737 Max grounding to cost Boeing $4.9 billion in Q2

posted on 19th July 2019 by Justin Burns
737 Max grounding to cost Boeing $4.9 billion in Q2

Boeing said yesterday (18 July) grounding of the 737 Max will cost the manufacturer $4.9 billion after tax while it expects the aircraft to be back in service in the fourth quarter.

The US aircraft manufacturer said it will recognise the impact to earnings when it releases second-quarter (Q2) 2019 results on 24 July.

The cost us in connection with an estimate of potential concessions and other considerations to customers for disruptions related to the 737 Max grounding and associated delivery delays. This charge will result in a $5.6 billion reduction of revenue and pre-tax earnings in the quarter.   

While the entire estimated amount will be recognized as a charge in Q2, Boeing expects any potential concessions or other considerations to be provided over a number of years and take various forms of economic value. 

Additionally, Boeing’s estimated costs to produce the aircraft in the 737 accounting quantity increased by $1.7 billion in Q2, primarily due to higher costs associated with a longer than expected reduction in the production rate. The increased 737 program costs will reduce the margin of the 737 program in Q2 and in future quarters.  

Boeing said it continues to work with civil aviation authorities to ensure the 737 Max’s safe return to service, and these authorities will determine the timing of return to service.

For purposes of the Q2 financial results, the company has assumed that regulatory approval of 737 Max return to service in the US and other jurisdictions begins early in the fourth quarter 2019.

This assumption reflects the company’s best estimate at this time, but actual timing of return to service could differ from this estimate.

The second-quarter financial results will further assume a gradual increase in the 737 production rate from 42 per month to 57 per month in 2020, and that aircraft produced during the grounding and included within inventory will be delivered over several quarters following return to service. Any changes to these assumptions could result in additional financial impact.  

“We remain focused on safely returning the 737 Max to service,” said Boeing chairman, president and chief executive officer, Dennis Muilenburg. “This is a defining moment for Boeing. Nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes.

“The Max grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks.” 

Boeing chief financial officer and executive vice president of enterprise performance and strategy, Greg Smith added: “We are taking appropriate steps to manage our liquidity and increase our balance sheet flexibility the best way possible as we are working through these challenges.

“Our multi-year efforts on disciplined cash management and maintaining a strong balance sheet, in addition to our strong and broad portfolio offerings, are helping us navigate the current environment.” 

Boeing’s previously-issued 2019 financial guidance did not reflect impacts related to the 737 Max. Due to the uncertainty of the timing and conditions concerning 737 Max return to service, new guidance will be issued at a future date.