Boeing to take $7.2 billion charge for 737 Max

A worker stands near a Boeing 737 MAX 8 jetliner being built prior to a test flight. Photo / AP

Boeing will take a US$4.9 billion ($7.2b) after-tax charge in the second quarter related to the grounding of the 737 Max, the manufacturer's first estimate of the cost of compensating airlines for schedule disruptions and delays in aircraft deliveries.

The charge will result in a US$5.6b cut in revenues and pre-tax earnings for the second quarter, due to be announced on July 24, the company said in a statement issued on Thursday.

The size of the charge underlines the magnitude of the crisis Boeing is facing, with its fastest-selling jet grounded worldwide and unlikely to resume flying until the end of this year or even later. The plane was taken out of service globally in March after two deadly crashes in Ethiopia and Indonesia killed 346 people.

The nearly US$5b charge does not include less tangible cost to Boeing's reputation, which has taken a hit as it has repeatedly revealed new problems with the plane, and delays in getting it fixed to return safely to the air.

Earlier this month, Boeing lost a US$5.9b order for up to 50 Max planes, when Flyadeal, a Saudi Arabian low-cost carrier, cancelled its order.

It also does not include the cost of lawsuits filed by victims' families or any potential fines imposed after investigations by global regulators and the US Department of Justice.

The company has signalled it could allow customers to renegotiate orders and delivery dates as it works to limit the commercial fallout from the grounding.

Although the charge — equal to US$8.74 per share — will be taken in the second quarter, Boeing said it expects its customers would see the "potential concessions or other considerations . . . over a number of years". Concessions in such circumstances often take the form of price cuts on aircraft orders rather than cash payments.

The charge dwarfs analyst consensus forecasts of adjusted earnings per share for the second quarter of US$1.80.

But the quantification gave investors some succour, with Boeing shares rising almost 2 per cent to US$368 each in after-market trading. This compares with a 52-week low of US$292 a share.

Boeing also said it was raising its estimated costs of producing the aircraft by US$1.7b in the second quarter, primarily due to higher costs associated with a reduced production rate. Boeing cut production to 42 per month in April, down from 52 per month. Boeing said it expects to ramp up to 57 a month in 2020.

The company said it assumed regulatory approval to resume flights would be granted for the Max in the fourth quarter of this year but it added a caveat. "This assumption reflects the company's best estimate at this time, but actual timing of return to service could differ from this estimate," the company said.

"This adds certainty and for the first time puts an expected return to service timeline out there which we think is positive," said Jim Corridore, aerospace analyst at CFRA research. "It's not surprising to see them take a sizeable charge but I think this at least helps quantify the damages at this point".

Boeing chief financial officer Greg Smith added: "We are taking appropriate steps to manage our liquidity and increase our balance sheet flexibility the best way possible as we are working through these challenges. Our multiyear 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."

Boeing suspended financial guidance after the grounding and said it will issue new forecasts at a later date.

"The revenue lost so far during the grounding (US$5b) will be made up when deliveries of the stored aeroplanes resume," wrote Scott Hamilton, aerospace analyst at Leeham News and Analysis, an aviation website.

"It will take a year, maybe two, but this revenue does show up (minus any concessions). It's going to be several years before Boeing works its way out of this".

Written by: Patti Waldmeir

© Financial Times