5 Hurdles To Solving Boeing’s Cash Problem

Boeing suffers from the self-inflicted wounds that grounded the 737 MAX and the COVID-19-induced near shut down of the airline industry.

Does Boeing have enough cash to withstand the hardship ahead? Despite speculation — on various borrowing alternatives and reports of a possible dismissal of 10% of its employees — nobody really knows.

In response to an April 10 request for comment on its cash position and the charges it would take were it to dismiss 10% of its staff, a Boeing spokesperson said, “We have no comment at this time.” (I have no financial interest in the securities mentioned in this post).

Last month, CEO David Calhoun was optimistic, telling Fox Business, “I think we’re going to weather this [storm] and weather it well.” He also said that he had no interest in giving up an equity stake in Boeing in exchange for the $17 billion fund slated 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 most in “decades,” according to CNBC. Boeing said it was adjusting production in response to customers’ financial pressures.

Can Boeing raise the cash it needs to survive? Analysts told the Wall Street Journal that they estimate Boeing needs another $20 billion. After suffering a $190 billion loss in stock market capitalization since the beginning of 2020, selling more stock to the public could be tough.

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

To survive the storm to which Calhoun referred, Boeing must grapple with five challenges.

Will Boeing’s First Quarter 2020 Report Beat Expectations?

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

One analyst expects Boeing to report a drop in revenue and significant losses. In an April 13 interview, Ron Epstein, Managing Director of Aerospace & Defense at Bank of America Securities, said he expects Boeing to report revenue of $21.5 billion (down 6.5% from 2019’s first quarter), 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 surveyed by Zacks Investment Research — whose consensus loss per share forecast for the quarter is ($1.78).

Were Boeing to report better than expected results and offer positive guidance, I would expect its stock to rebound — which could make selling more equity a more attractive option for Boeing.

How Long will It Take Boeing To Burn Through Its Current Cash Position?

The answer depends on how much cash Boeing has, how much it is burning through each month, and how much more cash Boeing can raise.

We will have to wait until April 22 to learn how much cash Boeing has. Epstein estimates that Boeing will report $14 billion in cash for the end of March and that it burned through $6 billion in cash during the quarter (which includes $500 million in capital expenditures).

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

How long would this $14 billion last? It depends on its cash burn rate and whether it can borrow more money.

There is no consensus on how much cash Boeing will burn each month. Epstein estimates the number at $2 billion to $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 portion of that is fixed cost and supplier costs hence if Boeing cuts production rates the payment to suppliers may fall.”

If these estimates are accurate, without raising more cash, Boeing will burn through that $14 billion in another three to seven months — depending on whether the $4.3 billion or $2 billion monthly burn rate estimates are correct.

Of course, there are ways Boeing can lower its monthly burn rate.

Can Boeing Cut Its Workforce 10% And Still Receive $17 Billion in Government Funds?

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

How much cash would Boeing have to pay out in severance were it to part ways with 16,100 of its workers? Epstein estimated somewhere between $800 million and $1.6 billion — based on assumptions he stated below.

As he said, “If Boeing offers voluntary early retirement to 10% of its workforce, I assume that it’s most likely that the most highly tenured would take it — as they are closest to retirement. I [assume these employees] get an average of about $100,000 per year and...receive [between] one and two weeks of severance pay per year of service and that they served an average of 30 years. [That works out to] six to 12 months of severance pay or $50,000 to $100,000 per individual. If you multiply that over 16,100 employees, [you] get $800 million to $1.6 billion.”

Boeing could find a way to raise money from the government. Epstein thinks it might be possible for Boeing to be able to get the Cares Act funds if the layoffs are voluntary. Also he notes that while Calhoun said he did not want to give the government equity in Boeing, he might accept granting warrants.

We will have to wait to see whether Boeing actually moves 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 responded well to recent developments at Boeing.

Its five year credit default swap premium has soared 495% in the last month. Its CDS premium rose from 79 at the beginning of March 2020 to as high as 640 on March 23. From there it tumbled and ended April 6 at 470, according to AssetMacro.

Meanwhile, Boeing’s credit rating is getting worse. S&P “downgraded Boeing’s credit rating by two notches on March 17, to BBB from AA-, leaving it just two notches above junk. The analysts also left Boeing’s rating on watch for more downgrades in the event its cash flow doesn’t improve. The analysts now expect Boeing to burn $11 billion to $12 billion of cash this year,” according to Barron’s.

How Long Before Boeing Can Generate Positive Cash Flow From Operations?

Debt markets would be more optimistic were Boeing able to demonstrate a path to positive cash flow from operations.

Sadly there is little certainty about when that would happen. Epstein notes that it could be a long time until the airline industry needs to order new aircraft — traffic is down 96%. “The number of people traveling through TSA each day should be 2.4 million, today it was 90,000. There is a lack of clarity about what things will look like nine months from now. There is too much uncertainty: How many months before the economy recovers? What will be the impact on travel? How will that affect the airline industry? What will happen to jet sales?,” he said.

On the other hand, he thinks that the government will not let Boeing fail. “I can’t believe the government won’t help them. Boeing is one of the largest aircraft companies in the world. This will pass. There is value there. How long does the bridge have to be between here and there? While Boeing has a cash generating defense business, there are 400 737 MAXs which the airlines ordered and were delivered and 400 that Boeing has made that have not been shipped. That makes things harder.”

Another analyst, Richard Aboulafia, VP of Teal Group, gives Boeing a year or two if it takes tough measures. According to his March 2020 letter, “Nobody wants a jetliner right now. So, let’s consider the economic reality of building jetliners today. If they keep building jets, they’ll keep burning through $5 billion or so each month, and with a non-functioning market, nobody will give them money for those jets.”

Boeing must shut down to preserve cash. As he wrote, “For Boeing to survive, all they need to do is stop building jets, close their factories, lay off most of their workers, and stop ordering stuff from their suppliers, who will also lay off most of their workers (where most of the jobs are in the industry) and close their factories too. Boeing can then coast for a year (or two), and then worry about high line re-start costs. Meantime, there’d be scores of plant closings and tens or hundreds of thousands of layoffs.”

Boeing does not seem poised to do this, so those bankers better get results fast.