Boeing is sharply reducing production of its widebody planes and aims to cut its workforce by 10%, the company said Wednesday as it reported the financial toll of a first quarter in which the collapse in travel from the coronavirus pandemic added to its problems from the prolonged grounding of the 737 MAX.
Boeing will halve the production rate of the 787 Dreamliner to seven a month by 2022, from 14 at present, following a step down to a rate of 10 a month this year. It will reduce output of the 777 and 777X to three per month in 2021 from five, and “take a measured approach” to ramping up production of the 777X, which is expected to enter into service in 2021.
The pandemic is “delivering a body blow to our business,” Boeing CEO David Calhoun said in a message to employees. Calhoun said the 10% cuts to the company’s workforce of 161,000 will come through a combination of the buyouts it announced earlier this month, natural turnover and layoffs “as necessary.” The cuts will be deeper – 15% — across Boeing’s struggling commercial aircraft division, corporate staff and its aftermarket services division, which Calhoun said is seeing dramatically lower demand for parts and upgrades with airlines grounding the majority of their planes and slowing maintenance.
“We will be a smaller company for a while,” Calhoun said on a conference call as he discussed the company’s efforts to adjust to weaker demand. It will take two to three years for travel to return to 2019 levels, he said, and a few years beyond that for the aviation industry to return to its long-term growth trends, which have fundamentals that he insisted remain intact.
The Chicago-based plane maker lost $641 million in the first quarter on a 26% decline in revenue to $16.9 billion compared to the same quarter last year. It burned through $4.7 billion in cash in the quarter — sharply better than analysts’ consensus expectation of a $5.8 billion outflow — amid sharply lower plane deliveries and reported it ended the quarter with $15.5 billion in hand.
With airlines in crisis as travel has ground to a near-halt due to the coronavirus pandemic, Boeing customers have cancelled 225 orders for the 737 MAX so far this year, four for the 787 and one for the 777. The company’s commercial airplane order backlog fell 6.6% in value to $351.8 billion in the quarter.
On a conference call, Calhoun said deferrals of deliveries will be counterbalanced to a degree by a need for new aircraft stemming from an increase in retirements of older aircraft. However, he expects international travel to rebound slower than domestic, slowing its ability to capitalize on that trend with its widebody aircraft.
Boeing plans to resume 737 MAX production at low rates before the end of June, gradually increasing to 31 planes per month in 2021. Calhoun said the company expects to win regulatory approval for the plane to return to service in time to allow for deliveries to resume in the third quarter, in a climb down from a target of approval by midyear that the company stated before the pandemic took hold.
Boeing is depending on its defense and space businesses, which have had a series of high-profile stumbles, to provide the company with steady government income that will help it through the crisis. Revenue in the defense and space division fell 8% in the first quarter to $6 billion as it booked a pretax charge of $827 million for problems with the KC-46A tanker, but the Pentagon has been accelerating contract awards to help defense contractors.
Boeing hiked its estimate of the increase in production costs due to the suspension of 737 MAX production since January by about $800 million to $5 billion. That raises the total financial damage it’s booked from the grounding of the 737 MAX to over $19 billion. The company said it was making no material changes to its estimates of the compensation it will provide to customers related to the 737 MAX grounding.
The numbers are about as ugly as expected, analyst Robert Stallard of Vertical Research Partners wrote in a client note. “We think investors were braced for an EPS loss and free cash outflow in the first quarter, but the chances are that things will get worse before they get better.”
Boeing shares were up 10.3% to $145 in early afternoon trading.
Rival Airbus, which seemed in position to capitalize on Boeing’s travails with the 737 MAX, is now under severe stress as well, reporting a net loss of $520 million for the quarter earlier Wednesday. It said earlier this month it would cut production by roughly 30%.
“We are now in the midst of the gravest crisis the aerospace industry has ever known,” CEO Guillaume Faury said in a statement.
Parts makers face a doubly uncertain outlook, with a slide in revenue from the slowdown in plane production compounded by a drop-off in maintenance work with so much of the global airliner fleet idled.
General Electric reported a 40% drop in profits for its aviation division Wednesday with worse pain ahead: installations of new aircraft engines have declined 45% and slid 60% for spares in the second quarter, it said. It’s aiming for $2 billion in cost cuts.
This article originally appeared on Forbes.
