Boeing Co. reported on Tuesday that it burned through $14 billion of cash in 2024 and is likely to post negative cash flow this year as well. Regardless, its shares jumped as much as 7.6%.
Investor optimism has everything to do with the ramp-up of production, especially on the 737 Max narrow-body airliner that historically has been the company’s cash-cow aircraft. Chief Executive Officer Kelly Ortberg said the planemaker plans to reach a 737 Max production rate of 38 a month this year and then work with the Federal Aviation Administration to allow it to raise that output, perhaps to the next production break of 42 a month.
This is great news and would put the company on track for full recovery, if Boeing can pull it off. It also means that Boeing doesn’t need to sell assets, such as its Jeppesen navigation unit, to raise cash. Ortberg should shelve that deal, which analysts estimated could fetch as much as $8 billion, and keep this highly profitable business.
Remember that the FAA intervened to monitor Boeing’s manufacturing processes after workers left the bolts off a 737 fuselage door plug, which blew out early last year during an Alaska Airlines flight. Luckily, nobody was injured in that mishap, but it underscored Boeing’s substandard safety culture. The FAA capped 737 production at 38 a month, which Boeing was unable to reach last year anyway, and put in place key production indicators that need to be met before that rate can be increased.
The FAA has seen “significant improvement” on safety management and production status, Ortberg said on a conference call with analysts. “We have an agreed upon path for rate increases beyond 38 per month,” he said.
After Boeing endured a strike that shut factories in the Seattle area for almost two months, Ortberg took the time to train workers properly and to “balance” the production lines to eliminate out-of-sequence work before restarting output. Boeing has delivered 33 planes in January with a few days to go.
Boeing also plans this year to close so-called shadow factories that had been set up to deal with incomplete aircraft waiting on parts. These facilities are expensive to operate, swell up inventories and divert workers from the main factory floors. These temporary factories were a symbol of how Boeing lost its way amid a supply-chain meltdown that throttled production and hurt quality.
This road map to recovery includes Boeing’s finances, which are in good shape after a share sale allowed the company to raise $24 billion in October. At the end of the year, Boeing had $26 billion in cash and equivalents and $54 billion of debt, down about $4 billion from the end of September.
The company has enough dry powder to get it through this year, especially after it already repaid a $3.5 billion bond that was due later this year and has only $800 million of remaining debt maturities in 2025. If the production ramp-up goes as planned, Boeing will begin to post cash profits beginning in the second half of this year after losing money in the first half, including about $4 billion of negative cash flow in the first quarter. Ortberg is feeling confident enough about the balance sheet that Boeing plans to increase capital expenditures by about $500 million over last year to fund growth projects.
There’s no need to sell good assets. Jeppesen is a desirable one because it offers navigation, flight planning, crew solutions and other related services that are based on software and have recurring revenue. Suitors included all of the top aerospace companies and private equity, including Blackstone Inc. and Carlyle Group Inc., according to a Bloomberg article earlier this month. This is precisely why Boeing should keep Jeppesen.
The Global Services unit, of which Jeppesen is a part, had revenue of $5.1 billion, a 6.3% increase from a year ago, and boasts operating profit margins of 19.5%. Even during the best of times, neither the commercial unit nor the defense unit has ever matched those margins.
Ortberg said he had completed a portfolio review and was contemplating action on businesses “that are questionable to our core.” There won’t be a significant restructuring of the company, he said. “Think of it as more pruning the portfolio, not cutting down the tree.”
An area where Boeing should prune is its space unit. The company has faced well-publicized struggles with its effort to shuttle astronauts to and from the International Space Station. The satellite industry is being turned on its head with the advent of small satellites in low earth orbit, and competition is only going to heat up with SpaceX and now Blue Origin after its successful rocket test. With a lack of buyers, some of this space activity may have to be shut down or spun off.
When Ortberg whips out the pruning saw, he should keep the limbs that are healthy and growing — Jeppesen for example — and cut the dead weight — which includes space.
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