How bad are things for Boeing? Investors are about to find out
A top Boeing executive left the company Tuesday, the first to do so in the wake of the 737 Max crisis. What the mounting crisis is costing the rest of the company will become clearer to investors on Wednesday when the company reports earnings.
Out of a job is Kevin McAllister, who had been president and CEO of Boeing Commercial Airplanes, the unit that builds its passenger jets. He is being replaced by Stan Deal, the head of Boeing Global Sevices, the unit of the company that provides engineering, analytics, supply chain services and training support to the aircraft maker’s customers.
McAllister came to Boeing from General Electric in November 2016, after the Boeing 737 Max was well on its way to being certified and after the flawed safety feature at issue in the crashes was already part of the jet’s design. The commercial airplanes unit is the core division of the company, responsible for about 60% of Boeing’s sales revenue in normal times.
Boeing reports its third quarter results Wednesday, and it is expected to show a return to profitability. But that bit of good news can’t outweigh all the bad news buffeting the embattled aircraft maker. Investors will be looking for some new guidance as to when the company’s best-selling plane, the 737 Max, can return to service. The plane has been grounded since March following two fatal accidents that killed everyone on board in each case, a combined 346 people.
Boeing has already taken a $5 billion charge related to compensation it expects to give to its airline customers. It is likely that Boeing will announce a new charge Wednesday because of continuing delays getting approval for the plane to fly again, said Cai von Rumohr, an aerospace analyst with Cowen.
“These [charges] are apt to be large,” he wrote in a note Monday.
Boeing had been promising it would submit a final software fix, including completing a certification flight, to the Federal Aviation Administration by September, and that it hoped to have approval to have the plane flying again “early in the fourth quarter.” But its latest update on Tuesday did not say whether it had submitted one. Boeing said only that “last week the company successfully conducted a dry-run of a certification flight test.”
The company also received harsh criticism from the FAA on Friday for only recently alerting the agency to concerns about the plane expressed by two of its employees during the jet’s 2016 certification process. In internal messages, the two employees had shared concerns about how the safety feature that is the focus of the cash investigation performed during simulated flights.
Questions about that earlier certification process are separate from whether Boeing has arrived at a fix for the plane. But “the most likely impact [of the revelation] is that this could delay approval of the revised software by the FAA and other global regulators due to political pressures,” credit rating agency Standard & Poor’s on Tuesday, as it warned that it might have to cut Boeing’s debt rating.
In its statement Friday the FAA said it found the communication between the Boeing employees about the safety system “concerning” and that it is “disappointed that Boeing did not bring this document to our attention immediately upon its discovery.”
All this suggests the regulator isn’t rushing to return the plane to service. In fact, the agency said on Friday that “the FAA is following a thorough process, not a prescribed timeline, for returning the Boeing 737 Max to passenger service. The agency will lift the grounding order only after we have determined the aircraft is safe.”
Boeing has continued to build the 737 Max during the grounding in order to try to meet a backlog of more than 4,000 orders for the plane that it has on the books. But it won’t get most of the revenue from sales of the plane until delivery.
CEO Dennis Muilenburg, who was stripped of his chairman title earlier this month by the company’s board, said three months ago that the company could be forced to suspend production of the Max if the approval for it to fly again is not completed by the end of this year.
The company’s update Tuesday provided no details on production plans, but analysts are sure to ask about that on Wednesday.
There also will likely be questions about a separate problem with an older version of the jet, the 737 Next Generation. At least 38 of those jets have been grounded due to cracks discovered in a structural support that keeps the wings in place. Boeing has not yet indicated the cost to fix those planes or the time it will take, or provided an estimate on how many of the 6,800 planes in service might have the problem. Only 800 of the jets had been inspected when the initial grounding was reported earlier this month.
Analysts have been cutting their outlook for the company and the stock ahead of Wednesday’s report.
“We can no longer defend the shares in light of the latest discoveries, discoveries which significantly increase the risk profile for investors,” Credit Suisse analyst Robert Spingarm wrote in cutting his recommendation on the stock Monday, saying that the revelations of concerns about the plane’s safety system contained in the messages revealed last week “may shatter the fragile trust between regulators and Boeing.”
The revelations could also increase the political risks for approval of a return to service and threaten public confidence in the jet, Spingarm wrote. Muilenburg is scheduled to testify before Congress next week.
— CNN’s Rene Marsh contributed to this report.