Boeing forecasts big losses after the Alaska Airlines incident

Boeing forecasts big losses after the Alaska Airlines incident - Business and Finance - News

Boeing Braces for Major Loss in Q1 Due to 737 Max Door Plug Incident and Quality Control Issues

Boeing, one of the world’s leading aircraft manufacturers, is expected to report a significant loss in the first quarter of 2023, with its commercial airplane unit’s operating profit margin plunging to around -20%. This represents the largest loss margin at Boeing’s commercial aviation division in several years, surpassing the negative margins recorded when the company halted deliveries of its 787 Dreamliner due to quality control issues in 2021.

The latest setback for Boeing can be traced back to an incident on January 5, when a door plug blew off a 737 Max 9 operated by Alaska Airlines shortly after takeoff, leaving a large hole in the jet’s side. Consequently, shares of Boeing, which is a component of the Dow Jones industrial average, fell approximately 2% in premarket trading as a result of this guidance.

The financial implications of the incident extend beyond just Boeing, with Alaska Air CEO Ben Minicucci revealing that it incurred approximately $150 million in losses as a result. The airline expects to be compensated for these damages by Boeing. Furthermore, the production rate of the 737 Max has been slowed down due to the incident and subsequent investigations by regulatory authorities like the Federal Aviation Administration (FAA).

Beyond the immediate consequences of the door plug incident, Brian West, Boeing’s Chief Financial Officer, indicated that there are ongoing changes required to improve quality control measures within the company. He acknowledged that prioritizing the assembly line process over perfection had been a long-standing issue and that this approach must now change.

As a result of these changes, Boeing has decided to reduce 737 Max production below the previously planned rate of 38 planes per month. Initially, Boeing had intended to increase output this year; however, these plans have been postponed due to the FAA’s ongoing audit of Boeing’s operations and its mandate for the company to devise a plan addressing quality and safety concerns for its commercial aircraft.

The FAA audit, which has uncovered widespread issues with Boeing’s quality control processes at various facilities, is described as “tougher” than any previous audits the company has encountered. Consequently, profit margins in Boeing’s commercial aviation division, which accounts for a substantial portion of the company’s revenue, will remain negative throughout 2023. However, West expressed optimism that these margins will recover and eventually reach historical levels in the 2025-2026 timeframe.

It is important to note that Boeing’s commercial aircraft unit had a 14% operating profit margin in its most profitable year, 2018. The company reported an operating loss of $41 million for the commercial aircraft unit in the fourth quarter of 2022, translating to a meager 0.4% profit margin. The period from late 2019 to the end of 2022 was marked by the grounding of the 737 Max following two fatal crashes that resulted in the deaths of 346 individuals. Since the onset of the grounding, Boeing has reported total operating losses amounting to $31.5 billion.

Although a 20% loss margin is significant, it pales in comparison to the staggering losses Boeing experienced during the second quarter of 2020. During that period, the commercial aviation unit’s operating loss margin reached a whopping 169%, as Boeing grappled with both the Max grounding and the onset of the pandemic that caused a near-halt in air travel, leading to airlines ceasing deliveries of new jets.

Boeing’s path to recovery will involve a combination of higher production rates in the future and the shutdown of so-called “shadow factories,” where planes are held back from delivery for additional work. West emphasized that a significant amount of work remains before the company can return to profitability in its commercial aviation division.