Pontifications: 2Q earnings reports begin this month

By Scott Hamilton

July 13, 2020, © Leeham News: Earnings season calls for the second quarter begin this month.

For our readers, Airbus and Boeing are the big ones.

Boeing’s earnings call is July 29. Airbus follows the next day.

A few early analyst previews were issued last week for Boeing.

Risk reduction is the key

Melius Research, in a note issued Friday, put it succinctly about Boeing: Risk Reduction is the Key.

“For Boeing, 737 MAX Return to Service is just the tip of the iceberg when it comes to recovery. A rebuilding of trust and credibility will take a long time and need to touch numerous stakeholder groups. Just prior to the MAX crisis, we were already growing more concerned about Boeing’s risk-heavy posture on numerous fronts,” Melius wrote.

“But the MAX crisis, the response to it, and the overlay of COVID-19 presented more downside drag than we ever thought possible. We still believe that much of the last decade’s success was built on lowering the company’s risk profile in the wake of the 787 program’s failures – those lessons were clearly forgotten.

“What remains to be seen is if Boeing will use the current implosion to remake itself for the better. It’s a tall order and it’s not clear yet that they’ll be fully up to that challenge.) The company’s history is one resembling a pendulum of overemphasis on narrow stakeholder groups at the expense of others across shareholders, labor, customers, and governments. Finding a way to break that pattern and establish a healthier equilibrium is key to re-establishing the company’s trust and credibility. It’s not impossible, but it will take time.”

Boeing: Wild Card

The investment firm Cowen characterizes the Boeing outlook as a “wild card.”

“Q2 A “Wild Card”; Consensus Numbers Look High: Q2 will be a mess, and loss/cash outflow estimates range broadly,” Cowen writes. “Consensus mean “core” estimate of a $2.33/share loss looks optimistic given sharply lower commercial delivery/service sales and hefty severance and MAX compensation payments. We’re at a $2.80/share deficit. Combined with incoming supplier materials, COVID-19 disruptions, and customer deferrals, we also see $9bn cash outflow vs. Street’s $6.6bn.

“MAX Delivery Profile Still Unclear; China Response Is A Risk: MAX certification has slipped to late Q3, delivery ramp is uncertain, and customer negotiations are “challenging” and “dynamic”. With ~385 MAXes already in airline fleets, most MAX customers are committed to the plane; and MAX customer compensation agreements likely call for lower payouts if orders are canceled. However, spiking US COVID-19 cases will reinforce the push to defer deliveries, and given rising tensions with the US, China, which accounted for 28% of 737 deliveries in 2018, seems unlikely to confirm orders for MAX or 787 (China was 14% of 2018-19 deliveries) before elections. China also might stretch out MAX recertification to gain IP for its own Comac C919 slated for delivery in 2023-24.”

Blood baths to come

Whatever the 2Q results and financial stability Airbus and Boeing may report, watching the supply chain will be crucial. One weak, key supplier can muck up an entire supply chain and final assembly.

The strength or weakness of a major supplier must be closely watched. Spirit, GKN, MTU, Raytheon Technologies, etc., all are public companies. Some are stronger financially than others.

The private companies are more difficult to watch but are nevertheless also key to the supply chains.

The second quarter is the first full financial period to face the full impact of the COVID crisis. The impact is mitigated to some degree by government assistance and, for Airbus, Boeing and other large companies, tapping the capital markets.

But the bloodbath is yet to come. In the US, a large piece of government funding was intended only to cover through Sept. 30. United Airlines announced last week it will send “WARN” alerts to 36,000 employees—about half its work force—advising they may be laid off come Oct. 1. Other US airlines will do the same, as will companies outside the aerospace sector. Across the globe, drastic downsizing by airlines has been foretold. Airbus and Boeing already are laying off workers.

In the US, COVID infections are skyrocketing. Hospitals, especially in the South and Southwest but also in California, are filling to capacity.

Airlines and other companies already filed bankruptcy. The third and fourth quarters will no doubt bring scores more.

5 Comments on “Pontifications: 2Q earnings reports begin this month

  1. On the subject of Boeing’s future, does anyone think that the 777X has a tangible chance of success? The order book was already thin, and is getting thinner, and there appears to be an aversion to VLA at the moment — bear in mind that, in the past, Boeing themselves have categorized the 777X as a VLA.
    For the sake of ca. 50 fewer seats, an A350-1000 could be picked up for a (much) lower price, and it has a proven track record so far. An 85% load factor for a 777-9 will correspond to a 100% load factor for an A350-1000…and are there really that many VLA widebody flights with more than an 85% load factor? Particularly in the CoViD / post-CoViD era?
    Some notable airlines that have ordered the 777X are already A350-1000 operators (Qatar, Cathay, BA), and others are A350-900 operators (SIA). I can’t imagine that Boeing is sleeping easy about this…

    • Less thin and more over-focused on ME3.

      But agreed, the A350-1000 may be the new largest size normal.

      Good thing Airbus did not come out with the -2000 the fans were squaking for !

  2. CONSENSUS estimâtes for BOEING are jokes!
    Truth will be very very far….
    It is impossible to understand how people are so well paid for doing such a lousy job.
    they probably do not read Leehamnews….
    lots of bad news:
    – very little production
    – extremely reduced deliveries, and turnover
    – costs are still quite high
    – most remaining deffered 787 costs should be depreciated, sooner or later
    and cancelled MAX downpayments must be refunded
    Bottom line: Floods of red ink!

    • The KC-46 shows the same on the military side, hosed up development on the Starlooser (software again) as well as a plethora of other issues NASA missed (Boeing was such a good contract nor oversight needed despite billions of overrun on the other rocket)

      Can they acualy do a clean project? Not since the P-8, that is for sure.

      T-7 next?

      Old programs like the Apache, Chinook, F-15 and F-18 doing well (thank you Lockheed for messing up the F-35)

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