Another earnings presentation, another negative result for Boeing. In recent years, the U.S. manufacturer found no way to escape this sequence, and Q3 2022 was no exception.

Although a deeper analysis shows a change in trend and some signs of recovery in the medium term, Boeing’s position remains complex.

In this quarter, Boeing presented a net negative result of $3.3 billion on total revenue just under $16 billion. A disastrous result across the board and, in one of those rare cases, a direct consequence of the problems that the division that kept the manufacturer afloat during the peak of the 737 MAX crisis is carrying silently. The goose that laid the golden egg is now a liability that triggers alerts on all fronts.

Boeing Defense and the fixed-price contract trap

For years, the Defense division proved to be a safe harbor for Boeing shareholders: long, expensive contracts with a production volume that guaranteed continuity. Of course, to win those contracts some concessions had to be made, which in part were born out by the contractors’ sustained abuse of the finances of the forces buying the products.

It took several things to happen on several programs that suffered delays, cost overruns, contracted packages that did not meet the operator’s expectations, and price increases before the USAF decided to put its foot down and not subsidize the supplier’s inefficiency: fixed-price contracts were born.

Perhaps the paradigmatic case is the KC-46: the multipurpose refueler that won by force a contract from the Airbus A330 MRTT was rushed out in bid-we-can’t-reject mode. Eleven years after winning the contract it still has not resolved basic issues with its remote vision system for refueling and only this year made progress with the approval of air-to-air refueling operations.

In 2011 it signed a fixed-price contract for 179 aircraft. Eleven years later, it delivered 62. With more than 100 aircraft to go, the KC-46 is a burden that will never recoup its development costs. And it is not the only one.

The T-7A Red Hawk has not been an easy – or cheap – project either, and the MQ-25 preferred not to feel alone and joined the club that also includes the new Air Force One, the VC-25B.

In this quarter Boeing Defense took responsibility for $2.8 billion of the $3.3 billion loss, on those four programs and a smaller expenditure on the NASA Commercial Crew program. An atrocious result for the division, which posted a -52 percent operating margin.

“While our cash generation was strong, our revenue and earnings were significantly impacted by losses on fixed-price development programs in our defense business, driven by higher estimated manufacturing and supply chain costs, as well as technical challenges,” Dave Calhoun said in a communication to employees.

“We are focused on maturing these programs, mitigating risks and delivering for our customers and their important missions,” he added

Boeing Commercial: Bad, but not that bad.

While unable to escape the red, Boeing’s commercial aviation division is showing some improvements that suggest the future doesn’t look as bad as it did in 2020 or 2021. With a loss of 643 million and an operating margin of -10.3 percent, it cannot be said that this is a good result – in fact, in millions of losses it is a little worse than last year, while revenue was considerably higher-, but much of this balance is attributable to problems that are already reducing their impact.

With 737 MAX deliveries in full swing and 787 deliveries gaining pace after returning in August, expect revenues to grow and charges for past delays and cancellations to impact less and less.

The 737-7 and -10 certification issues still hang over the division’s head and resolution of that conflict is absolutely key to the entire MAX project, but a favorable decision would solidify a must-have financial relief for the manufacturer at its flagship division’s worst historical moment.

“We continue to take important steps in our turnaround effort as we drive stability and focus on performance. That said, we remain in a challenging environment and have more work ahead of us to ensure we deliver on our commitments and restore the strength of our company” Calhoun also shared in his message.

“As we begin to reach key operational milestones, we were able to generate $2.9 billion of free cash flow in the quarter. This puts us on a very solid path to achieve positive free cash flow by 2022, which has been our key financial metric for the year,” he concluded.

And that is Boeing’s goal: to deliver a cash-flow positive year. After years of navigating troubled waters – in 2021 cash flow was -507 million – and with serious challenges ahead, Boeing has yet to resolve profoundly significant questions about its immediate future. But it seems that a little beyond the storm there is some sunshine.

 

This article was originally published by Pablo Diaz on Aviacionline in syndication with AirlineGeeks.