5 obstacles to solving Boeing’s cash flow problem


Boeing is suffering from the self-inflicted injuries that brought the 737 MAX to a standstill and the airline industry’s virtual shutdown caused by COVID-19.

Does Boeing have enough money to deal with the difficulties ahead? Despite speculation – on various borrowing alternatives and reports of a possible layoff of 10% of its employees – no one really knows.

Responding to an April 10 request for comment on its cash flow situation and the fees it would require if it were to lay off 10% of its staff, a Boeing spokesperson said: “We have no comments for the moment”. (I have no financial interest in the securities mentioned in this article).

CEO David Calhoun was optimistic last month, saying Business fox, “I think we will overcome this [storm] and resist well. He also said he had no interest in selling a stake in Boeing in exchange for the $ 17 billion fund provided for the company in the Cares Act.

Boeing’s need for cash was highlighted by the April 14 report that Boeing customers canceled 150 737 MAX orders in March – the highest number in “decades,” according to CNBC. Boeing said it was adjusting production in response to financial pressures from customers.

Can Boeing muster the cash it needs to survive? Analysts said to the Wall Street newspaper that they estimate that Boeing needs an additional $ 20 billion. After suffering a $ 190 billion loss in market capitalization since the start of 2020, selling more shares to the public could be difficult.

Boeing hired Lazard and Evercore according to the Journal. I guess the reason is to help Boeing borrow money on affordable terms.

To survive the storm Calhoun referred to, Boeing must overcome five challenges.

Will Boeing’s Q1 2020 report beat expectations?

Boeing is expected to provide investors with its first quarter 2020 report on 22 april.

An analyst expects Boeing to report declining revenues and significant losses. In an April 13 interview, Ron Epstein, general manager of aerospace and defense at Bank of America Securities, said he expects Boeing to report $ 21.5 billion in revenue. dollars (down 6.5% from First quarter 2019), an adjusted net loss per share of ($ 1.22) – vs. Q1 2019 Non-GAAP EPS of $ 3.16; and a GAAP net loss per share of ($ 0.79) compared to Q1 2019 EPS of $ 3.75.

Epstein is more optimistic than five analysts polled by Zacks investment research – whose loss per consensual share is expected for the quarter ($ 1.78).

If Boeing reported better-than-expected results and offered positive guidance, I would expect its stock to rebound, which could make selling more stocks a more attractive option for Boeing.

How long will it take Boeing to use up its current cash flow?

The answer depends on how much money Boeing has, how much it burns each month, and how much more Boeing can raise.

It will be necessary to wait until April 22 to know how much cash Boeing has. Epstein estimates that Boeing will report $ 14 billion in cash by the end of March and that it spent $ 6 billion in cash during the quarter (which includes $ 500 million in capital spending).

To get to the $ 14 billion, Epstein started with Boeing’s $ 10 billion in cash at the end of December, and added $ 13 billion to Boeing’s withdrawal from its term loans. He then subtracted $ 3 billion for dividends paid by Boeing and an additional $ 6 billion in cash burned from operations.

How long would that $ 14 billion last? It depends on its rate of cash consumption and its ability to borrow more money.

There is no consensus on how much money Boeing will spend each month. Epstein estimates the number at $ 2-3 billion per month. Jefferies analyst Sheila Kahyaoglu said in an April 10 email that Boeing’s monthly burn rate is “$ 4.3 billion. However, a large part of this amount is fixed costs and supplier costs. Therefore, if Boeing cuts production rates, payment to suppliers may go down. “

If those estimates are correct, without raising more money, Boeing will spend that $ 14 billion in another three to seven months, depending on whether the monthly burn rate estimate of $ 4.3 billion or $ 2 billion is. correct.

Of course, there are ways for Boeing to reduce its monthly burn rate.

Can Boeing reduce its workforce by 10% while receiving $ 17 billion in public funds?

Boeing is considering the possibility of cutting 10% of its 161,000 employees, according to the the Wall Street newspaper. Such layoffs could jeopardize Boeing’s access to the $ 17 billion Cares Act because “The conditions of part of the aid would oblige some loan recipients to maintain at least 90% of their workforce until September 30,” according to the Journal.

How much money would Boeing have to pay in severance pay if it were to part with 16,100 of its employees? Epstein estimated somewhere between $ 800 million and $ 1.6 billion – based on the assumptions he set out below.

As he put it, “If Boeing offers voluntary early retirement to 10% of its workforce, I guess it is highly likely that the most incumbents would take it, because they are the closest to retirement. I [assume these employees] get an average of about $ 100,000 per year and … get [between] one and two weeks of severance pay per year of service and they have served an average of 30 years. [That works out to] six to 12 months severance pay or $ 50,000 to $ 100,000 per person. If you multiply that over 16,100 employees, [you] get between $ 800 and $ 1.6 billion.

Boeing could find a way to raise money from the government. Epstein believes it might be possible that Boeing could get the Cares Act funds if the layoffs are voluntary. He also notes that while Calhoun has said he does not want to give the government equity in Boeing, he could agree to grant warrants.

We’ll have to wait and see if Boeing actually goes ahead with such layoffs and, if so, what severance package it offers.

Will credit markets become more optimistic about Boeing’s ability to repay its debts?

The credit market has not reacted well to recent developments at Boeing.

Its five-year credit default swap premium climbed 495% last month. Its CDS premium went from 79 at the beginning of March 2020 to 640 on March 23. From there it dropped and ended on April 6 at 470, according to AssetMacro.

Meanwhile, Boeing’s credit rating is deteriorating. S&P “downgraded Boeing’s credit rating two notches on March 17, from AA- to BBB, leaving it just two notches above junk. Analysts have also left Boeing’s rating on watch for further downgrades in case its cash flow does not improve. Analysts now expect Boeing to burn $ 11 billion to $ 12 billion in cash this year, “according to Barron.

How long before Boeing can generate positive cash flow from its operations?

Debt markets would be more bullish if Boeing were able to show a path to positive operating cash flow.

Unfortunately, there is little certainty on when this would happen. Epstein notes that it could be a long time before the airline industry needs to order new planes – traffic is down 96%. “The number of people who go through ASD each day is expected to be 2.4 million; it is now 90,000. There is a lack of clarity on what things will look like nine months from now. There are too many uncertainties: how many months before the economy recovers? What will be the impact on travel? How will this affect the airline industry? What will happen to aircraft sales? “, did he declare.

On the other hand, he believes the government will not let Boeing fail. “I can’t believe the government won’t help them. Boeing is one of the largest aviation companies in the world. This will pass. There is value there. How long must the bridge be between here and there? While Boeing has a cash-generating defense business, there are 400 737 MAXs that airlines have ordered and delivered and 400 that Boeing made that have not been shipped. It makes things more difficult.

Another analyst, Richard Aboulafia, vice president of Teal Group, gives Boeing a year or two if it takes tough action. According to his March 2020 letter, No one wants an airliner right now. So consider the economic reality of building airliners today. If they keep building jets, they’ll continue to spend around $ 5 billion every month, and with a market that’s not working, no one is going to give them money for those jets.

Boeing must close its doors to preserve its liquidity. As he wrote: “For Boeing to survive, they just have to stop building jets, shut down factories, lay off most of their employees, and stop ordering products from their suppliers, who will also lay off most of their employees (where most of the jobs are in industry) and also close their factories. Boeing can then coast for a year (or two) and then worry about the high costs of restarting the line. In the meantime, there would be dozens of factory closures and tens or hundreds of thousands of layoffs. “

Boeing doesn’t seem ready to do it, so these bankers had better get results quickly.

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