Updated 6:32 p.m.
Aircraft maker Boeing [NYSE: BA] is reporting sharply lower earnings for its fiscal third quarter as the company deals with the grounding of its new 737 MAX short-haul jet involved in two deadly crashes.
The commercial airplanes unit experienced a 41% drop in revenues to $8.2 billion, reflecting lower 737 deliveries, according to earnings released Oct. 23. The company, as previously reported, completed 62 planes of all types, compared to 190 in the same quarter of 2018. Third-quarter operating margin decreased to -0.5%, reflecting lower 737 deliveries partially offset by a higher margin on the 787 program.
Boeing said slowing production and other expenses in the quarter will cost it another $900 million, which will be spread out over 3,100 future units and reduce margins. The company is still making 737 MAX planes at its plant in Everett, Washington, albeit it at a slower pace until aviation authorities give the green light for safe resumption of commercial flight. Boeing says it has developed three extra layers of protection to make sure the automated flight-control system doesn’t overreact in the future to signals of a potential stall during takeoff. Planes coming off the production line are being stored until the no-fly order is lifted.
Company officials say they assume global regulators will approve the 737 MAX return to service by the end of the year and that Boeing will gradually increase the 737 production rate from 42 per month to 57 per month by late 2020. If return to service is delayed, Boeing may have to further reduce production rates or temporarily shut down the MAX line.
“Our top priority remains the safe return to service of the 737 MAX and we’re making steady progress,” said Boeing President and CEO Dennis Muilenburg. “We’ve also taken action to further sharpen our company’s focus on product and services safety, and we continue to deliver on customer commitments and capture new opportunities with our values of safety, quality and integrity always at the forefront.”
Boeing also said it will reduce production of the long-range 787 Dreamliner to 12 airplanes per month for two years beginning in late 2020 because of trade tensions with China, where the company anticipated future growth . It said the 777X program is progressing through preflight testing and remains on track for a first flight in early 2020, with first delivery in early 2021. The next-generation 777 suffered a development setback last month when a body section failed during a load test and is facing delays because of a glitch with its GE-supplied engines.
“The GE9X engine remains the pacing item, as we work towards first flight of the 777X,” Muilenburg said on an earnings call later in the day. “GE, our engine supplier, has made good progress to address the durability challenges. GE has installed retrofit components in the certification test engines and testing has restarted. Once the engines become available, GE and Boeing will need to successfully complete additional testing before we are ready to fly.”
Muilenburg suggested five weeks ago that 777X deliveries might resume in late 2020.
The safety and business problems cost Kevin McAllister his job as head of commercial airplanes on Oct. 22. Earlier this month, the board took the chairman’s role from Muilenburg.
CFO Greg Smith said concessions to customers to compensate for the grounding and delivery delays will be provided over several years, impacting cash flow. “We expect our financial results to continue to be adversely impacted until we safely return the 737 MAX to service, resume deliveries to our customers and ramp-up production rates.,” he said.
The poor performance of the commercial airplanes unit was partially offset by higher defense and services business. Corporate-wide revenue fell 21% to $20 billion, with earnings down 43% to $1.26 billion and operating margin off by 2.6 points to 6.3%. Earnings per share were cut in half to $2.05.
Boeing said it booked net orders worth $5 billion during the quarter, including six 777 freighters for China Airlines.