-efficient any longer. Tough deal ! So we may assume that the underlying cashflow situation @ Boeing is indeed quite serious !

  2. “It’s a given within the analyst community that if analysts ask “hard” questions, Boeing Investor Relations is likely to ban them from future earnings calls questions and/or withhold Boeing participation from analyst-arranged client meetings or aerospace conferences. ”

    That’s sometimes the feeling I get with the Chalet’s at Paris and Farnborough.

    The press are pampered, nipping good wine, enjoying good food looking out over the masses, enjoying the scenery.

    What’s in return? Boeing wants them to bring good news, their home public wants good news, their boss needs the advertising (Boeing?) stock holders want good new$. Are they strong enough journalist to ask good question to get the truth above the table? Or do they take the easy road, repeating what that generous VP Market Communication tells them, with different words? Has market dynamics made them into lapdogs, cherry picking news all want to hear.

    E.g. Seeking Alpha has turned into an hurray Boeing good news machine. What’s their interest?

    Thank god there are forums that give some independent views and facilitate open discussion.

    A decade ago blogger Ostrower was telling the world how the Dreamliner was progressing. Overriding mainstream media and official Boeing releases. Now he works for WSJ’s. Is he still asking tough questions, or only the right tough questions?

    This goes beyond aerospace. I suspect things to be worse than I want to know..

    • Reading this site has opened my eyes. I had no idea that such crude practices were possible without investors jumping on it
      This seems to be similar to Tesco supermarket, but at least in that case it was secret.

    • I can’t agree with you more. The duopoly will kill anything that disrupts them. Including information and news. This is like the White House delisting someone from getting onto AirForceOne. Do we really expect them to be fair and balanced? No, totally not. When was the last time the duopoly had to buy a company to accelerate change? When stifled enough, nothing changes, you don’t need to innovate and you don’t need to buy out anyone to include their technologies (think of examples like Google buying waze: they could’ve crushed them, built it themselves, etc BUT they are moving/innovating/growing so fast that it’s just easier to take them onto their train). Right now, it’s really hard for anyone to disrupt the duopoly (ask Bombardier how that’s working). But if/when a technology finally leapfrogs the duopoly, it might be coming from a Silicon Valley billionaire. Not from anyone with a 4000$ suit drinking champagne out of a chalet in Farnborough or Paris. Ten years ago we could only use our cell phones ta make calls and play centipede. Now we have computers in the palm of our hands. Truly scifi stuff. Yet we still fly on the same 737s with minor tweaks. Even the original designers would go “uh, in 2015 the planes will still be 737s only with better engines and scimtars?!?! What happened? A nuclear war or something slowed down our human progress??”. When they designed the 737, they were also going to the moon, seeing the Concorde take shape, etc. This is not good. We must be in some form of parallel universe where things took the wrong turn somewhere. Get the delorean out, we need to go back and fix some things. Or we could wake up now and fix them now…

      • OK so you’re a C series fan. Aren’t we all.The questions you have to ask yourself are how much does it it cost to produce, how difficult will it be to provide support and spares and if you were an airline is there a killer reason to buy? Obviously Scott knows a bit about this and has clearly put his money on Embraer.

      • People sometimes compare aircraft to electronics, that’s total bogus.

        In electronics you can easily com out with a new iteration every 4 or 5 months (not improvements necessarily but different, back in the VCR days it was to fix all the screw ups when overseas mfg got ahold of them. Cheap was the word in all its meaning. they had to give up fixing them as the schematics could not keep up.

        A new aircraft takes something like 10 billion to develop, that’s vastly more than what it takes to crank out a smart phone that sell in the millions.

        Ships, planes and trains all face physical limitations. They are mature products that there are no magical work arounds from the medium they operate in.

        IN other words its damned tough to squeeze out improvements let alone revolutionize the industry.

        Boeing comes out with the Sugar variegation and public won’t fly it is another huge risk.

        Engine technology is incremental as well, there are no game changers out there, just refinements and improvements of previous (and they are doing a darned good job as they are no extremely reliable)

        Want to see a mess was the complex compound turbo supercharge Radials at the end of the prop era, ugh.

        Lot easier to criticize than go out and do it.

  3. Is this serious in terms of cash flow positive/ negative or more a case of window dressing the accounts. I believe it is the latter rather than the former. The issue as I am sure we can all appreciate is that decisions regarding how the financial information in the past was presented is coming back to haunt Boeing Commercial Aircraft (I know less than nothing about the wider company).

    Booking early cash flow is simply ‘robbing Peter to pay Paul’ and once started is difficult to stop. The one big cause for investor concern is the remotest likelihood that the B787 programme is perceived as not generating a profit over the accounting block. This could be extended but if there a chance of a forward loss then some very large numbers suddenly will appear in red in the accounts in write offs.

    Boeing will do all in their power to avoid this but the merest hint of it would make for a wobbly share price. How likely is it? Can we go for an accounting block of 2,000, 3,000?? And as the need to reflect the more conservative accounting practices in the near future starts biting is there some real trouble for the senior management in justifying their comfortable remuneration.

    You could say it doesn’t matter as it is predominantly sunk cost but we are still seeing the B787 being produced at a substantial loss on a unit basis

    • Visually effective is not the deed as done but the deed as a transient.
      Everytime you move payments left or outlay right you produce a significant wave of apparent income.
      Less visible is the complementary increase in dept.
      Now that dept is permanent while the income is transient.
      This is a habit forming circle driven by finding still another avenue of positive present performance.

  4. For the 787 program the A330NEO is a gift from hell. It gives customers credible negotiating power while Boeing needs to harvest to recoup investments.

    “Yes the 787 has bigger windows, but this one has the same engines, wider seats and we fly them already”.

    • I’m surprised by the size of Stoddard’s estimated forward loss, I wasn’t expecting a profit but this is a whole NSA program. All the more reason to ensure that the 737 has a life after MAX.

  5. Playing around with contractual PDPs to window-dress your cash-flow ressembles another (penally reprehended) practise in earlier times in financial spheres named kiting (in French : cavalerie de chèques) … I wonder if it would withstand scrutiny by an expert Penalist ?

  6. The worry here is what happens when the B777X costs start coming in, and the MAX starts trailing off and either a MOM or an NSA is needed. The cash coming in now might well be needed in 3-4 years time when is should have been paid. Add on declining share of military programs and a tight KC43A margin…..

    Boeing could resell the shares bought back, but how will today’s share market react to that? They might get less than they paid.

  7. I’m kind of intrigued by the United 737-700 deal. In which ways would Bombardier’s chances be different if fleet planning had greater influence? In my naïve thinking, introducing a new type to a fleet may be beneficial financially but will introduce a burden on operations/planning..? No question, though, that Boeing has an extraordinarily efficient production system, and can compete pretty mightlily for those blue-chip customers.

    • More interesting, Airbus didn’t complete. I’d like to know how much it costs to build an A320 compared to a 737.Probably has better things to do with the slots. This implies Boeing hasn’t.

      • EXACTLY. This sounds like united either didn’t do what’s best for shareholders (true competition on price/features between Airbus, BBD, Boeing for the best product for the bottom line) but did a back room favor to Boeing OR WORSE: tag-team duopoly (now truly a monopoly that will crush any new entrant). If true, this is really bad for real capitalism and real innovations coming to the front. This is not good, these are not real market forces. The sad thing is that the taxpayers [in both Europe and the USA] end up footing the bill for these 50% off list price hidden subsidies. And the workers end up with a company that has less money and could end up in dire straights and have to make concessions. This is bad management. I hope everyone stands up and puts an end to these subsidized planes. Sell them for what they’re costing. No need to jump off the bridge just because the competitors are doing it (Airbus subsidized most of its development costs on all its planes, to the tune of over 265B$!). This has to stop. We spend billions on G8, G20, Davos and whatnot summits to discuss what? How to screw up real market economies? Time to all agree to stop this and let smaller players (like my beloved Bombardier) at least eat some leftovers. This is not going to end well for ANYONE. Sure Airbus/Boeing each sold ~4000 A320Neo and 737Max. But when you’re not making any money off of it, what’s the goal? We need a little lesson from Apple here: they don’t command anywhere near the top market position in cell phones. But when they sell one, they make good money. Volume without profit means nothing. Arggg, this is all so wrong in so many ways. I’m not surprised by Airbus, this is how Europe works. But Boeing? Come on, wake up, put those gloves on and let’s wake up the World Trade Organisation (WTO). I’m even willing to bet that normal Joes like me (taxpayers, aerospace workers, etc) would be willing to start that movement. That is the real solution to all our problems: get rid of subsidies. Otherwise, we’ll all be very poor really fast.

        • I can’t believe anyone in the western world is more addicted to subsidiys than Bombardier

          • But no lament that others get so much subsidies
            while they themselves have to beg, borrow and sell their firstborn. 🙂

          • Bombardier mode of operation in the UK was to endlessly blackmail the government into buying expensive trains until everyone got fed up with it and the competition authorities intervened.I don’t think you would produce aircraft in NI without huge subsides.

        • Are we sure they are below cost? The level of discount is more a function of excessive list price than anything. The 737 production process must be refined to a level never seen before in commercial aircraft (even noting MAX changes). What Boeing (and Airbus) can make for a profit is what BBD can only make for a loss.

          This is the catch 22 of developing a new aircraft, going up against an existing product with fully amortised costs, down the right of the learning curve and a production line geared to churning out more than one a day is always going to be a tall order.

          Factor in cheap fuel and the cseries faces an almighty challenge. BBD has a lot to do, good luck to the

          • It’s even harder than that
            Airbus were subsidised to the hilt, had a technological base going back to ww2 and a massive technology boost from concorde
            Boeing had huge profits and technology from ww2 and a ludicrously large bomber programme in the 1950/60s

    • Wow, you talk about Boeing’s airshow Chalet a lot in your comments, both recently and over the last several years. Did they kick you out or something?

        • No it doesn’t, but I think watching the airshow from there would be much more comfortable than the bright concrete of the tarmac. On a sunny midsummer day, it’s what I imagine the inside of a running microwave to be like.

          • Small price to pay for telling it like it is though.
            And that would be a sunny day in northern France, not in Phoenix or Dubai.
            Quite bearable I would say.

      • Now you ask, I had lunch at least once with Boeing in Farnborough, but have a hard time remembering how I got there / who I met. It was the year of the russian dansers.

        Have to give it to Boeing that you can still walk on to their booths in halls, having a chat, meeting old relations. Those unfriendly “on invitation only” fortresses are brand damaging in my opinion.. the folks at the entrance have just no idea who they stop dropping by. 😀

  8. Not sure I want to, more better to read the excerpts.

    It would be news if they quit eating their seed corn.

  9. Liked your column in Forbes, Scott. Those are all great questions that I hope get asked. Even if they’re asked though, they probably won’t get answered.

  10. I guess the 777 production rate and the cashflow issue are closely linked. To make even the reduced 777 numbers Boeing will have to heavily discount planes produced in the next few years. Meaning the 777 is no longer the cash cow it was during the 787 debacle. Military sales are also down, leaving 737 production as the main funder of the tanker, the 777X and the 737 MAX developments,as well as any dividends and future charges against the 787 deferred costs .

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