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.
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.”
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.”
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.