Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Boeing’s second quarter of 2020; cutting production as revenue halves due to MAX grounding and COVID-19
July 29, 2020, © Leeham News: Boeing presented its results for the second quarter of 2020 today. The company revenue is halved compared with the last second quarter with full 737 MAX production, 2Q2018. The reported loss was $3bn but the real loss, masked by program accounting, is close to double this number.
Boeing will now cut production of the cash cow 787 to less than half the pre-COVID rate, producing six planes per month instead of 14, and the 777/777X rate goes from five presently to two per month next year and stays there for 2022.
The 737 MAX production will stay at a very low level until the present inventory of 450 produced MAX has cleared. Present planning is a slow ramp during 2021, with a rate of 31 per month only reached at the end of 2022.
Boeing accounting rules and the published results
To understand what’s happening in Boeing because of the MAX groundings compounded by the COVID-19 pandemic, we will compare the 2Q2020 numbers with both 2Q2019 (where MAX was grounded) and 2Q2018 (when Boeing was the normal Boeing). The interspersed comments in “quotes” are from today’s CEO and CFO call with analysts.
Boeing revenue for 2Q2020 was $11.6bn ($15.8bn 2Q2019 and $24.3bn 2Q2018) with a net loss of -$2.4bn (-$2.9bn and +$2.2bn).
These numbers are affected by Boeing’s accounting method using program accounting. It applies a synthetic production cost, which is the average of pre-COVID, in-COVID, and assumed post-COVID production costs, over the so-called accounting block (essentially the expected total sales volume for the aircraft type). Any production costs over the synthetic number are parked in inventory and do not show up in the company’s profit and loss statement.
Operating cash flow
To understand the actual company result for the quarter we must look at Operating Cash Flow. It has gone from +$4.7bn in 2Q2018 to -$5.3bn in 2Q2020. The operational result using the classical unit accounting method should, therefore, be close to these -$5.3bn for the quarter.
Boeing expects the cash flow to improve to a black zero end 2021, as it can deliver “a majority” of the 450 ramped 737 MAX during 2021. Boeing expects the production rate of 737 MAX, presently at a very low rate, to reach 31/month by end 2022. The rate will be kept low during 2021 to not build more inventory as ramp 737s are delivered.
Boeing Commercial delivered 20 planes during the quarter, whereof four were 737, four 767, four 777, seven 787, and one 747.
The initial COVID production plan for the 787 was to go from 14/month to 10 and then down to 7 by 2022. With the present international traffic development, the 787 rate is taken down to 6 by next year. With the low production rate, the “viability of two production sites (Everett and Charleston) will be assessed”.
The same prognosis for international traffic hits the 777/777X. Certification is now seen in 2022 and production rates for the 777/777X go from 5 today to 2 from 2021 onwards.
The 767 rate stays at 3/month as KC46 tanker deliveries ramp.
The 747 continues at 0.5/month until the last Queen of the Skies rolls of the line in 2022.
Boeing benefits from Defense and Space staying flat at $6.6bn revenue. Formal margin has declined from 14.8% last year to 9.1% for 2Q2020, but last year’s second-quarter result was propped up by asset sales.
Services hit
With air traffic taking a severe hit from the pandemic, Boeing Services is hit as well. Its revenue declined to $3.5bn 2Q2020 from $4..5bn 2Q2019 and $4.1bn 2Q2018.
“Airlines only do a minimum of service on their fleet and the increased rate of retirements provides the market with plenty of used spare parts. The backlog has shrunk considerably as a result and the $18bn backlog is now majority Government business”.
Interresting, but usually LEEHAM NEWS gives us a lot more information…
Such as :
– the deferred accounts position of the 787
there are probably around 20bn yet to recover, and at the new production rates, the recovery will be awfully slow: less profits per frame, multiplied by fewer frames…
– the last quarter cash flow.
– the analyst comments
just to illustrate this point: in the SEATTLE TIMES we read to day:
“In a note to investors, Rob Stallard, an analyst with Vertical Research, said all aspects of Boeing’s financial results were worse than expected.
“We would like to think that this is as bad as it gets for Boeing, but the … rate cuts that have been announced today put further downward pressure on expectations for the out year cashflows,” he wrote. “We continue to think that the plethora of downside risks are not fully reflected in Boeing’s current share price.”
$16B in deferred production cost and almost $2B in tooling and NRE.
$0.8B deferred production recovered during 2Q20.
Weird accounting when there is 50 undelivered 787 at Everett and Charleston.
I would have thought you only reduce the accounting loss when you get paid for the plane in question…
Or is it another account smoothing process in operation
Not a good quarter and future guidance isn’t too promising either. To me, as many know, I’m a “Boeing koolaider” however I think Boeing has been VERY poorly run by management and the BOD hasn’t done anything. BOTH should’ve been removed by shareholders.
I own stock in Airbus and Spirit Aerosystems. While they have their own sets of problems, I feel they are much better managed than Boeing.
Boeing has a LONG road and with A LOT of uncertainties.
Key in this is that Boeing is going to (study) consolidation that 787 line, ergo, it all goes to Charleston
The 747 production ceases when the current orders are filled (they lost a major supplier and to restart that under Boeing or someone else is not viable)
The next step is going to be a write down of these phony “inventory” items as the block numbers become unrealistic with the reduced productions levels. Not a cash flow item but many $BBs of red ink potentially flowing through results.
On a positive note, perhaps the reduction in production volume will allow B to reduce, or get rid of, the FOD cluttering its products?
They should be so good or so lucky…
In the long term, I still think we are going to see a formal reorganization of B, with military side hive off into a BMil entity and a hair cut for the old creditors/Shareholders of BCA , perhaps driven by some major airline(s) bankruptcy impacting the backlog.
Well when NASA did the Space Capsule audit they found the same messiness in the software and the project we have seen on the BCA side.
Turns out it was not Space X they needed to keep an eye on, but their old (formally) reliable partner in crime.
If they did deliver four 737s, would they be NGs, and I thought the last NGs had made it out a while back?
Those 4 737s , wouldnt they be the P-8 version based on the 737NG
As I understand it, we have enough P-8s, the money is not going to build a border wall.
Foreign buyers have been taking the end of line P8s
Given that the 747 shutters in ’21, if the 787 shifts 100% to Charleston, do Boeing look to consolidate as much WA work as possible (maybe all WA work) at Everett? Otherwise they are left with a vast space, with all the overheads, dribbling out just a small number of 767 and 777X pretty soon.
Obviously depends on zoning etc etc but I assume that if Boeing were to get rid of one site out of Everett and Renton, then Renton would realise the most, as well as being the least flexible for Boeing going forward. Plus there will never be a better time to relocate than now, when a line can comfortably be swapped over due to lack of demand.
The end of the B747 was long due, it can’t be profitable to manufacture a low demanded plane with a rate of 0.5.
It leaves a lot of doubts about Boeings products and strategy.
The B767 is in it’s last days, the KC 46 keeps it alive, but how can Boeing recover the development cost and the additional depreciation with a rate at 3?
How can the B777 be bridged over to the B777x at a rate of 2? And what will Boeing do if one of the 2 major customers Qatar or Emirates struggles with the order? ANA, BA, LH, SIA are all reputable airlines who will survive the Corona crisis, but the only ordered 78 B779.
Cathay is in deep deep trouble, after the protests and Corona and in a highly political environment.
Qatar has the same issue and 60 orders from 24 on.
Emirates has already cut its order and is likely to rework that order again. So more B789 and less B779.
It might be bad timing, to come with a new very large twin when everyone has shrinking demand and plenty of aircraft, but it was a general trend to the middle-sized widebodies already before.
Plenty of B747, B767, A340 have been replaced by B789 and A359.
That leaves Boeing with a brand new plane, expensive development, shaky backlog, and less than 300 orders.
If the analysts are right, long haul recovery will need till 2024/25, and thus the demand for new Wbs will be low the next few years.
With the max crisis and the B787 deferred cost and quality issues, Boeing really has a perfect storm.
That is the longest running storm in the history of stormdom
We bash the McDonnell Douglas merger, but in reality, Defense and Rockets are probably keeping the operation afloat…
2022 is an optimistic prediction for B777x. From technical point of view Boeing probably and finally will manage to resolve development & certification issues until then. But will be demand? for more than 10 units per year? Doubltly.
Too late, too expensive development to make this program profitable for Boeing. But had to be carried on anyway because ca.80%, I hope, of the cost is already burden.
Well much like Custer told his men, this does not look good but we are committed.
I wonder if it would make good business sense for BA to commit to use that 25B to make a new plane or two? Now hold on! I’m talking about a Covid safe, carbon fiber wonder. Disease experts anticipate more highly contagious viruses to become commonplace.