Boeing's restart in survival mode

The news came on Monday: Norwegian Air's important Danish and Swedish subsidiaries which employ cabin crews and pilots have filed for bankruptcy. One of Europe's major low-cost airlines, Norwegian has long been earmarked as a possible case of an airline that could go bust soon, all the more so since the COVID-19 crisis took hold.

Aviation is a global industry, so this news had a ripple effect over 7,000 kilometers away in Seattle on the west coast of the US, bringing worries to the world's biggest aircraft manufacturer Boeing. Norwegian Air is an important Boeing customer. There are currently 92 non-delivered orders for 737 MAXs, as well as two 787 Dreamliner aircraft waiting at the Everett factory to be ferried to Scandinavia.

A third rests partially finished on the assembly line, which was shut down until Monday due to the spread of the coronavirus since March 25. The first of 27,000 Boeing employees were expected back on their jobs for the late shift on Monday. In the Renton factory they are being put to work to prepare for restarting 737 MAX production, which had already been stopped back in January due to the grounding of this aircraft type since March 2019.

A total of 422 MAX jets had been assembled but remained undelivered due to the flight ban. They had to be distributed to various storage areas in the Western US under growing logistical pains. The future of the 737 MAX program and the airplanes already produced is now more uncertain than ever. In March, leasing company Avolon canceled orders for 150 aircraft, Boeing itself removed 139 unsubstantiated orders from the books and only last weekend, leasing company Gecas canceled a further 69 MAX orders.

Struggling on all fronts

Meanwhile, assembly lines for the models 747, 767 and 777 took up full production on Tuesday. Lines for the 787 Dreamliner in Everett will be reopened on Thursday and are supposed to run at full capacity by the end of the week, while Boeing is promising its workforce, fearful of the coronavirus, full protection measures.

Just how desperate the situation currently is in Seattle was illustrated in a Financial Times report on Monday. In late March Boeing was supposed to hand over a new 787-10 to one of its most important customers in the Middle East. According to DW research, this is very likely to be Etihad of Abu Dhabi. The airline, according to the paper, told Boeing that the deal would collapse if they didn't lower the price further, already discounted at 55% below the list price of US$338 million.

Usually an airline would have serious second thoughts before canceling an order at such short notice, as this would lead to painful penalties and forfeiting of deposits. At an agreed price of US$150 million, this could easily result in a write-off in the region of US$100 million. Not so in this case, which stands as an apparent example of the currently dire situation at Boeing and Airbus, where the majority of airline customers are fighting for survival.

Boeing reportedly accepted a further price reduction of 15%, preferring to have the aircraft delivered instead of haggling back and forth for a few million dollars more or less. Aircraft manufacturers are standing with their backs to the wall. Within a few weeks, their order books, having been at record levels after a decade of boom with deals worth over $1 trillion US dollars (€919 billion), have now been thrown into uncertain disarray, likely to continue for years.

Boeing's situation is especially precarious. "Their survival is threatened now and they need to take dramatic action," says Adam Pilarski, senior vice president of Californian consultancy Avitas. Boeing's commercial arm alone is currently burning about US$4 billion a month, just to keep itself and some major suppliers going.

Changed times

Despite having raked in record profits only recently — fired Boeing CEO Dennis Muilenburg was accused of putting shareholder value above safety in the MAX crisis — Boeing ended 2019 with US$27 billion in debt, doubling the level from the previous year.

Up until mid-March, Boeing had used up a new credit line of US$14 billion. On top of that is the huge burden caused by the MAX crisis, which recently added up to US$18.7 billion in costs. There aren't many options to explore for Boeing without a guarantee from the government," says US consultancy AeroAnalysis. According to their sources, Boeing has $15 billion in cash and a $9.6 billion revolving credit facility it can use.

"But that will only sustain the company for a matter of months if the current cash burn continues," the analysts warn. Even though Boeing's CEO David Calhoun is against accepting federal support if any strings are attached to it, the manufacturer is simply too important for the US economy to be allowed to fail. Boeing's production single-handedly equals around 1% of US GDP.

Uncertain future

This week, Boeing is expected to announce the eagerly awaited new production rates. There is talk of halving previous rates. Currently, 62% of the global Boeing fleet is grounded. Analysts expect that only 6,300 new aircraft will be needed in the coming five years, down from 8,300 predicted before, as air traffic will drop considerably.

"Most of all Boeing, but also Airbus, have to use the time wisely until traffic will probably bounce back by 2023 to work hard on revolutionary new aircraft, which are both more environmentally friendly and faster than today, " says Adam Pilarski.

Boeing is currently at a dead end with the MAX and lacks any compelling narrowbody aircraft offering. Airbus, on the contrary, has done well with its A321neoLR, which is capable of flying shorter intercontinental routes even as a smaller single-aisle aircraft.

Also the newest model A220 is expected to be given more range to win orders in this lucrative segment as well. "This offers the least risky option for airlines and is clearly the best way to go," says Pilarski. It will come at the expense of expensive widebody aircraft and will affect Boeing much harder, as it will soon offer the world's biggest passenger aircraft after the end of the A380, the new 777X, which has been ordered by Lufthansa.

Cathay Pacific from Hong Kong, which has ordered 21, has reportedly already decided internally not to take up the 777X. There have even been rumors that the whole program might be scrapped, but experts don't think that's very likely. In any case: "In the next 12 months, for Boeing it's all about survival," says Pilarski.