The Boeing 737 MAX Bailout (NYSE: BA)

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In a previous report, I looked at the Boeing (NYSE: BA) bailout and found it inappropriate for Boeing to seek government assistance to support the aerospace manufacturing industry while maintaining the payment and dividends from the CEO. I do not know if they read the report at Boeing headquarters or if Boeing was suddenly willing to take appropriate action, but a few hours after its publication, the payment of the CEO and the payment of the dividend were suspended.

Source: Icelandair

I currently note that Boeing’s request is placed in a context that includes only the Boeing 737 MAX. This is not a complete picture in my opinion as I think the Boeing 737 MAX has considerably weakened the Boeing, but the most urgent question is COVID-19, which affects not only Boeing but companies in various sectors. In this report, I want to know if you can connect the Boeing 737 MAX crisis to the 60 billion dollars requested by Boeing. I will do so taking into account responsibilities, pre-delivery payments and what Boeing may have to reimburse if the Boeing 737 MAX never flies again. I will also consider the other scenario, the one in which the Boeing 737 MAX will fly again. None of these scenarios considers COVID-19.

Over the past few weeks, I’ve observed that many people have a hard time differentiating between different scenarios because a lot is happening at the same time. In this report, we will review Boeing’s initial plan (and provide our cost estimate thereon) and see what the costs would be, and consider a scenario in which the MAX will no longer fly. It is important to realize that I am giving an overview of various components, and you will see cost estimates. As deadlines change, projections are, of course, also subject to change. The goal is to figure out where the $ 60 billion that Boeing asked for for the aerospace manufacturing industry would fit. In a future report, I will develop the analysis and put the Boeing 737 MAX crisis in combination with the COVID-19 crisis and see what unfolds.

I would also like to take a moment to point out again (as some readers seem to miss this point even when mentioned) that the Boeing 737 MAX crisis is at a point beyond an MCAS fix. This fix was ready in mid-2019, but since then regulators and Boeing have done a thorough review of the Boeing 737 MAX design and human-machine interactions, which has pushed the point of return even further.

The costs: the Boeing 737 MAX flies

Liabilities of the Boeing 737 MAX

The first part of the equation is the liabilities of the Boeing 737 MAX. Previously, I had made projections that included the positive impacts of low oil prices and COVID-19 on the liability count, but the negative impacts on production acceleration patterns. If we remove these benefits for an 18-month earthing, we reach $ 9.5 billion in costs and an additional $ 7 billion if we assume higher compensation models. Of this $ 16.5 billion, $ 1.4 billion in compensation has already been paid. This explains the first 3 bars of the waterfall graph.

Payment of short-term debt and interest from Boeing

The next part is about Boeing’s borrowings, and that’s obviously what caused the company problems with another crisis hitting many industries; Boeing borrowed $ 25.4 billion in 2019 and fully used its $ 13.8 billion credit facility. Of the $ 25.4 billion, $ 12.2 billion was used to repay the debt. The current portion of Boeing’s long-term and short-term debt is $ 7.3 billion. While many companies are now using their lines of credit, Boeing has done so already in the past year, which is by no means a positive indication. I also modeled in Boeing using its $ 9.6 billion revolving credit facility, of which $ 3.2 billion is due by the end of October 2020, although Boeing has the option to extend the terms of one year termination.

I estimated that Boeing would pay approximately $ 800-950 million in interest on its debt at the end of 2019 and high fees of $ 1 billion on their $ 13.8 billion deferred withdrawal agreement as well as significant fees on line of credit agreements.

Financial commitments and accrued liabilities

Accrued liabilities have increased in recent years. If we fully attribute the increase in 2019 to the Boeing 737 MAX, we get $ 2.6 billion plus $ 5.6 billion in customer financing commitments. Boeing also plans to make $ 621 million in contributions to pensions and other post-retirement requirements, although I believe this will come from the sale of shares, so this part has not been modeled.

Additions to property, plant and equipment

Last year, Boeing added $ 1.8 billion in property, plant and equipment compared to $ 1.7 billion a year earlier, with a multi-year figure of $ 1.77 billion that we used in this analysis . Boeing will probably seek to lower its silhouette.

Costs of the Boeing 737 MAX, Embraer and dividend

The last three cost elements would be $ 4 billion in costs to restart production of the Boeing 737 MAX, which would materialize in 2020 and 2021, but we loaded it upstream. Boeing had previously approved a dividend of $ 1.16 billion and $ 4.2 billion would be required for the joint venture between Boeing and Embraer (NYSE: ERJ).

Collect money

If we add it all up, we come up with an astonishing $ 47.8 billion that Boeing has to raise somewhere. So where would the money come from in a normal year? An extremely small sum would come from some 350 Boeing 737 MAX aircraft that Boeing intended to deliver from storage and the production line, generating approximately $ 1.6 billion in cash. Cash flow from other commercial aircraft programs is estimated to be approximately $ 5.2 billion. Boeing Defense, Space and Security has an optimistic revenue estimate of $ 26.5 billion, while we have taken $ 18.5 billion for Boeing Global Services, which should translate into operating cash flow of 6, $ 8 billion for these segments. Boeing ended the year with $ 9.5 billion in cash. This would give us a total of $ 23.2 billion, which is $ 16.4 billion less than what would be necessary. However, there remains the $ 13.8 billion drawdown term loan used by Boeing and the $ 9.6 billion revolving credit facility.

In total, this would leave Boeing with a shortage of at least $ 2.4 billion. So Boeing really depends on a combination of borrowing money and high delivery volumes. Thus, the current arrangements and previous plans for 2020 are barely sufficient for Boeing, that is, after it has fully used its drawdown term loan, the credit facility and the liquidity at its disposal.

Now back to the connection issue. Is there a link between the $ 60 billion Boeing requested to support the aerospace manufacturing industry that can be connected to Boeing’s cash needs? If we completely ignored the cash and cash from Boeing that should have come, Boeing would have needed almost $ 50 billion. However, in a “normal 2020”, Boeing should not need $ 60 billion.

The costs: the Boeing 737 MAX no longer flies

One of the hardest things to calculate is probably what Boeing’s costs would be if the Boeing 737 MAX were not re-certified. It’s a tricky calculation, but we know it’s going to be expensive just by considering the compensation that would come into effect for airlines:

  • The pre-delivery payments that Boeing has received are approximately $ 33.4 billion.
  • Boeing contractually delivered 385 aircraft that are currently immobilized. The value of these devices at basic market values ​​would be approximately $ 19.4 billion.
  • The compensation model would be frozen but would remain around $ 16.5 billion.
  • $ 6.8 billion in money would never come again.

I’m going to go into this in a future analysis, but if we add it all up, we will reach $ 76.1 billion. So, in case it is a game for the Boeing 737 MAX, the $ 60 billion aid request would be more than adequate, but it is not a one-on-one match and certainly cannot be the reason why Boeing will be held afloat or ask for help. The pressure point is in the supply chain, which could fail under its load, removing all health from the supply chain, which would be impossible for Boeing when production of the MAX could resume.

Conclusion

In this report, I tried to find out if we could link Boeing’s plan for this year to demand for $ 60 billion, which would tell us if the demand was driven by delays in Boeing 737 MAX. What I have observed is that Boeing is not well placed at all. If 2020 were a year of recovery for Boeing, there would be a relatively small deficit in 2021.

What holds is that in the absence of COVID-19, the calculations for Boeing do not add up, but the company would see a significant recovery in cash flow, which would allow it to more effectively access the debt market. On top of that, Boeing could defer certain debt repayments and could delay the $ 4.2 billion, which at this point makes no sense. So even with the MAX crisis still unresolved, Boeing could do the math by pulling a few levers here and there.

With worries about delivery volumes this year and the collapse of financial markets, the chances of getting into debt on favorable terms or into debt at all have been greatly reduced, which is why Boeing asked for help. government, perhaps in the form of government loans, but preferably in the form of government guaranteed loans.

If we do a rough calculation on the Boeing 737 MAX, assuming that this is indeed the end of the game for the Boeing 737 MAX, then the demand somewhat matches. However, you have to take into account that the $ 60 billion demand is for the entire aerospace manufacturing industry, not just Boeing. With that in mind, I don’t think it is reasonable to assume that Boeing is asking for help to amortize the Boeing 737 MAX, but it is certainly true that Boeing is relying on government assistance or government-supported assistance because the Boeing 737 MAX crisis has eroded the company’s balance sheet.

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Disclosure: I am / we are long BA, EADSF. I wrote this article myself and it expresses my own opinions. I do not receive any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose actions are mentioned in this article.



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