Boeing to halve Dreamliner production and cut jobs: report

Demand for new planes has fallen due to the coronavirus outbreak, leaving Boeing with tough decisions to make.

Boeing 737 MAX annual loss
Boeing faces added strain from maintaining about 400 newly built 737 Max jets that are stuck in storage until regulators lift a grounding imposed more than a year ago [File: Lindsey Wasson/Reuters]

Boeing Co. is poised to cut 787 Dreamliner output by about half and announce workforce reductions when it reports first-quarter earnings next week, said people familiar with the plans.

Details of the production changes for Boeing’s commercial lineup are still being finalized and will determine the number of jobs to be eliminated through layoffs and buyouts, said the people, who asked not to be named as the discussions are confidential. The planemaker plans to lower the Dreamliner’s monthly output, which began the year at 14 jets, to a single-digit rate.

Dave Calhoun, Boeing’s chief executive officer, hinted that painful measures would be needed when he warned employees last month of a “new reality” with a far smaller jetliner market when the world emerges from the coronavirus pandemic. Global airline sales are projected to plunge by $314 billion this year, according to an industry trade group, and travel may not recover fully until mid-decade.

The forbidding landscape leaves Chicago-based Boeing with no easy decisions. Airbus SE, its European rival, has already announced plans to pare output by about a third. Both companies probably burned through record amounts of cash in the first quarter: 6.5 billion euros for Airbus and $8 billion for Boeing, according to calculations by Melius Research analyst Carter Copeland.

The U.S. manufacturer faces added strain from maintaining 400 or so newly built 737 Max jets that are stuck in storage until regulators lift a grounding imposed more than a year ago after two fatal accidents.

“Boeing is facing essentially a self-made problem on the Max and an act of God on the virus,” said Robert Spingarn, an analyst with Credit Suisse Group AG. “These two things together create just an unbelievably difficult situation to have to manage through.”

A spokesman for Boeing declined to comment beyond referring to Calhoun’s recent remarks.

Boeing fell 1% to $136.31 after the close of regular trading in New York. The shares have tumbled 58% this year, the biggest drop on the Dow Jones Industrial Average.

Cyclical business

Even U.S. President Donald Trump acknowledged the difficult restructuring ahead when he riffed on Boeing’s dilemma during an April 10 briefing.

“We know they’re going to need help,” he said of the prospect of the aviation colossus tapping federal aid. “But should they keep the people they actually don’t need? That business is a very cyclical business like many businesses, frankly. So that determination has not been made.”

A decision about slowing the production tempo for the 787 reaches far beyond steps such as the temporary, virus-induced pause of Boeing’s commercial-jet operations. Any increase or decrease in that pace is hugely significant, affecting the size of the workforce and the flow of thousands of parts through a delicately balanced supply chain stretching around the world.

While Boeing doesn’t break out the number of employees working on individual models, the 787 program involves thousands of people, spread between the planemaker’s wide-body factory in Everett, Washington, and a Dreamliner-only plant in South Carolina.

Raising money

Suppliers have also been in limbo as they make their own decisions on whether to maintain staff and order raw materials.

“We don’t know where Boeing is going to go, but they’re going to be lower, and that’s what we’re anticipating,” said Nick Stanage, CEO of Hexcel Corp., which supplies material for the 787’s carbon-fiber frame. “That’s what we’re positioning our operations to manage to.”

The savings from the production changes and downsized organization will determine how much money Boeing needs to survive a prolonged downturn — another likely discussion point for the company’s April 29 earnings call with analysts.

Boeing has been analyzing whether to raise about $10 billion to $20 billion through newly available financing from the Federal Reserve and CARES Act rescue legislation, as well as the debt markets.

Investments from the likes of Warren Buffett’s Berkshire Hathaway Inc. and sovereign funds are other options, but Boeing is focused on federal aid as it awaits Treasury Department guidelines, said one of the people familiar with the discussions.

Lengthy disruption

While the planemaker isn’t in imminent financial danger, travel patterns and demand may be disrupted for years, crimping jet sales.

Businesses will probably lean more on teleconferences, while executives and leisure travelers alike may have qualms about sitting in confined quarters with hundreds of other airline passengers before there’s a vaccine for the deadly new coronavirus. About 16,700 commercial jets are currently parked, equivalent to 64% of the global fleet, according to aviation consultant Cirium.

“There’s probably no airline in the world that needs or wants an airplane right now,” Ron Epstein, an analyst with Bank of America Corp., said in an interview.

Demand was fading for aircraft designed for long-haul routes even before the pandemic caused the travel industry to unravel, Spingarn said. After pushing 787 Dreamliner output to a record 14-jet monthly pace last year, Boeing had already announced two production-rate cuts that would lower output to 10 Dreamliners a month next year. And that was before the outbreak turned into a global nightmare.

Spingarn, the Credit Suisse analyst, estimated that Boeing would need to reduce the Dreamliner production rate to eight jets a month for the final three quarters of 2020 before taking output a step lower next year to a six-jet pace.

“I don’t think it’s ever going back to 10,” he said of the monthly production rate.

Phased reductions

Epstein also predicted that Boeing would halve Dreamliner output, probably in stages, while ramping up the 737 at a slower-than-expected pace when it reopens Max assembly lines that have been dormant since January. But he expressed greater optimism about the 787’s longer-term prospects.

The chance of an eventual rebound is a key reason why Boeing is reluctant to close its 787 line in Everett, Washington, even if the monthly output plunged. Boeing’s experienced workforce there has repeatedly stepped in when the company’s newer South Carolina factory struggled with out-of-sequence work.

Boeing would also have to reallocate fixed and variable costs absorbed by the highly profitable Dreamliner program to other wide-body jets built at the same factory, affecting their economics.

While there’s a high cost to operating two lines at such low rates, Boeing probably couldn’t reverse a decision to shut down the Everett line and furlough workers — a move that could prove even costlier when the market rebounds.

“Do you want to take that bet now? Probably not,” Epstein said. “It’s too soon.”

Source: Bloomberg