Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Boeing to record >$4bn charge in 2Q
July 18, 2019: Boeing just issued this press release:
Boeing [NYSE: BA] announced today it will recognize an impact to earnings when it releases 
second-quarter 2019 results on July 24.
Boeing will record an after-tax charge of $4.9 billion ($8.74 per share) in connection with an estimate of potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding and associated delivery delays. This charge will result in a $5.6 billion reduction of revenue and pre-tax earnings in the quarter.
While the entire estimated amount will be recognized as a charge in the second quarter, the company expects any potential concessions or other considerations to be provided over a number of years and take various forms of economic value.
Additionally, Boeing’s estimated costs to produce the aircraft in the 737 accounting quantity increased by $1.7 billion in the second quarter, primarily due to higher costs associated with a longer than expected reduction in the production rate. The increased 737 program costs will reduce the margin of the 737 program in the second quarter and in future quarters.
Boeing continues to work with civil aviation authorities to ensure the 737 MAX’s safe return to service, and these authorities will determine the timing of return to service. For purposes of the second-quarter financial results, the company has assumed that regulatory approval of 737 MAX return to service in the U.S. and other jurisdictions begins early in the fourth quarter 2019. This assumption reflects the company’s best estimate at this time, but actual timing of return to service could differ from this estimate. The second-quarter financial results will further assume a gradual increase in the 737 production rate from 42 per month to 57 per month in 2020, and that airplanes produced during the grounding and included within inventory will be delivered over several quarters following return to service. Any changes to these assumptions could result in additional financial impact.
The first financial quantification, surely heads will roll once the affair is behind them. The stockholder concerns themselves with a single measure and this will hurt them in their pocket!
CNBC reports this announcement means there is a “degree of certainty” of the financial impact to the company, although additional charges could be incurred. It also seems that Boeing is making definite plans to put the MAX back in service before the end of the year. Makes one think that they’ll probably have to have about 10 to 20 flight test vehicles (FTV,) possibly more than when the MAX first was tested. They’ll run those planes through every possible flight situation to verify exactly what will be different from the earlier flight control system. Could be very involved and labor intensive. That many billions? Think of what they could have done? Started an NSA; bought the CSeries, re-winged and raised the plane in question…
Wow !! With that money they could have built a 737 MAX that would ruled the segement. Let this be a lesson that EVERYONE will forget in 5 years :>(
Early Q4 will almost certainly be wildly optimistic in terms of return to service. Most of what I’m seeing is December or Q1 of 2020.
That suggests more charges to come.
Very good point. So how much will that be? Grounding was in the beginning of March. The planes are piling up, so compensation will be for more aircraft, thus cost per month will go up too. So if that date moves by three months (early 2020), you can easily expect another $3-5 billion in revenue lost.
Also, this announcement doesn’t say anything about other costs, like compensation for the victims of the flights (assuming not all is covered by insurance) and the much higher financing cost for all the inventory sitting there.
Agree the assumption seems a tad optimistic, especially as we do not know what specifics the remedy(ies) involved will require. This whole thing smells of Wall Street massaging/messaging or gradual speak.
If , for discussion purposes, we go by B’s performance in predicting the KC 46 costs, this first estimate is very likely off by a factor of 3+😟.
So let’s guess around $15 BB when the dust settles.🤬
Take the for 787 announced delays as a reference.
Given in bites of ~~3 month. Invariably reasoning for the delays highlighted and moved to the causal front partner/contractor issues.
Poor, poor Boeing entangled by incompetence all around their shrine on a hill .. 🙂
Some experts, including Leeham News’ own usually very accurate & reliable experts, as expressed in posts made last week, said re-certification could take until next year.
Call me cynical – or jaded – but given Boeing’s propensity to be “overly optimistic” versus Scott’s & Bjorn’s far more reliable “just the facts, no bs” track record, I’d lean more in favor of comments made by either of them, than anything that comes from “McBoeing’s” corporate communications department!
Just sayin’ 😉
Scott and Bjorn been consistently over optimistic until recently.I suspect that Boeing have been as well and are now a bit stuck.Maybe they have an answer and are just waiting until all their ducks are in a row before announcing it.
The funny bit is that because of the extensive buy-back of share the impact per share is increased!
I am looking forward for the updated impact, this is going to hurt big time.
Well done Boeing corporate! 🙂
BOEING, in their refers to an “Estimate of Potential Concessions and other considerations to Customers For Disruptions related to the 737 MAX Grounding and Associated Delivery Delays”, however, there is absolutely no mention of Reserves they have to constitute for the potential Criminal Suits for the Humans who were Sacrificed on the Lion Air and Ethiopian 737 MAX’s. Insurance Coverage is probably way insufficient, that is if Coverage applies due to non-compliance with the MCAS facts Known to Boeing, but not Revealed to the Underwriters when contracting their various Insurance Programs.
It seems to me Scott and Bjorn have been become a bit careful / protective on Boeing in recent weeks. Probably because of all they see and hear. As experts they know a healthy balance and competition between the big OE ‘s is important for the industry longer term. Restoring that is important and public perception is powerfull these days.
$6 billion charge in Q2. Won’t be any lower in Q3 or Q4. It will stretch into 2020 plus there will other costs on top.
Boeing is looking at total charges for the Max disaster well north of $20 billion.