Boeing cites China as a risk factor to its recovery efforts

Boeing does not expect China to allow the 737 Max fly until the second half of the year, which could affect how fast the company increases production rates for the jet.

On an earnings call on Wednesday, the aircraft maker’s executives highlighted the need for regulatory approval and overall US-China relations as risk factors for its business, along with Covid-19 infection rates and the pace of vaccinations.

The Asian country is a critical market for Boeing, accounting for 25 per cent of the global aviation growth the company has forecast over the next decade.

Boeing said it plans to increase production of the Max to 31 per month by early 2022. But chief financial officer Greg Smith said the timing of regulatory approval on the Max from Beijing “will affect our 737 delivery plan . . . and order activity from China will affect our future production rates”.

Chief executive David Calhoun said Boeing was highlighting the US-China relationship now to ensure the new Biden administration “knows the importance of getting those relationships straight”.

His remarks were like “exclaiming the risk of a car accident you’ve already been in”, said Richard Aboulafia, aerospace analyst at Teal Group.

“A former Boeing executive once told me they’ve always been the designated hostage in any China stand-off,” he said. “It’s sort of bizarre that it’s been a couple years of galloping trade and geopolitical tensions, and it’s now showing up as an area of risk. Yeah, you think?”

Boeing reported lower first-quarter revenue than a year ago, when it was in the midst of the 737 Max crisis, hurt by delays in 787 deliveries and a global pandemic that continues to depress airlines’ demand for planes.

Revenue fell 10 per cent to $15.2bn in the first quarter, and the company reported a net loss of $561m. Its loss shrank slightly from the $641m net loss it posted for the same period a year ago.

Calhoun said: “While the global pandemic continues to challenge the overall market environment, we view 2021 as a key inflection point for our industry as vaccine distribution accelerates, and we work together across government and industry to help enable a robust recovery.”

The flow of cash out of the door has slowed. The company reported free cash outflow — operating cash minus capital expenditures — of $3.7bn for the quarter, compared with an outflow of $4.7bn a year ago.

Boeing also reported a $318m charge related to its contract for the Air Force One programme, which builds jets for the US president. The company earlier this month said it cancelled its contract with supplier GDC Technics, which installs aircraft interiors, after it failed “to meet contractual obligations”. GDC Technics filed for Chapter 11 bankruptcy on Monday.

Boeing resumed deliveries of its wide-body 787 planes last month after quality problems caused months of delays, which hurt first-quarter results. The jet maker is dropping the production rate to five per month from six as demand for wide-bodies remains low. They are used mostly on long-haul international routes, which the aviation industry expects will have the slowest recovery in air traffic.

Boeing continues to struggle from the nearly two-year grounding of its workhorse jet, the 737 Max, following a pair of crashes that killed a combined 346 people. On April 9 it said it had alerted customers to an electrical problem with the planes. The US Federal Aviation Administration later said 106 planes were grounded while the company worked on a fix.

“We are finalising the plans and documentation with the FAA to outline the process required for operators to return their airplanes to service,” Calhoun said in a memo to employees. “Upon approval by the FAA, we expect the work to take a few days per airplane.”

While it was “marginally encouraging” that Boeing reported a net rise in orders in March for the second month in a row, the 29 aircraft deliveries last month were “lacklustre”, Cowen analyst Cai von Rumohr said in a note.

The Chicago-based company reported a record $12bn net loss in 2020, and is saddled with long-term debt of nearly $58bn. It turned to the debt markets a year ago for $25bn to ride out the pandemic as airlines deferred deliveries because of plummeting passenger numbers and revenue.

Many, though not all, airline executives have predicted a recovery in aviation fuelled by pent-up demand for air travel. 

The company’s board last week said Boeing would raise the retirement age for the chief executive from 65 to 70, allowing Calhoun, 64, to stay in his role. Smith, a three-decade veteran of Boeing who was seen as a potential contender for the top job, said he would retire in July.