How the aerospace giant’s struggles are impacting other companies in the sector.
Boeing’s problems are bigger than its own.
A hint at the magnitude came a few weeks ago when Treasury Secretary Steve Mnuchin said that 2019’s grounding of the company’s 737 Max could take a half a point off US economic growth in 2020.
As Boeing struggles to return the 737 Max to full production, the most significant ripple effect is being felt in the commercial aircraft sector.
Analysts at AllianceBernstein point to the grounding of the 737 Max as the number one issue in the commercial aerospace sector and note that it has disrupted the entire supply chain. They note that Boeing has taken a $5.6 billion pre-tax provision to cover compensation that will be given to airlines and estimate the company will further recognize another $2.5 billion to $3.5 billion depending on the length of the grounding.
Analysts at Jefferies, meanwhile, estimate cash flow outflow of $2.3 billion a quarter, including dividends, while 737 production is halted.
Companies throughout the sector--from Tui Group to Southwest Airlines--are feeling the impact as disclosed in their regulatory filings.
Air Lease Corporation
The AirLease Corporation faced major groundings and delays as disclosed in its 10Q. “We expect that if the grounding continues for an extended time, or if there are significant Boeing 737 MAX delivery delays even after the grounding is lifted, some of our customers may seek to cancel their lease contracts with us,” the company said. The company said this, though, that it remains confident in the long-term prospects for the jet.
Carrier Tui Group broke out the costs of the 737 impact in its Annual Report. “2019 was a challenging year for the whole travel industry. And in addition, TUI was impacted by the Boeing MAX grounding, costing us close to EUR 300 million,” the company said. However, “we gave early clarity on the expected Boeing MAX cost impact, and our early calculations for the communicated scenario turned out as planned,” the company noted.
In December, the company said that it could see losses of up to EUR 400 million in its 2020 financial year if the jet does not come back into service by May.
American Airlines, meanwhile, noted in its 10Q that its fleet included 24 Boeing 737 MAX aircraft with an additional 76 aircraft on order. Because of the 737 issues, “we canceled 9,475 flights in the third quarter of 2019,” the company said. “We estimate that the Boeing 737 MAX flight cancellations decreased our third quarter 2019 pre-tax income by approximately $140 million.”
On its fourth quarter earnings call on Jan 20, the company said that grounding of the Max continues to pressure growth and capacity growth will be lower than 4% to 5% in 2020 until the jet returns to full service.
American also continues to seek additional compensation from Boeing in addition to damages already paid out. “The financial cost of the MAX grounding should be borne by Boeing shareholders, not Americans.”
The 737 grounding cost Southwest Airlines - which owns more 737 Max jets than any other airlines - $828 million in 2019. Like American, the company said it will seek more compensation from Boeing for the extended delays. "We will continue discussions with Boeing regarding further compensation," said Southwest CEO Gary Kelly.
The company owns 34 Max jets and said it had expected to end the year with 75 jets before the grounding put a pause on deliveries. Difficulty procuring the 737 resulted in a decline of capital expenditure estimates for Southwest Airlines. The company said it lowered its annual 2019 capital expenditures to be in the range of $1.1 billion to $1.2 billion, compared with its previous guidance in the range of $1.2 billion to $1.3 billion in its 8K.
Travel conglomerate Hudson Limited saw a decline in traffic in some of the terminals it operates, the company said in its third quarter earnings call. Airline terminals impacted by the 737 Max grounding saw as much as a 4% to 8% decline in passenger growth during the downtime.
Avcorp, which provides supply chain solutions to aircraft manufacturers, saw revenue decline because of a decrease in activity by customers like Delta. Delta revenues from the production and delivery of business and commercial jet programs has decreased by about $3.3 million in the third quarter of 2019 compared to a year ago the company said in an interim financial report.
Even as Boeing struggles with its turnaround, the impact of its woes are being felt from the entire US economy down through the aerospace sector. The upside: a successful turnaround could lead to a shot in the arm for all involved, just like the challenges have been headwinds.