Boeing’s Crisis Management Keeps Falling Short
Jon Sindreu
Boeing’s BA -4.29% latest clash with regulators adds little information about the actual financial risks faced by the company. But it is yet another indictment of how its upper management is handling those risks.
On Monday afternoon, Boeing’s stock dropped more than 3%, based on reports by The Wall Street Journal that the plane maker could suspend or cut production of its 737 MAX jet, which regulators are keeping grounded. Building these planes without selling them is a huge cost for Boeing, which has relied on cash from its 787 Dreamliner and higher debt issuance to keep production rates at 42 a month.
The report has stoked fears that Boeing’s 12,000-employee factory in Renton, Wash., could shut down temporarily. Consequences would be felt across the U.S. economy. Shares of Spirit AeroSystems, which makes the MAX’s fuselage, were down 3% Monday.
For Boeing, cutbacks on production will save cash but damage earnings, given that the company accounts for MAX’s profit margin based on projections of its whole life cycle—and selling fewer of them means fewer profits per unit. Sheila Kahyaoglu, analyst at Jefferies, now calculates an additional 6% damage to earnings-per-share in 2020.
However, it is unlikely that this news caught investors entirely off guard.
Delays in the MAX’s return to service beyond January were always thought to imply production cuts. And given that recertifying the plane has become very politically charged, it has been entirely uncertain when it may be able to fly again. Indeed, carriers such as Southwest Airlines have been rewarded by the market for penciling in conservative assumptions about the MAX’s return.
What should worry investors is that Boeing’s Chief Executive Dennis Muilenburg, who is already under pressure to resign, hasn’t chosen to be conservative as well. In October, he maintained that 2019 recertification was still on track.
Last week, it emerged that this in itself created pushback, leading the Federal Aviation Administration to criticize Boeing for an “unrealistic” schedule that could be “designed to force FAA into taking quicker action.”
Boeing has a great plane catalog and can certainly overcome the MAX fiasco, but
Mr. Muilenburg’s priority after the grounding was to get officials on board by erasing perceptions of a culture of short-termism. This is even more important now that the FAA, whose image also has been tarnished by the MAX’s crashes, is trying hard to get both the public and overseas regulators back on its side.
Somehow, Boeing’s management is failing to take this on board.