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354.41 USD   +4.24%
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Boeing Plans to Take $5 Billion Hit -- WSJ

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07/19/2019 | 02:49am EDT

By Andrew Tangel and Doug Cameron

Boeing Co. will set aside about $5 billion to compensate airlines that have suffered because of the prolonged grounding of the 737 MAX plane.

Chicago-based Boeing also faces litigation seeking compensation for families of the 346 people who died in two crashes, as well as higher costs after curtailing production of the MAX following its grounding by global regulators in March.

The costs and the potential timing of the MAX's return to commercial service will be a key focus of investors when Boeing releases earnings for the second quarter next week.

Shares in Boeing rose 2% after hours on Thursday from their close at $361.11, erasing a 2% decline during regular trading.

Boeing said the $4.9 billion after-tax charge in the June quarter was related to estimates for "potential concessions and other considerations to customers for disruptions." It said the charge, which takes into account taxes, would result in a $5.6 billion reduction in revenue and earnings for the quarter.

The company is expected to report sales of about $20 billion for the second quarter and about $94 billion for 2019, according to the consensus among analysts polled by FactSet. They had been projecting a quarterly profit of $1.2 billion, meaning the charge likely will result in a deep loss for the period.

Boeing also said it expects to award the concessions to airlines over a number of years. Airlines likely will be compensated in cash and a mix of other concessions including delivery timing, discounts, and added features and services, a person familiar with Boeing's plans said.

The company said its estimated future costs to manufacture the 737 would increase by an additional $1.7 billion due to a production slowdown that has lasted longer than expected. The cost increases come on top of $1 billion in additional production costs announced in the first quarter.

That $2.7 billion in costs will be set against an undelivered accounting block of 3,100 737 MAX jets, implying that Boeing expects only a minimal dent in margins on a program that is expected to drive profit for more than a decade. The 737 MAX 8 model carries a list price of $122 million, though airlines secure discounts for big orders, with typical sales in the region of $60 million apiece, analysts said.

The company said its financial results assume a gradual increase in monthly production from 42 planes currently to 57 next year. It trimmed output from 52 aircraft in April, though most suppliers have remained at that rate and were already preparing for a step up to 57 this month.

Major U.S. airlines that fly the 737 MAX have taken the aircraft out of their schedules through early November. Boeing said Thursday its guidance assumed the plane would fly again early in the fourth quarter. But government and industry officials now say it could be 2020 before the plane returns to passenger service, as aviation regulators weigh various fixes to the aircraft's systems and crew training.

U.S. carriers have said they are more focused on the plane's safe return to flight than on specific conversations with Boeing about compensation. But the grounding is also hitting their profits. Airlines have canceled thousands of flights that the MAX planes were expected to make, curtailing capacity during one of the busiest travel seasons on record.

American Airlines Group Inc., which was planning to boost its MAX fleet from 24 planes to 40 by the end of this year, said last week that cancellations due to the grounding reduced its pretax earnings by $185 million in the second quarter. American is scheduled to report earnings next week.

"We've got a long history and a nice order book going forward. I'm certain that Boeing will want to make sure that we are taken care of appropriately," American Airlines President Robert Isom said in May.

European budget carrier Ryanair Holdings PLC said Tuesday the grounding will hurt its growth plans. The airline was expecting to receive 58 of the 737 MAX200 variant by next summer but said it is now planning its schedule based on at most 30 deliveries by May 2020. Ryanair said delays in receiving MAX jets will force it to close some bases and make cuts at others this winter -- and to trim its planned summer-season capacity growth in 2020 to 3% from 7%.

Boeing faces over 100 lawsuits in the U.S. brought by families of victims of the crashes in Ethiopia and Indonesia. The company is negotiating settlements with some. Some plaintiff attorneys are pushing for a jury trial to air the details of the accidents. Mediation talks in cases affiliated with the October crash of a MAX operated by Indonesia's Lion Air were scheduled to begin this week.

Separately, Boeing has pledged $100 million to support families and communities affected by the Lion Air crash and the second fatal crash in March of a MAX operated by Ethiopian Airlines. This week, Boeing said it hired victim-compensation attorney Kenneth Feinberg to distribute half of that fund to families who lost relatives.

--Alison Sider contributed to this article.

Write to Andrew Tangel at Andrew.Tangel@wsj.com and Doug Cameron at doug.cameron@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
AMERICAN AIRLINES GROUP 0.42% 26.53 Delayed Quote.-17.38%
BOEING COMPANY (THE) 0.00% 330 Delayed Quote.3.18%
BOEING COMPANY (THE) 4.24% 354.41 Delayed Quote.9.89%
RYANAIR HOLDINGS 0.47% 8.538 Delayed Quote.-20.07%
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Financials (USD)
Sales 2019 85 484 M
EBIT 2019 4 136 M
Net income 2019 3 378 M
Debt 2019 11 625 M
Yield 2019 2,25%
P/E ratio 2019 60,7x
P/E ratio 2020 14,7x
EV / Sales2019 2,47x
EV / Sales2020 1,68x
Capitalization 199 B
Duration : Period :
Boeing Company (The) Technical Analysis Chart | MarketScreener
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Technical analysis trends BOEING COMPANY (THE)
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 24
Average target price 415,05  $
Last Close Price 354,41  $
Spread / Highest target 41,1%
Spread / Average Target 17,1%
Spread / Lowest Target -18,2%
EPS Revisions
Dennis A. Muilenburg Chairman, President & Chief Executive Officer
Jenette E. Ramos Senior Vice President-Supply Chain & Operations
Gregory D. Smith CFO, EVP-Corporate Development & Strategy
Theodore Colbert Chief Information Officer & SVP-Data Analytics
Gregory L. Hyslop CTO, Senior VP-Engineering, Test & Technology
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