Global air travel nearly ground to a halt this spring due to the COVID-19 pandemic, making it clear that aircraft manufacturers were in for a rough year. Many airline executives think it will take at least two or three years — and possibly longer — for air travel demand to fully recover.
As a result, hardly any airlines need new jets in the near term. Moreover, the global airline industry may grow much more slowly over the next decade than the torrid growth pace of the past 10 years, denting long-term aircraft demand.
Last week, investors got their best glimpse yet at just how painful this market crash will be for Boeing (NYSE: BA). With commercial jet orders being canceled left and right and deliveries plunging to near zero, investors should steer clear of Boeing stock.
More order cancellations
Boeing recently reported that it suffered another 60 order cancellations for its troubled 737 MAX jet in June. It also removed an additional 123 orders from its official backlog last month, related to struggling airlines that are no longer expected to take delivery of those aircraft. Meanwhile, it received just a single jet order last month (for a 767-300 freighter).
More than 600 737 MAX orders had already disappeared from Boeing’s backlog in the first five months of 2020. Year to date, Boeing has booked just 59 gross orders, offset by 843 jets either canceled or removed from the backlog due to customers’ financial woes.
Image source: Boeing.
This leaves Boeing’s firm backlog at 4,552 commercial jets, down from nearly 5,900 at the beginning of last year. The 737 MAX still accounts for nearly 80% of the jets on order.
On the one hand, a backlog of 4,552 jets is still sizable by historic standards. A decade ago, Boeing’s commercial airplanes backlog stood at around 3,300 units. On the other hand, the tidal wave of order cancellations shows no sign of slowing. Furthermore, Airbus (OTC: EADSY) ended June with 7,584 firm orders in its backlog, highlighting a significant risk that Airbus will make lasting market share gains at Boeing’s expense.
Deliveries grind to a halt, too
Making matters worse, Boeing’s aircraft deliveries have slowed to a crawl. The aerospace giant was already hamstrung by the 737 MAX grounding entering the year. Now, very few airlines want to take delivery of any jets, as the collapse in demand means that they can’t even use all of the aircraft already in their fleets.
In the first quarter, Boeing delivered 50 commercial jets, led by 29 deliveries for the 787 Dreamliner family. During the same period, Airbus delivered 122 commercial jets. In the second quarter, Boeing’s deliveries plunged 60% sequentially to just 20 units, of which only seven were passenger jets (all 787s). Airbus fared much better, delivering 74 jets last quarter.
In the first quarter, Boeing burned through a stunning $4.7 billion of cash. With aircraft deliveries plunging to near zero, Boeing’s cash burn probably accelerated to $6 billion or more last quarter.
Weak cash flow and high debt are a recipe for disappointment
In April, Boeing issued $25 billion of bonds, bolstering its liquidity position. As a result, even after burning billions of dollars of cash last quarter, the company likely had over $30 billion of cash and investments on hand at the end of June. Thus, Boeing is in no danger of running out of cash anytime soon.
That said, the $25 billion debt issuance brought Boeing’s total debt load to around $64 billion: up from just $14 billion a year and a half ago. With aircraft demand set to remain well below 2018 levels over the next several 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 reinstate its dividend.
Boeing’s market cap remains above $100 billion despite the company’s sagging balance sheet, rapid cash burn, and diminishing prospects for the decade ahead. While that’s down from nearly $200 billion prior to the pandemic, the company’s extraordinarily weak finances call for an even greater discount. Investors should avoid Boeing stock unless it falls much further or clear signs of a faster-than-expected aircraft demand recovery emerge.
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