Boeing Co. unveiled deep cuts to jobs and production as the manufacturer rushes to adapt to a shrinking market for jetliners after the worst downturn in aviation history.
The U.S. planemaker will pare output for wide-body jets such as the 787 Dreamliner and behemoth 777X, according to a company statement Wednesday. Production of the 737 Max will resume gradually as key customers like Southwest Airlines Co. shelve growth plans. With factory activity slowing, Boeing will reduce employment by 10%, or about 16,000 jobs.
“I know this news is a blow during an already challenging time,” Boeing Chief Executive Officer Dave Calhoun said in a message to employees. “I sincerely wish there were some other way.”
The unprecedented collapse in air travel spurred by the Covid-19 pandemic is forcing Boeing, once a prodigious cash generator, into a fight for its life. While rival Airbus SE is also consuming cash at an alarming rate, Boeing faces added financial strain and uncertainty because of its best-selling Max, which has been grounded for more than a year after two deadly crashes.
“It’s all about survival,” George Ferguson, an analyst at Bloomberg Intelligence, said in an interview before Boeing’s announcement.
Avoiding Worst Case
Still, there were glimmers of promise in the results. While the company burned through a record amount of cash — $4.7 billion — the total was $1.1 billion less than the free-cash outflow expected by analysts.
And Boeing sees 737 Max deliveries resuming in the third-quarter, roughly in line with its previous forecast that the flying ban would be lifted in midyear. That would bolster cash while reducing inventories that have ballooned to $80 billion.
“The draconian, worst-case fears haven’t come to pass,” Canaccord Genuity analyst Ken Herbert said in an interview. “But we’ll see how much of this was kicked down the road.”
The shares climbed 3.7% to $136.15 at 10:19 a.m. in New York. Boeing plunged 60% this year through Tuesday, the biggest drop on the Dow Jones Industrial Average.
The aircraft manufacturer provided a partial glimpse of the financial fallout to come from the Covid-19 outbreak, with a series of accounting charges stemming in part from factory shutdowns that began in late March. That impact has worsened in the second quarter as consumers around the globe were urged to stay at home.
The revamp is the most extensive at Boeing since the 9/11 attacks and will have lingering repercussions. For example, lower production will slice into profit margins for the aircraft programs and drag on the jetliner division. Some Boeing defense programs, which rely on resources from the commercial-plane unit, also will take a hit to profitability.
With the cuts, Calhoun is making good on blunt warnings that the manufacturer would need to pare its 161,000-strong workforce to reflect the smaller market prospects and slow growth ahead. The U.S. industrial giant doesn’t see the aviation market returning to 2019 levels for another three to five years, he said in an interview on CNBC.
Boeing is confident that sales will eventually come back as airlines swap older models for newer, more efficient designs that spew less air pollution into the atmosphere and cut down on fuel costs.
“That’s what we’ve modeled,” Calhoun said. “We’ve stress-tested the model. And we believe the credit markets and liquidity will be there for us.”
For now, cutting expenses is paramount. The job losses will be done through a combination of voluntary layoffs, employee turnover “and involuntary layoffs as necessary,” the CEO said. Boeing’s commercial-jet division, services operation and headquarters staff will bear the brunt, with a 15% employment drop. The defense and space divisions will largely be spared.
Output of the Dreamliner will fall to 10 planes a month this year from 14, and then be gradually reduced to seven a month by 2022. The combined production rate for the 777 and 777X jets will slide to three a month next year.
The near-term rate cuts for the Dreamliner, a crucial source of cash, were less than many analysts had anticipated given the collapse in long-range flying. Herbert, the Canaccord Genuity analyst, said he was “a little surprised” that Boeing was waiting until 2022 to reset production seven jets a month.
“We’ll see how many white tails they’ll make,” he said, using an industry term for jets built without a buyer.
Output of the 737 Max will start slowly at first and will gradually rise to 31 planes a month next year. The company didn’t say when it expected output to return to the pre-grounding rate of 52-jets a month.
Calhoun, a longtime board member who took the reins in January after months of executive-suite turmoil, will provide more detail about his strategy for navigating the virus-era slump in conference calls with analysts and reporters later Wednesday. He is also expected to discuss the company’s plans to raise capital, potentially including government aid.
The company swung to an adjusted loss of $1.70 a share. Wall Street had expected a shortfall of $1.76 a share. Sales fell 26% to $16.9 billion. Analysts had predicted $17 billion.