Economic heavyweight Boeing hit by Max setbacks, pandemic

NEW YORK • Boeing lost US$52 billion (S$73.6 billion) on the stock market in a week, a rout underscoring the challenges facing the aircraft manufacturer amid setbacks over the 737 Max jet as well as the coronavirus pandemic.

But the industrial giant remains a business behemoth key to the American economy.

Boeing has lost all the gains amassed since President Donald Trump arrived in the White House in January 2017, which begs the question: Is the maker of the presidential plane, Air Force One, on solid financial ground?

For years, investors believed the 104-year-old company was a safe bet, because it has driven multiple technological revolutions and operates in a safe and growing market, said Mr Richard Aboulafia, an aviation expert at Teal Group.

But "these beliefs are being tested" with the 737 Max crisis, he said. "Boeing is in distress and a lot of that is self-inflicted."

Boeing itself helped sow doubt in the past week: Banking sources said it drew on the full US$14 billion credit line that it secured from banks only just last month.

That request gave the impression that the company is strapped for cash, said Mr Ken Herbert, managing director of financial services firm Canaccord Genuity.

Boeing, which faces a mountain of legal suits from the families of victims of the Ethiopian Airlines and Lion Air crashes involving its troubled 737 Max, wants to make sure it has enough reserves to deal with any unexpected problems in the current uncertain climate in the financial markets, sources familiar with the matter told Agence France-Presse. "There is no cash issue," said one source.

Boeing estimates the Max crisis will cost it at least US$18.7 billion. This caused its debt to explode to US$27 billion as of Dec 31 last year.

The firm has neither produced nor delivered any 737 Max since the jet was grounded a year ago after the second of the two deadly crashes, which killed 346 people.

EXPECTATIONS DASHED

Our desire to hang in with Boeing until the return of the 737 Max has worked out poorly, both regarding the timeline for re-certification and now more importantly with the impact of Covid-19 on aircraft demand.

MR SETH SEIFMAN, vice-president of JP Morgan.


ESSENTIAL ENTITY

(Boeing) is so essential to the (US) defence department that it is not a company that the government would drop.

MR GREGORI VOLOKHINE, president of financial services firm Meeschaert.

With its return to the skies uncertain, orders are in the red, and sales of the 787, Boeing's main source of income now, have slowed.

Despite these issues, "we do not believe Boeing will face a cash crunch", Mr Herbert said.

But new difficulties are mounting owing to the spread of the coronavirus. The pandemic poses the most serious crisis for the airline industry since the Sept 11 attacks of 2001, and likely will cause airlines to postpone their purchases of planes and even cancel orders.

Delta Air Lines, for one, has decided to postpone deliveries of new aircraft, while United Airlines will take on new aircraft only if it believes it can pay for them.

"Our desire to hang in with Boeing until the return of the 737 Max has worked out poorly, both regarding the timeline for re-certification and now more importantly with the impact of Covid-19 on aircraft demand," said JP Morgan vice-president Seth Seifman, who until the pandemic was among the few Wall Street experts advising investors not to sell their Boeing shares.

But Mr Gregori Volokhine, president of financial services firm Meeschaert, argues that Boeing "is a business like no other".

"It is so essential to the (US) defence department that it is not a company that the government would drop," he said.

Not only does the group manufacture the KC-46 tanker as well as the F-18 and F-15 fighter jets, but it is also the leading American exporter, with around 600 suppliers employing hundreds of thousands of people in the United States.

The Max assembly plant alone employs 12,000 people. When Boeing suspended production of the Max in January, most economists believed that this decision would affect US growth in the first half.

The impact of the Boeing crisis on the economy "is bigger than what you would see in a hurricane", said IHS Markit economist Joel Prakken.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on March 16, 2020, with the headline 'Economic heavyweight Boeing hit by Max setbacks, pandemic'. Print Edition | Subscribe