July 26, 2021, © Leeham News: Boeing and Airbus report second-quarter/first-half earnings on Wednesday and Thursday, respectively.
Boeing continues to have a rocky year. Although 737 MAX deliveries and production are picking up, 787 deliveries remain suspended. There are now more than 100 787s in inventory, with deliveries largely suspended since October. Production anomalies required rework and inspections combine to suspend deliveries.
The Federal Aviation Administration wants more detail about Boeing’s inspection and rework program. Even though the FAA restored on June 19 to Boeing what’s called “ticketing” authority to certify individual aircraft, the airplanes remain undelivered. The FAA continues to retain ticketing responsibility for the MAX deliveries.
Boeing previously announced it was lowering the 787’s production rate below 5/mo because of the continued delivery delays. Workers were diverted from the Charleston (SC) production line to the rework. Boeing didn’t announce what the new rate is—and there is no indication if executives will disclose this on the earnings call Wednesday.
The continued delivery suspension and the reduced production raise the question of whether Boeing finally is at the point of a forward loss for the 787 program. Boeing warned in several federal filings with the Securities and Exchange Commission that lowering rates risks declaring a forward loss.
In its July 20 preview note, Credit Suisse wrote, “We see the biggest risk to our Q2 earnings per share estimate as coming from 787—specifically, the risk that Boeing books a first-time forward loss on the program owing to the latest production issues and decline in production rate (to below 5 in the near-term).”
JP Morgan also raised the prospect of a charge in a July 14 note.
“With 787 moving closer to a charge, we assume 72 deliveries this year. Despite coming close a few times (we believe), Boeing has avoided 787 charges for over a decade and we aren’t building anything into our model now. But lower production should pressure the program booking rate, which is already in the low-single-digits and so we cannot rule out a charge. In and of itself, this is not an issue for us beyond what it says about expectations for future production and unit cash profitability.”
Seaport Global doesn’t see a near-term risk. In its July 20 preview, it wrote, “A forward loss charge on the B787 certainly has a long-term impact. However, the program is at a near break-even gross margin already for the current block.”
Once deliveries resume and the industry finally recovers from COVID, with demand presumably recovering for wide-body aircraft, production rates should come back up to 5/mo—or even higher.
LNA doesn’t think Boeing is ready to declare a forward loss this week. It seems premature.
Airbus, unburdened by the unique circumstances facing Boeing, already is on a path to recovery from the COVID pandemic. Airbus plans aggressive production ramp-up for the A320 while maintaining low-rate production for the A330neo and A350. Financial results for the first quarter returned to operating and net profits.
The London-based firm, Stifel, was upbeat in the earnings preview note July 23. Stifel wrote, “We look for Q2-21 sales of €13.6bn (up 64% year over year, mostly due to a soft Q2-20 comparator, which is broadly in line vs company-provided consensus of €14bn), ‘EBIT Adjusted’ of €1.8bn (or a 13.5% margin, which is 16% above consensus of €1.6bn), and ‘Free Cashflow Before M&A and Customer Financing’ of €980m, which is 10% above consensus of €880m.
“Airbus is, in our opinion, an early-stage revenue, margin and cash flow recovery story, benefiting from the faster pace of recovery of domestic and narrow-body traffic and its leading market share in that segment, and we look for validation of this thesis in the H1-21 results,” Stifel wrote.