Boeing to take $US4.9 billion charge for MAX fiasco

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July 19, 2019
Southwest MAX two months
Southwest Airlines 737 MAX aircraft at Victorville, California. Image: KCAL9.

Boeing will take an after-tax charge of $US4.9 billion in its second quarter to cover “potential concessions and other considerations to the customers” relating to the grounding of the 737 MAX fleet and other delays.

The manufacturer said the charge would result in a $US5.6 billion reduction of revenue and pre-tax earnings in the second quarter.

Analysts expect the charge to wipe out any profit.

“While the entire estimated amount will be recognized as a charge in the second quarter, the company expects any potential concessions or other considerations to be provided over a number of years and take various forms of economic value,’’ Boeing said in a statement issued Thursday US time.

“Additionally, Boeing’s estimated costs to produce the aircraft in the 737 accounting quantity increased by $1.7 billion in the second quarter, primarily due to higher costs associated with a longer than expected reduction in the production rate.

“The increased 737 program costs will reduce the margin of the 737 program in the second quarter and in future quarters.”

The airline also confirmed that it did not believe it would receive regulatory approval for the return to service for the MAX until early in the fourth quarter of 2019 and that 737 production will not return to previous levels until 2020.

It warned the return to service assumption reflected a “best estimate” and that “ actual timing of return to service could differ from this estimate”.

“The second-quarter financial results will further assume a gradual increase in the 737 production rate from 42 per month to 57 per month in 2020, and that airplanes produced during the grounding and included within inventory will be delivered over several quarters following return to service,’’ it said.

“Any changes to these assumptions could result in additional financial impact.”

Boeing chief executive Dennis Muilenburg said the company remained focused on safely returning the 737 MAX to service.

“This is a defining moment for Boeing. Nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes,’’ he said.

“The MAX grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks.”

Boeing Chief Financial Officer Greg Smith said the manufacturer was taking appropriate steps to manage liquidity and increase its balance sheet flexibility “the best way possible as we are working through these challenges”.

“Our multi-year efforts on disciplined cash management and maintaining a strong balance sheet, in addition to our strong and broad portfolio offerings, are helping us navigate the current environment,” he said.

Boeing’s previous 2019 financial guidance did not reflect the MAX problems and the company said the uncertainty and conditions regarding the return to service meant new guidance would be issued at a future date.

The company is due to release its second-quarter earnings on July 24.