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OFFON

THE BOEING COMPANY

(BA)
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BOEING CO Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/27/2021 | 01:36pm EST
Consolidated Results of Operations and Financial Condition
Overview
The global outbreak of COVID-19, 787 production issues and associated rework,
and the residual impacts of the 737 MAX grounding in 2019 continue to have
significant adverse impacts on our business and are expected to continue to
negatively impact revenue, earnings and operating cash flow in future quarters.
They are also having a significant impact on our liquidity - see Liquidity
Matters in Note 1 to our Condensed Consolidated Financial Statements for a
further discussion of liquidity and additional actions we are taking in response
to these challenges.
The COVID-19 pandemic has caused an unprecedented shock to demand for commercial
air travel, creating a tremendous challenge for our customers, our business and
the entire commercial aerospace manufacturing and services sectors. The latest
International Air Transport Association (IATA) forecast projects recovery of
passenger traffic in 2021 to approximately 40% of 2019 levels, as international
markets see continued reopening challenges. Additionally, global economic
activity is improving, but continues to be impacted by COVID-19, and governments
continue to severely restrict travel to contain the spread of the virus. While
recovery is accelerating, we continue to expect that that it will remain uneven
as travel restrictions and varying regional travel protocols continue to impact
air travel.
Generally, we expect domestic travel to recover faster than international
travel. As a result, we expect the narrow-body market to recover faster than the
wide-body market. Also, the pace of the commercial market recovery will be
heavily dependent on COVID-19 infection rates, vaccination rates, and government
travel and other restrictions on trade and commercial activity. Demand for
dedicated freighters continues to be strong, underpinned by a strong recovery in
global trade and overall air cargo growth. Overall cargo capacity remains
challenged given the large impact that COVID-19 has had on international
passenger operations, which also carry cargo.
Airline financial performance, which also plays a role in the demand for new
capacity, has been adversely impacted by the COVID-19 pandemic. According to
IATA, net losses for the airline industry were $138 billion in 2020 and are
expected to be approximately $52 billion in 2021. Our customers are taking
actions to combat the effects of the COVID-19 pandemic on the market by
preserving liquidity. This comes in many forms such as deferrals of advances and
other payments to suppliers, deferrals of deliveries, reduced spending on
services, and, in some cases, cancellation of orders. While the outlook is
improving and we have seen an increase in new orders in 2021, we continue to
face a challenging environment in the near to medium term as airlines have
adjusted to reduced traffic which in turn has resulted in lower demand for
commercial aerospace products and services. The current environment is also
affecting the financial viability of some airlines.
We continue to expect commercial air travel to return to 2019 levels in 2023 to
2024. We expect it will take a few years beyond that for the industry to return
to long-term trend growth. To balance the supply and demand given the COVID-19
shock and to preserve our long-term potential and competitiveness, we have
reduced the production rates of several of our Commercial Airplanes (BCA)
programs. These rate decisions are based on our ongoing assessments of the
demand environment and availability of aircraft financing. There is significant
uncertainty with respect to when commercial air traffic levels will recover, and
whether, and at what point, capacity will return to and/or exceed pre-COVID-19
levels. During the fourth quarter of 2020, we made adjustments to our estimates
regarding timing of 777X entry into service. We now anticipate that the first
777X delivery will occur in late 2023. We will closely monitor the key factors
that affect backlog and future demand for each of our commercial aircraft
programs, including customers' evolving fleet plans, the wide-body replacement
cycle and the cargo market. We will maintain a disciplined rate management
process, and make adjustments as appropriate in the future. Notwithstanding the
changes we have made to production rates, risk remains that further reductions
will be required. Additionally, if we are unable to make timely deliveries of
the large number of aircraft in inventory as of September 30, 2021, future
revenues, earnings and cash flows will be adversely impacted.
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Deliveries and production have also been impacted by production issues and
associated rework. For example, deliveries of the 787 are currently paused and
the production rate has been reduced while we focus on inspections and rework
and continue to engage in detailed discussions with the Federal Aviation
Administration (FAA) regarding required actions for resuming deliveries. Risk
remains that these issues may continue to impact the timing of delivery of
airplanes in inventory and/or our ability to achieve planned production rates.
Revenues, earnings, and cash flows will continue to be impacted until we are
able to resume timely deliveries.
The long-term outlook for the industry remains positive due to the fundamental
drivers of air travel demand: economic growth, increasing propensity to travel
due to increased trade, globalization, and improved airline services driven by
liberalization of air traffic rights between countries. The shock from COVID-19
has reduced the near to medium term demand, but our Commercial Market Outlook
forecast projects a 4% growth rate for passenger and cargo traffic over a 20
year period. Based on long-term global economic growth projections of 2.7%
average annual GDP growth, we project demand for approximately 43,610 new
airplanes over the next 20 years. The industry remains vulnerable to exogenous
developments including fuel price spikes, credit market shocks, acts of
terrorism, natural disasters, conflicts, epidemics, pandemics and increased
global environmental regulations.
The Continuing Resolution (CR), enacted by U.S. Congress on September 30, 2021,
continues federal funding at FY21 appropriated levels through December 3, 2021.
Congress and the President must enact either full-year FY22 appropriations bills
or an additional CR to fund government departments and agencies beyond December
3, 2021 or a government shutdown could result, which may impact the Company's
operations.
Deliveries of the 737 MAX resumed in the fourth quarter of 2020, when the FAA
rescinded the order that grounded 737 MAX aircraft in the U.S. In addition,
other non-U.S. civil aviation authorities, including the Brazilian National
Civil Aviation Agency, Transport Canada, and the European Union Aviation Safety
Agency (EASA) have subsequently approved return of operations, allowing us to
resume deliveries in those jurisdictions. About 175 countries have approved the
resumption of 737 MAX operations. Orders to suspend operations of 737 MAX
aircraft from certain non-U.S. civil aviation authorities, including the Civil
Aviation Administration of China, are still in effect. The grounding has had a
significant adverse impact on our operations and creates significant
uncertainty. We are focused on safely returning the 737 MAX to service for all
of our customers.
At Global Services (BGS), while the outlook is improving, we are continuing to
see a direct impact on our commercial supply chain business as fewer flights and
more aircraft parked and/or retired result in a decreased demand for our parts
and logistics offerings. Additionally, our commercial customers are curtailing
discretionary spending, such as modifications and upgrades and focusing on
required maintenance. Similar to BCA, we expect a multi-year recovery period for
the commercial services business. The demand outlook for our government services
business, which in 2019 accounted for just under half of BGS revenue, remains
stable.
At Defense, Space & Security (BDS), we continue to see a healthy market with
solid demand for our major platforms and programs both domestically and
internationally. However, while we continue to experience near-term production
disruptions and inefficiencies due to COVID-19 impacts, we are seeing
improvements in 2021.
We have implemented procedures to promote employee safety in our facilities,
including more frequent and enhanced cleaning and adjusted schedules and work
flows to support physical distancing. These actions have resulted, and will
continue to result, in increased operating costs. In addition, a number of our
suppliers have suspended or otherwise reduced their operations, and we are
experiencing some supply chain shortages. Our suppliers are also experiencing
liquidity pressures and disruptions to their operations as a result of COVID-19.
We continue to monitor the health and stability of the supply chain as we ramp
up production. We also continue to have large numbers of employees working from
home. These measures and disruptions have reduced overall productivity and
adversely impacted our financial position, results of operations, and cash
flows. We expect further adverse impacts in future quarters.
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On September 9, 2021, President Biden signed an Executive Order mandating
vaccinations for the federal workforce and federal contractors. On September 24,
2021, the Administration released implementation guidelines, which require that
all federal contractors and other workers at federal contractor workplaces
either be fully vaccinated or have an approved reasonable accommodation for
disability or sincerely held religious belief, and requirements to follow CDC
guidance at contractor workplaces. Boeing is requiring our U.S.-based workers to
be fully vaccinated or have an approved reasonable accommodation by December 8,
2021. We will be monitoring these requirements and their implementation for any
potential impacts to our operations.
In July 2020, we announced business transformation efforts to assess our
business across five key pillars: infrastructure, overhead and organization,
portfolio and investments, supply chain health and operational excellence. We
continue to make progress across all five key pillars as we utilize a lower
production rate environment to transform and improve our business processes.
Within the infrastructure pillar we are assessing our overall facility
requirements in light of reduced demand in our commercial businesses and remote
and virtual work opportunities for large numbers of our workforce. The
consolidation of the 787 production in South Carolina during the first quarter
of 2021 is an example of this. We also anticipate a reduction of approximately
30% in office space needs compared to our pre-COVID capacity. During 2020 and
2021, we have made certain reductions to our footprint and are planning to
implement further reductions in 2021 and over the next few years. However, as we
consolidate our footprint, terminate leases and dispose of properties, we may
incur near term adverse impacts to earnings. The overhead and organization
pillar is focused on our cost structure and how we are organized so we can right
size our workforce and simplify and reduce management layers and bureaucracy. We
have recorded severance costs for approximately 19,000 employees. The portfolio
and investments pillar includes aligning our portfolio and investments to focus
on our core business and the changes in market conditions. Through our portfolio
and investment prioritization, we are reducing research and development and
capital expenditures. The supply chain pillar is focused on supply chain health
and stability, reducing indirect procurement spend and streamlining our
transportation, logistics and warehousing approach. We are reducing indirect
spend by reducing expenditures in areas such as freight and logistics, purchased
services and others. The operational excellence pillar is focused on improving
performance, enhancing quality and reducing rework. For example, our information
technology teams are evaluating opportunities to form or expand strategic
partnerships with vendors that allow us to simplify and optimize our operations,
and reduce overall costs. These activities are not intended to constrain our
capacity, but rather to enable the Company to emerge stronger and be more
resilient when the market recovers. We expect that successful execution of these
measures will improve near term liquidity and long term cost competitiveness.
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