Boeing earnings down 10% as 737 MAX uncertainty continues

By Douglas MacMillan and Aaron Gregg / The Washington Post

The Boeing Co. reported a drop in earnings and sales Wednesday as the company acknowledged that concerns over the safety of 737 MAX airplanes are taking a toll on business.

The aerospace giant said earnings fell 10 percent, to $3.75 per share in the first quarter, and profit slid 13 percent, to $2.1 billion. Sales fell 2 percent, to $22.9 billion.

Chicago-based Boeing said Wednesday it is accounting for $1 billion in extra costs from 737 MAX plane production in Renton. Earlier this month, the company lowered production to 42 737s a month, from 52. Those costs do not include potential financial penalties associated with compensating airlines and families of crash victims, which analysts say could add up to billions of dollars.

Perhaps more troubling for investors, Boeing took the unusual step of withdrawing its estimates for future 2019 financial results, saying it could not predict sales while it is still working to with regulators to get approval its fix of the 737 MAX.

“Due to the uncertainty of the timing and conditions surrounding return to service of the 737 MAX fleet, new guidance will be issued at a future date,” the company said in a news release. “Boeing is making steady progress on the path to final certification for a software update for the 737 MAX, with over 135 test and production flights of the software update complete.”

The souring picture for Boeing’s business shows how quickly the company’s fortunes have reversed since two deadly crashes of 737 MAX planes in Indonesia and Ethiopia killed 346 people. Boeing has long been prized by investors as a cash-producing machine with huge growth potential. The company has outperformed Wall Street earnings estimates for 11 straight quarters.

On a call with analysts Wednesday, Boeing CEO Dennis Muilenburg projected confidence in the future of the business and deflected a suggestion that the company made a mistake in its design of the maneuvering characteristics augmentation system, or MCAS, an anti-stall system that played a role in both crashes.

“There was no surprise or gap or unknown here, or something that somehow slipped through the certification,” Muilenburg said. “We know exactly how the airplane was designed, and we know exactly how the airplane was certified.”

The CEO said both crashes were caused by a “series of events” that included erroneous sensor data being fed into the MCAS software.

“There were actions — or actions not taken — that contributed to the final outcome,” he said.

He said the company would continue to keep open a dialogue with pilot groups, some of which were highly critical of Boeing’s decisions in the months between the two crashes.

“We think a key voice in all of this will be the pilots,” Muilenburg said Wednesday. “That bond between the passenger and the pilot is one that is critical.”

Boeing CFO Greg Smith laid out the many different aspects of the company’s operations that have been affected by the grounding. Boeing has assigned a dedicated team to manage the 737 MAX crisis, he said, whose job is to work with suppliers to change production schedules, help regulators assess the software fix and plan for the planes to be delivered quickly once the grounding ends.

American Airlines and Southwest Airlines have canceled 737 MAX flights through August, suggesting that they are preparing for a grounding that lasts another four months. The cancellations affect hundreds of flights every day.

It is unclear whether Boeing’s proposed software and training fix will satisfy the Federal Aviation Administration, which has not offered any official notice regarding when it expects to lift the grounding order. Boeing is yet to submit its final package of software fixes to the FAA for approval, reflecting a delay from an initial timeline. Even if the FAA determines that Boeing’s software fix is enough to make the plane safe to fly, international regulators might not follow the FAA’s lead.

Muilenburg said Wednesday that there are “different paces and different processes in each country” and that the company is “working with each country to try to align them.”

Boeing executives seemed to acknowledge Wednesday that they face a broader crisis of confidence that could persist long after the grounding is lifted. Executives said they are working with airlines to develop plans regarding how each can regain customer confidence.

“We know we have some work to do to earn and re-earn the trust of our airline customers and the flying public in particular,” Muilenburg said.

American Airlines has said it would cancel all flights involving its 737 MAX aircraft until Aug. 19, affecting more than 100 flights a day for the carrier. Southwest Airlines, the other U.S. airline with 737 MAX 8 jets, has canceled flights involving the aircraft through Aug. 5.

Though the company was slow to acknowledge the severity of issues with the 737 MAX, Muilenburg eventually apologized for the loss of life caused by the crashes.

In addition to the earnings decline announced Wednesday, the company told investors it booked an accounting charge associated with the cost of updating and training pilots on MCAS. Boeing didn’t specify how much that would cost.

Boeing had previously said in January that it expects free cash flow — a measure of how much cash the company generates after taking out the cost of capital expenditures — of $17 billion to $17.5 billion this year.

The company now declines to say whether it can reach that goal. Analysts at Cowen predict about $12 billion in free cash flow this year.

In another impact of the 737 MAX crisis, Boeing paused its plan to buy back $18 billion in stock. Boeing has been at the forefront of a recent wave of corporate buying of shares, purchasing about $24 billion in its stock during the past three years — nearly three-quarters of the company’s free cash flow over that period.

The company said it has bought $2.3 billion in shares this year but stopped buying its stock in mid-March due to the 737 MAX grounding. A Boeing executive said Wednesday that the company has “temporarily paused its share-repurchase program” but expects its long-term share-repurchase strategy to be unaffected.

Shares in Boeing have nearly tripled in value in three years, the most rapid rise in the company’s history and growth close to four times as fast as the Dow Jones industrial average during that period. But investor confidence in Boeing has wavered since the second crash of a 737 MAX 8 last month in Ethiopia, shaving about 10 percent from its market value. The stock on Wednesday closed at $375.46 per share, up $1.36.