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.
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.
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.
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”.