Categories Analysis, Industrials

The coming months will prove to be a testing time for Boeing (BA)

Boeing faces tough competition in the commercial airplanes space

Shares of Boeing Co. (NYSE: BA) were up 13% in afternoon hours on Monday. The stock is down 63% from its 52-week high of $391. As the aviation industry suffers considerably from the coronavirus pandemic, Boeing has also taken hits. From the looks of it, the upcoming months could particularly be tough for the aircraft-maker.

Image for representation only/Courtesy: Nafis Al Sadnan/Unsplash)

737-Max tragedy

Boeing’s problems started way before the COVID-19 health crisis with the grounding of its 737-Max aircraft. The company temporarily suspended the production of the 737-Max in January and stated at the time that it expects to receive certification by mid-2020.

In its 10-K filing, Boeing mentioned that the grounding has impacted its revenues, operating margins and cash flows and the company expects to take a hit to these metrics until production and deliveries resume and the rates of production return to the levels they were at before the grounding.

Delays in bringing back the 737-Max to service and resuming deliveries to customers are expected to result in additional costs for Boeing which in turn could affect cash flows. In 2019, the company recorded an earnings charge of $8.2 billion associated with estimated concessions and other considerations to customers for disruptions and delivery delays due to the grounding. Any further charges in this range will take a toll on the company’s financials.

COVID-19 mayhem

The current health crisis has pushed Boeing’s plans further downhill. The company has halted operations at its Puget Sound and Philadelphia facilities and expects to resume work towards the end of this month. These stoppages will affect the company’s ability to meet customer requirements thus putting pressure on its performance.

Like several other firms, Boeing too has suspended its dividend and share buyback programs amid the crisis and its executives have decided to take pay cuts. It also remains to be seen whether the pandemic will delay the 737-Max’s return to service.

Boeing is one of the major aerospace companies in the world and a leading producer of commercial aircraft. The company had a total workforce of approx. 161,100 at the end of 2019.

Customer woes and competition

The coronavirus outbreak has caused the airline industry some major turbulence and Boeing’s customers include several leading airlines such as American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL) and United Airlines (NYSE: UAL).

Last month, American Airlines reduced its international capacity for the summer peak by 10% with a 55% reduction in trans-Pacific capacity. The company also said it would reduce its domestic capacity by 7.5% in April.

Delta announced a 20-25% reduction in international capacity and a 10-15% reduction in domestic capacity. United announced a 60% schedule reduction in April, with a 42% reduction across the US and Canada and an 85% decrease in international flights.

With the airline industry seeing large declines in capacity and demand, a recovery is bound to take some time. This is likely to put new orders and purchases on the backburner for now or even lead to order cancellations. This trend could negatively affect Boeing, which also faces tough competition in the commercial airplanes space.

Boeing’s main rival in the commercial airplane space is European firm Airbus SE, which continues to increase its market share in the US. Airbus is solidifying its North American operations and partnering with US defense companies as part of these efforts. Experts believe Airbus stands to benefit from any order cancellations that Boeing faces as the former would be the next best choice for customers.

Taking all these factors into consideration, it is likely that even after the current crisis subsides, Boeing’s struggles might not end. The fate of the 737-Max and how things go from there are crucial points to watch in the coming months. 

Boeing is expected to report its first quarter 2020 earnings results at the end of this month. Stay connected with AlphaStreet for the live earnings coverage, infographics and follow-up stories.

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