By Chris Isidore for CNN
A Boeing 737 MAX plane under construction at a factory in Washington state, USA. Photo: Jennifer Buchanan / Pool / AFP
Analysis - Cash-starved Boeing, contending with massive financial losses from a crippling strike and years of operational and safety problems, is turning to major banks and Wall Street to raise tens of billions of dollars in cash.
In a regulatory filing early Tuesday, the company announced plans to borrow $10 billion (NZ$16.5bn) from a consortium of banks. It also separately announced plans to raise $25 billion by selling stock and debt. The $10 billion borrowing plans would be included in the $25 billion that Boeing filed to raise.
The company's debt surged in the last six years as Boeing reported core operating losses of more than $33 billion. Its commercial airplane production has ground to a near halt by a month-long strike by 33,000 members of the International Association of Machinists.
Talks between Boeing and IAM broke down last week with no new negotiations planned. On Friday, Boeing's new CEO Kelly Ortberg announced plans to cut 10 percent of its worldwide staff of 171,000 workers.
Boeing's credit rating has plunged to the lowest investment-grade level - just above "junk bond" status - and major credit rating agencies have warned Boeing is in danger of being downgraded to junk. That would raise its cost of borrowing. Boeing's long-term debt has climbed to $53 billion at the end of June from $10.7 billion at the end of March 2019, when a second fatal crash of the 737 Max led to a 20-month grounding of that plane, the company's best-selling aircraft.
Escalating crises
Over the last six years, Boeing has been buffeted by one problem after another, ranging from embarrassing to tragic. Two 737 Max crashes killed 346 people, a tragedy for which the company agreed to plead guilty to deceiving the Federal Aviation Administration during the certification process for the plane. A federal judge is considering whether or not to accept its plea agreement that would include up to $487 million in fines and require it to operate under the supervision of a court-appointed monitor. Attorneys for families of the crash victims argued in court that the penalty is not severe enough.
Whistleblowers have testified before Congress that Boeing's production process put profits ahead of safety and quality, violating the company's own rules. That was driven home in January when a door plug blew off the side of a 737 Max flown by Alaska Airlines, leaving a gaping hole in the plane shortly after takeoff. While none of the crew members or passengers were severely injured, the incident prompted numerous federal investigations, including one that found the plane had left a Boeing factory without the four bolts needed to keep the door plug in place.
The strike by the IAM is just the latest blow. Last month, the company and union leadership agreed to a tentative deal that would have given union members a 25 percent raise over the four-year life of the contract, only to have the rank-and-file vote nearly unanimously to reject the deal and go on strike. Boeing's offer to increase the raises to 30 percent over the life of the deal was also rejected by union negotiators.
Despite all of its problems, Boeing is able to borrow money from the consortium of banks and likely will be able to sell the stock and debt issues it needs on Wall Street because of the unique market position in which it operates. Boeing and European rival Airbus are essentially the only companies that make the full-size jets that the global airline industry needs. Its place as part of a duopoly essentially ensures its survival.
Both have backlogs of orders stretching for years into the future. And Airbus doesn't have the capacity to take on Boeing's orders. Should an airline cancel its orders for Boeing jets and place orders with Airbus instead, it would have to wait as many as five years for deliveries to start for those planes. And it would take years for another competitor to win approval for its own aircraft should it try to enter the market. So while Boeing has lost market share to Airbus in recent years, it isn't going anywhere.
But the halt in production of its 737 Max, as well as its 767 and 777 freighters caused by the strike, will create more cashflow problems for Boeing in the near-term, since it gets most of the money from the sale of a plane at the time of delivery. In addition, the company announced on Friday that its already long-delayed 777X, the next generation of that widebody passenger jet, will be delayed further due to problems discovered during test flights. It is now not due to start deliveries until 2026.
- This story was first published by CNN