Boeing will take a $4.9 billion charge over grounded 737 Max

Published 1:30 am Thursday, July 18, 2019

By David Koenig / Associated Press

DALLAS — The Boeing Co. says it will take a $4.9 billion charge to cover possible compensation to airlines whose 737 Max jets remain grounded after two deadly accidents.

The company said Thursday that the calculation was based on an assumption that regulatory approval for the plane’s return to flying will begin early in the fourth quarter.

That timing is earlier than some analysts expect and may have contributed to a rally in Boeing shares in after-hours trading.

Boeing said the after-tax charge will cause a $5.6 billion reduction in revenue and pre-tax earnings for the April-through-June second quarter. Boeing is scheduled to report financial results next week.

Airlines around the world have canceled thousands of flights since March, when regulators grounded the Boeing 737 Max and the company suspended deliveries of new jets.

Boeing is also raising its estimate of Max production costs by $1.7 billion because production will be reduced longer than expected. Boeing is still working on fixing flight-control software that appeared to play a role in crashes that killed 346 people off the coast of Indonesia and in Ethiopia.

The plane’s return has been pushed back several times, most recently after Federal Aviation Administration pilots found a new flaw while testing Boeing software changes in a flight simulator.

That discovery prompted Boeing to say in late June that it expected to present its proposed fix to the FAA “in the September timeframe.” It would likely take several more weeks for the FAA and other regulators to approve Boeing’s work, give pilots additional training, and bring long-parked jets, more than a few at Paine Field in Everett, up to flying condition.

Boeing faces dozens of lawsuits in U.S. courts from families of the passengers. Families of the victims of the Oct. 29 crash of a Max operated by Indonesia’s Lion Air have agreed to consider mediation, but relatives of passengers on an Ethiopian Airlines Max that crashed March 10 have resisted Boeing’s requests, according to their lawyers.

Analysts have estimated that Boeing’s liability to the families will be far less than the cost of compensating its airline customers.

Boeing says concessions to airlines will be spread over several years but it is taking the entire estimated expense as a charge in the second quarter. Boeing did not specify what form the compensation would take, but hinted that it would not be entirely in cash.

Despite the grounding, Boeing has kept building Max jets, although at a reduced rate of 42 per month, down from 52, since April. The company said Thursday that it assumed it can raise production gradually to 57 per month in 2020.

Boeing has delivered fewer than 400 Max planes but has unfilled orders for about 4,500.

Shares of Chicago-based Boeing rose $8.14, or 2.3%, to $369.25 in late trading. Before the announcement, they fell $8.41 to end regular trading at $361.11.

Southwest Airlines, meanwhile, said Thursday that it is taking the plane out of its schedule through Nov. 2, a month longer than previously planned.

Without the plane, Southwest said, it will drop about 180 flights a day — about 4.5% of its normal schedule — up from 150 a day.

Southwest is also delaying the addition of new pilots as a result of the Max grounding.

The airline told pilots last week that it was postponing two classes for new-pilot training and two for pilots upgrading to captain. The classes were to begin in September, October and December.

A spokesman for United Airlines said Thursday that the airline continues to conduct classes for new pilots. A spokeswoman for American Airlines said the Max is not affecting its hiring or training plans. Last month, however, Icelandair said it would lay off 24 pilots and cancel plans to hire 21 more because of the grounding.

The longer the situation lasts, the more flights per day will be dropped. In March, Southwest had 34 Max jets — the most of any airline — and expected to get more as the year went on. The Dallas-based carrier has about 750 planes. All are various types of Boeing 737s.