Boeing Faces Troubled Future Amid Mounting CancellationsBy Alicia Arizpe | Thu, 07/02/2020 - 12:56
Aerospace giants continue to grapple with the effects of the COVID-19 crisis. As new orders dry up and cancellations rise, OEMs are struggling to adapt to a world that suddenly needs much fewer aircraft that predicted. Boeing, which had been plagued by cancellations since 2019, suffered its biggest blow to date as Norwegian cancels an order for almost 100 new aircraft.
After years of sustained growth and positive predictions, the aerospace industry took a sudden plunge as the COVID-19 outbreak paralyzed global aviation. Border closures and shelter-in-place policies dried demand for air travel and took aviation into its worst crisis in history. Airlines, which a few months earlier were buying and leasing more aircraft to attend growing demand, suddenly found themselves with most of their aircraft grounded for the foreseeable future and in a poor position to receive the ones they had ordered in greener times. The situation led to unprecedented order cancellations.
Boeing, which had been grappling with the crisis caused by the crash of two 737 Max that killed 346 people, has found itself in a much worse position with the spread of COVID-19. The crashes led to global groundings of what was once Boeing’s fastest selling aircraft. While initially the company was certain that a return to the skies would occur sharply, the aircraft has been grounded for over a year with no clear sign as to when it will be back in service. Altogether, Boeing closed 2019 with 87 negative orders, marking the first year in three decades that the company had more cancellations than orders. 2020 would only prove to be worse
The OEM began 2020 with a strong 5,049-unit backlog, which included 4,079 orders for the 737 Max. But the COVID-19 crisis quickly brought numerous cancellations. Just in March, Boeing had 150 cancellations for the 737 Max, which would only continue to add up. Boeing reports that during the first five months of the year it accumulated a total of 602 negative net orders, as those of the troubled 737 added to those of the 747 and 777 to surpass the few orders for new 767s and 787s. "The COVID-19 pandemic is affecting every aspect of our business, including airline customer demand, production continuity and supply chain stability," said David Calhoun, President and CEO of Boeing.
On June 30, Boeing took its worst blow to date as Norwegian Air Shuttle made the largest cancellation by an individual client. The cancellation includes 92 737 Max and five 787 Dreamliners. Moreover, the airline announced that it would take legal action against Boeing to seek the return of pre-delivery payments for the pending aircraft and compensation for the financial losses caused by grounding of Norwegian’s 18 Boeing 737 Max. Boeing had previously agreed to pay compensation to some airlines hurt by the 737 Max grounding. Earlier this year it made a US$428 million payment to Southwest Airlines and had reached agreements with other airlines for varying amounts, including Turkish Airlines, American Airlines and Aeroméxico. The Mexican airline had not reported cancellations to date but it filed for bankruptcy protection in June 30. Aeroméxico’s fleet includes six 737 Max which have been grounded since March 2019 and the airline has pending orders for nine more.
This significant dry up in demand led Boeing to cut down production of the 737 Max as early as January 2020. Later on, the OEM had to reevaluate its production at several different sites. In April, it announced the cancellation of a plant in North Charleston and announced plans to cut down its workforce by 10 percent, which would translate to cutting down 16,000 jobs. It also lowered its production plans and asked suppliers to dial back deliveries.
Boeing also cancelled the acquisition of Embraer’s commercial jet division. While Boeing claimed that the acquisition was cancelled due to Embraer’s failure to comply with the necessary conditions to continue the deal, the Brazilian planemaker assured that it had fully complied with the terms and blamed Boeing’s financial problems caused by the 737 Max crisis for the company’s decision to back out of the deal. Embraer also entered an arbitration process against Boeing on April 27.
These issues have led to significant financial woes for the OEM. During its 1Q20 report, Boeing reported a 26 percent loss in revenue in comparison to the previous year due to the COVID-19 outbreak and the 737 Max crisis. The OEM saw a total revenue of US$16.9 billion for that quarter but its debt rose to US$38.9 billion, from the US$27.3 billion it started the year with. As the COVID-19 pandemic continues unabated, the company might find recovery to be far off. “Demand for commercial airline travel has fallen off a cliff, with US passenger volumes down more than 95 percent compared to last year,” said Calhoun.
Poor air traffic will only extend the planemaker’s troubles. The International Civil Aviation Organization (ICAO) warned that 1.5 billion people less are expected to travel during 2020, while the International Air Transport Association (IATA) warns that the industry might not see a recovery from the COVID-19 outbreak until 2021.These circumstances might worsen Boeing’s situation. “As the pandemic continues to reduce airline passenger traffic, Boeing sees significant impact on the demand for new commercial airplanes and services, with airlines delaying purchases for new jets, slowing delivery schedules and deferring elective maintenance,” indicated Boeing in its 1Q20 report.