Boeing Climbs After Mapping Jump in Max Output for Next Year

(Bloomberg) -- Boeing Co. rose after mapping out a sharp boost to output of the 737 Max, saying it remained confident that the beleaguered plane would be cleared to fly this year.

Production of the best-selling Max will increase 36% to 57 jets a month by late next year, the company said as it reported earnings on Wednesday, easing worries it would cut output. The tab for the Max’s grounding climbed $900 million to $9.2 billion in the third quarter, but the U.S. manufacturer said it didn’t see any major additional expense for customer compensation.

“The lack of incremental bad news on the Max has got people excited,” Ken Herbert, an analyst with Canaccord Genuity, said in an interview. While investors remain “healthily skeptical” that Boeing can gain U.S. approval for the Max to fly this year, “if they get the FAA to sign off on it, then that shifts the whole discussion between airlines and other regulators.”

Boeing is trying to work through one of the biggest crises in its 103-year history after two Max crashes killed 346 people within five months and prompted a global flying ban in March. Boeing, which is under investigation by the U.S. Justice Department and Congress, ousted its commercial-airplanes chief on Tuesday and stripped Chief Executive Officer Dennis Muilenburg of his role as chairman on Oct. 11.

The planemaker on Wednesday revealed setbacks for two wide-body jet programs. Boeing plans to pare output of its 787 Dreamliner to 12 jets a month by late next year from 14 today amid trade tensions with China, a key customer. And the debut of the 777X has shifted to early 2021 from late next year as the company awaits delayed engines.

The shares advanced 2.6% to $345.72 at 9:35 a.m. in New York, the biggest gain on the Dow Jones Industrial Average. Through Tuesday, Boeing had tumbled 20% since the second Max accident on March 10, the worst performance on the 30-member Dow.

Boeing’s 2.7% bonds due 2027 widened nearly 4 basis to 87.366 basis points over Treasuries, according to Trace. The cost to protect Boeing’s debt against default for five years rose 1.3 basis points to 46.6 basis points, according to ICE Data Services.

CEO Update

The latest update from Muilenburg on Boeing’s campaign to win over global regulators and prepare Max customers is probably more important to investors than the financial results. The CEO is set to host a conference call for analysts and investors at 10:30 a.m. in New York.

Shareholders were girding for disappointing results after Boeing delivered only 63 jets in the reporting period, down from 190 aircraft a year earlier.

Adjusted earnings fell to $1.45 a share, compared with the $2.17 average of analyst estimates compiled by Bloomberg. Sales tumbled 21% to $20 billion from a year earlier. That was slightly ahead of analysts’ expectation for $19.7 billion.

Boeing continues to churn out Max jets and will have 386 newly-built aircraft in storage by the end of the year if the U.S. Federal Aviation Administration still hasn’t cleared it for flight, according to estimates compiled by Cowen & Co. analyst Cai von Rumohr earlier this month.

Since airlines and lessors can’t take delivery of Max planes with the flying ban in place, payments to Boeing have dropped while the company absorbs costs for suppliers and the parked planes.

Cash Drain

Boeing burned $2.9 billion in free cash, after generating $4.1 billion a year earlier. The company’s inventories ballooned to $73.3 billion from $68.5 billion at the end of June.

“Boeing will need to sustain themselves, as one of the biggest generators isn’t generating cash,” George Ferguson, analyst with Bloomberg Intelligence, said in an interview before the earnings release.

The cash drain will continue as long as the Max is barred from commercial flight. Southwest Airlines Co., United Airlines Holdings Inc. and American Airlines Group Inc. don’t expect to carry passengers on the plane until next year.

While Boeing didn’t report another big accounting charge for its Max woes, as some analysts had predicted, the company recorded another $900 million in estimated production costs for the 737 due to the grounding. All told, Boeing has reported $3.6 billion in the rising costs to build and deliver the Max it has already sold, which will clip future profit margins.

At Boeing’s commercial airplanes division, revenue, profit and operating margin all plunged from a year earlier. The defense and global services businesses fared better. The defense unit recorded an operating profit of $755 million after posting a $247 million loss a year earlier. Profit for the services division rose 23% to $673 million.

The U.S. trade war with China and slumping sales of wide-body jets have injected new uncertainty into the Dreamliner program, another source of cash. Boeing attributed the planned cut in 787 production to “the current global trade environment.” Analysts had been skeptical that the company would be able to continue building 14 of the jets a month -- a record for twin-aisle aircraft -- without a sales windfall, which hasn’t materialized.

Then there is uncertainty over when the 777X will enter the commercial market. Boeing still hasn’t scheduled the hulking jet’s first flight as it awaits overhauled General Electric Co. engines. Regulator scrutiny of the company’s first new jetliner since the 737 Max could further delay the debut.

Both programs, combined with the Max, could limit the largesse that shareholders had expected of Boeing before the Max grounding. Canaccord’s Herbert expects the company to repurchase some shares in 2020 but sees debt reduction and spending on new aircraft as higher priorities for Boeing when the crisis abates.

--With assistance from Molly Smith, Richard Clough and Anny Kuo.

To contact the reporter on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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