(Bloomberg Opinion) — It would be hard for things to get much worse in commercial aerospace, an industry hit particularly hard by the global Covid-19 pandemic. Sober tones and a slew of writedowns out of industry stalwarts Boeing Co. and General Electric Co. provided more evidence of just how dour the outlook is from here.
Second-quarter results from the two companies on Wednesday were predictably bleak for a period that included the worst of the coronavirus slump in air travel and a rush to ground unneeded planes, retire older models and cancel orders for new ones. The best that could be said is that the nearly $8 billion in cash that Boeing and GE burned through collectively in the quarter wasn’t quite as terrible as analysts had feared. GE at least indicated it expected a sequential improvement in overall company cash flow in the second half of the year, with a return to positive numbers by 2021.
Given CEO Larry Culp’s tendency to set a low bar, the company’s usual back-end-weighted seasonality and the likelihood of some moderation in the pressures facing the aviation business as cost cuts take effect and planes come back into service, there’s at least a possibility that GE could end up with a moderately positive number this year — although Culp was reluctant to commit to that when pestered repeatedly by analysts on the earnings call. Boeing, too, may find a path to positive cash flow in 2021, Chief Financial Officer Greg Smith said on the earnings call, but there’s little hope of redemption on that front this year. Both companies are bracing for a lower-growth future.
Boeing announced fresh cuts to production plans it had already dialed back in April to reflect weaker demand for both its grounded 737 Max and the wide-body 787 and 777 models that are typically used for longer-haul, international flights. In an email to employees, Boeing CEO Dave Calhoun warned that the company was studying the feasibility of consolidating 787 production in one facility, given the lower rate. A plan to ramp up production of the Max to 31 planes a month by the beginning of 2022 — versus an earlier target of 2021 — may still be too optimistic, writes Vertical Research Partners analyst Rob Stallard. While U.S. regulators have signaled they may finally be ready to lift a grounding order by early in the fourth quarter, Boeing still has roughly 450 undelivered Max planes sitting in storage. Delivering those to airline customers who aren’t at all interested in adding to their fleets right now will be a challenge. “I don’t know why we would” take delivery of a Max jet this year, Gary Kelly, CEO of the plane’s largest operator, Southwest Airlines Co., said in an interview with Bloomberg News last week. Calhoun estimates it will take about three years for passenger traffic to recover to 2019 levels.
The production cuts, of course, are also bad news for GE, which makes the engines for the Max, the 787 and the yet-to-be-approved 777X. “This will be a multi-year recovery, given the dynamics on the existing fleet and new deliveries going forward,” Culp of GE said in a phone interview. Asked why he hadn’t followed Boeing and fellow aerospace suppliers Raytheon Technologies Corp. and Honeywell International Inc. in putting a specific time frame on getting the aerospace market back to last year’s levels, he said he didn’t take issue with forecasts for a recovery by 2023 to 2024, but cautioned that there’s “a level of false precision in that.” On a call with analysts, he flagged some early signs of improvement — particularly in China, where plane departures were trending down only 9% year over year in late July, compared with earlier slumps of more than 70%. But the coronavirus creates a hosts of unknowns. “As we work through all of this, we’re mindful that the fall is going to be really important,” Culp said in the interview. “What happens with cases? How do governments respond? How does the public respond, let alone the flying public? Operationally, we have a conservative posture.”
Unlike Boeing — which signaled on Wednesday that it would likely need to cut more than the roughly 16,000 jobs it has already announced it was eliminating — Culp said it would be premature to look at an expansion of GE’s plans to reduce its aviation division’s headcount by 25%.
A plethora of charges gummed up the numbers at both companies. Ranging from acquisition writedowns to asset impairments, severance expenses and ongoing headaches related to the Max, these charges are a testament to the severe rethink of growth expectations in what had been a high-flying industry. Most notable at Boeing was a $923 million charge in its services arm related to severance expenses and an impaired view of certain assets due to the coronavirus. Calhoun appeared to walk back his predecessor’s goal of building a services business with $50 billion in revenue in an interview with Aviation Week earlier this month. He cited a need for “transparency and support” for the supply chain and a preference for airlines to buy newer, more efficient jets rather than tap Boeing for services so they can keep flying old ones. The push into lucrative maintenance and spare-parts work by previous CEO Dennis Muilenburg had ruffled the feathers of suppliers who were simultaneously being pushed to drastically cut costs. Taken together, the charge and the comments suggest Boeing is planning for a future where there’s less of this kind of aircraft spending to go around.
On a similar note, GE took a $608 million charge in the second quarter related to its aerospace long-term service agreements to reflect updated billing and cost assumptions, including lower expectations for aircraft utilization. GE also took a roughly $900 million goodwill writedown related to its 2016 purchases of 3D-printing companies Arcam and Concept Laser as the growth expectations that underwrote those pricey takeovers got pushed out with the slump in aviation. It’s also writing down $839 million of goodwill in its GECAS aircraft lessor arm, with the bulk of that related to the $1.8 billion takeover of helicopter leasing company Milestone Aviation of 2015. Analysts had warned that business might be subject to writedowns since late 2018 when rival Waypoint Leasing Holdings Ltd. filed for bankruptcy.
For Boeing and GE — two companies still trying to right themselves from major setbacks that predate the pandemic — the Covid reckoning has been a bruiser. And the pain will continue for the foreseeable future.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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