Boeing Jumps on Relief That $4.9 Billion Max Charge Wasn’t Worse
Boeing expects the Max to be approved to return to service in the U.S. and other countries beginning early in the fourth quarter.
(Bloomberg) -- Boeing Co. rose the most in a month as its revelation of a $4.9 billion accounting charge provided the first glimpse of how the beleaguered 737 Max is weighing on company finances. Investors were relieved the damage wasn’t worse.
The after-tax writedown, equivalent to $8.74 a share, covers potential concessions for airline customers who have been forced to cancel flights and line up replacement aircraft as the Max’s grounding enters its fifth month, Boeing said in a statement late Thursday. The costs will clip $5.6 billion from revenue and pretax earnings in the quarter.
The assumptions behind the accounting charge also outlined Boeing’s recovery plan for its top-selling jet, which crashed twice in a five-month span, killing 346 people and engulfing the U.S. planemaker in one of the worst crises of its century-long history. The company said its best estimate is that the Max will be approved for flights in the U.S. and other countries beginning “early in the fourth quarter.”
“We believe the initial investor reaction is a sigh of relief,” Ken Herbert, an analyst with Canaccord Genuity, said Friday in a note to clients. Boeing’s timeline for resuming Max flights tamps down speculation of an extended delay that would force a second cut to 737 output, he said.
“The production rate appears to be holding at 42/month, and the charge helps to put a perceived limit on the financial impact of the grounding,” Herbert said.
Boeing climbed 3.5% to $373.85 at 11:35 a.m. New York, the biggest gain on the Dow Jones Industrial Average. Spirit AeroSystems Holdings Inc., which supplies Max airframes to Boeing, jumped 7.1% to $78.61.
While Boeing warned that the timing of a return to service could change, the estimate of fourth-quarter approval was in line with recent schedule changes by the model’s U.S. operators. United Airlines Holdings Inc., American Airlines Group Inc. and Southwest Airlines Co. have removed the plane from their schedules through early November.
The fourth-quarter time frame also rebuts a recent Wall Street Journal report suggesting that initial flights would slip to 2020. While Boeing had been overly optimistic with earlier predictions for recertifying software linked to the crashes, “I have to think they are far enough along in the process that they feel they understand everything the FAA needs,” said George Ferguson, an analyst with Bloomberg Intelligence.
Boeing’s calculations also assume that monthly production of its 737 jetliners will gradually build to a 57-month rate next year, earlier than some analysts have estimated. Aircraft produced during the grounding, and already included in the company’s inventory, will be delivered “over several quarters” once the Max is cleared to fly, the company said.
The $5.6 billion pretax hit in the second quarter “is higher than we would have thought. But it should be a high-end estimate,” Douglas Harned, analyst with Bernstein, said in a note to clients Friday.
The compensation will be spread over several years and may take on different forms that don’t necessarily affect Boeing’s near-term cash, he said. The manufacturer can offer changes in delivery slots, support services and discounts on future aircraft purchases.
Boeing’s first-quarter profit margins were dented by $1 billion in estimated costs after it cut factory output of the narrow-body jets following the global grounding. That expense has grown by another $1.7 billion, primarily due to a “longer than expected reduction in the production rate,” the company said.
Profit Pressure
The higher costs will reduce the margin for the 737 program, Boeing’s largest source of profit and revenue, in the second quarter and future quarters. The company is slated to report results on July 24.
More than 500 of the aircraft are stored around the globe, including about 150 newly built models that Boeing can’t send to airlines while Max flights are halted. But the volume of stored aircraft will continue to swell, amplifying the challenge for Boeing and disruption for airlines and lessors.
Canaccord Genuity’s Herbert estimates that by early 2020, when deliveries should be moving into high gear, Boeing will have about 425 Max in inventory.
“This is a defining moment for Boeing,” Chief Executive Officer Dennis Muilenburg said in the statement. “The Max grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks.”
--With assistance from Christopher Jasper.
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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