Boeing Takes $4.9 Billion Charge As 737 Max Fiasco Drags On, Stock Jumps

In a long-overdue step that suggests Boeing is eager to put the 737 MAX debacle behind it, the Seattle airplane company announced it would take a $4.9 billion charge in Q2 related to the grounding of the 737 Max aircraft, which represents that troubled aircraft maker’s first estimate of the cost of compensating airlines for schedule disruptions and delays in aircraft deliveries. The charge will result in a $5.6 billion hit to pre-tax earnings when the company reports earnings on July 24, the company said in a statement issued on Thursday.

There is just one problem: there is no assurance Boeing's 737 MAX woes will end in Q2, with media reports suggesting the grounding of the jet may last into 2020. That scenario is not being contemplated by the world’s largest commercial aircraft manufacturer, which said it assumes regulatory approval will be granted for the Max to return to global skies in the fourth quarter of this year.

"This assumption reflects the company’s best estimate at this time, but actual timing of return to service could differ from this estimate," the company said.

To address the possibility of an extended grounding, Boeing said that although the charge equal to $8.74 per share, would be taken in the second quarter, the company said it expects “potential concessions or other considerations” would come “over a number of years”. As the FT notes, "concessions in such circumstances often take the form of price cuts on aircraft orders rather than cash payments."

More importantly, and the reason why the company finds itself in this spot, Boeing said it is raising its estimated costs to produce the aircraft by $1.7bn in the second quarter, primarily due to higher costs associated with a reduced production rate (and hopefully with safety equipment that is sold as standard instead of options). While Boeing cut production to 42 per month in April from 52 per month, and is parking the grounded plane in car-lots...

... Boeing said it expects to ramp up to 57 a month in 2020.

Addressing Boeing's shareholders, CEO Dennis Muilenburg said that “we remain focused on safely returning the 737 Max to service. This is a defining moment for Boeing."

Boeing chief financial officer Greg Smith added: “We are taking appropriate steps to manage our liquidity and increase our balance sheet flexibility the best way possible as we are working through these challenges. Our multiyear efforts on disciplined cash management and maintaining a strong balance sheet, in addition to our strong and broad portfolio offerings, are helping us navigate the current environment.”

Boeing suspended financial guidance after the grounding and said it will issue new guidance in future, but for now investors liked the fact that over half a billion dollars would be paid out, sending Boeing stock higher after hours.