Global air travel almost stopped this spring due to the COVID-19 pandemic, making it clear that aircraft manufacturers had a difficult year. Many airline executives think it will take at least two to three years, and possibly more, for the demand for air travel to fully recover.
As a result, almost no airline needs new planes in the short term. Additionally, the global airline industry may grow much more slowly over the next decade than the torrid growth rate of the past 10 years, affecting long-term demand for aircraft.
Last week, investors had their best view of how painful this market crash will be for Boeing (NYSE: BA). With business jet orders canceled from left to right and deliveries falling to near zero, investors must stay away from Boeing’s actions.
More order cancellations
Boeing recently reported that it suffered another 60 order cancellations for its troublesome 737 MAX jet in June. It also removed an additional 123 orders from its official order book last month, related to troubled airlines that are no longer expected to receive delivery of those planes. In the meantime, he received just one plane order last month (for a 767-300 freighter).
More than 600 737 MAX orders had already disappeared from Boeing’s order book in the first five months of 2020. To date, Boeing has booked only 59 gross orders, offset by 843 aircraft canceled or removed from the portfolio due to financial problems of clients.
Image source: Boeing.
This leaves Boeing’s firm order book at 4,552 commercial aircraft, down from nearly 5,900 at the beginning of last year. The 737 MAX still represents almost 80% of aircraft on demand.
On the one hand, an accumulation of 4,552 jets is still considerable by historical standards. A decade ago, Boeing’s commercial aircraft portfolio was around 3,300 units. On the other hand, the tsunami of order cancellations shows no signs of slowing down. Also, Airbus (OTC: EADSY) It ended June with 7,584 firm orders in its order book, highlighting a significant risk that Airbus will achieve lasting market share gains at Boeing’s expense.
Deliveries also stop
To make matters worse, deliveries of Boeing planes have slowed down. The aerospace giant was already hampered by the grounding of the 737 MAX that entered the year. Now very few airlines want to receive planes, as the collapse in demand means they can’t even use all the planes that are already in their fleets.
In the first quarter, Boeing delivered 50 commercial aircraft, led by 29 deliveries for the 787 Dreamliner family. During the same period, Airbus delivered 122 commercial aircraft. In the second quarter, Boeing deliveries fell 60% sequentially to just 20 units, of which only seven were passenger aircraft (the 787). Airbus fared much better, delivering 74 aircraft last quarter.
In the first quarter, Boeing consumed an impressive $ 4.7 billion in cash. With aircraft deliveries dropping to nearly zero, Boeing’s cash burn likely accelerated to $ 6 billion or more in the last quarter.
Weak cash flow and high debt are a recipe for disappointment
In April, Boeing issued $ 25 billion in bonds, reinforcing its liquidity position. As a result, even after burning billions of dollars in cash last quarter, the company likely had more than $ 30 billion in cash and investments available at the end of June. Therefore, Boeing is not in danger of running out of cash any time soon.
That said, the $ 25 billion debt issuance raised Boeing’s total debt burden to around $ 64 billion: down from just $ 14 billion a year and a half ago. Given that demand for aircraft will remain well below 2018 levels in the coming years, cash flow is likely to be correspondingly weak. As a result, it could easily take five years for Boeing to repair its balance sheet enough to restore its dividend.
Boeing’s market capitalization remains above $ 100 billion despite the company’s falling balance sheet, rapid cash burnout and diminishing prospects for the next decade. While that is less than nearly $ 200 billion before the pandemic, the company’s extraordinarily weak finances require an even greater discount. Investors should avoid Boeing stocks unless they fall much further or clear signs of a faster-than-expected recovery in aircraft demand emerge.
