Why Boeing might not need a bailout despite coronavirus, 737 Max crises

Nathan Bomey, Brent Schrotenboer and Joey Garrison, USA TODAY

With seven vaguely written words in the $2 trillion federal stimulus law, Congress carved out a special provision for Boeing, one of the nation's largest manufacturers.  

Boeing isn’t mentioned by name in the 880-page bill. But the aerospace giant will qualify for as much as $17 billion in taxpayer relief through this language threaded into the fourth paragraph of page 513 of the CARES Act: “businesses critical to maintaining the national security.”

Does Boeing need or deserve taxpayer help?

To critics the answer is a sharp no. They note that the company is sitting on $24 billion in cash and has been the source of severe criticism for its actions in the 737 Max crisis, which was dragging down the company well before the novel coronavirus pandemic.

But supporters counter that the aid may be necessary to prevent Boeing from faltering and setting off crushing job cuts across the company and its vast supplier network – and to maintain its role in national defense as a major military contractor. Boeing had about 161,100 employees as of Dec. 31.

Critics of a bailout include former United States Ambassador to the United Nations and former South Carolina Gov. Nikki Haley, who resigned  from Boeing's board in protest.

"While I know cash is tight, that is equally true for numerous other industries and for millions of small businesses," Haley said in her resignation letter. "I cannot support a move to lean on the federal government for a stimulus or bailout that prioritizes our company over others and relies on taxpayers to guarantee our financial position. I have long held strong convictions that this is not the role of government."

Haley declined to comment further for this story.

President Donald Trump, however, has gone from criticizing Boeing in January as a "disappointing" company – and targeting the company even before he was inaugurated over the cost of Air Force One planes – to supporting the company's bailout, saying it's critical to "protect" it.

Asked on March 26 whether it was appropriate to give Boeing billions of dollars from the recovery package, Trump said the airline business is “a very tough business" that must be kept alive.

Trump said, "maybe we’ll take a piece of the airlines for the country" as part of their bailouts. It was not immediately clear whether he would endorse taking a similar approach with Boeing.

Skepticism of a Boeing bailout isn't without precedent. Bailouts of banks and automakers during the global financial crisis of 2008 and 2009 spawned a chorus of outrage among critics who said the government should not intervene to rescue companies that failed due to their own missteps. 

If Boeing does get help from the government, taxpayers would be stepping in to provide the company with funds to ensure it can survive a double whammy of: 

• The 737 Max safety crisis, which began in October 2018 when the first of two Max crashes occurred and has cost Boeing at least $18.6 billion so far, including money set aside to deal with future issues and lost orders, the company said in January. The costs stem from the impact of grounding 737 Max planes whose flaws killed 346 people.

• A global pandemic that has slowed travel to a trickle. Airlines, which make up a significant portion of Boeing's customer base, are widely expected to delay plane deliveries due to the global spread of the virus.

"There is a broad consensus that Boeing needs some kind of financial stabilization," said Peter McNally, global sector lead for industrials, materials and energy for Third Bridge's Forum business, which provides stock research to investors. "For Boeing, the crisis began with the 737 Max, but coronavirus has imperiled the financial health of its key customers," such as American Airlines, Delta Air Lines and Southwest Airlines.

Treasury Secretary Steven Mnuchin said last week  on Fox Business Network's "Mornings with Maria" that Boeing hadn't yet requested help.

"I appreciate the fact that Boeing thinks they can operate on their own," he said. "That's what we want them to do. The government is only there in case they can't do that."

He left open the door for financial aid to Boeing but said "taxpayers will be fully compensated" if it happens.

Boeing declined to comment for this story on whether it would pursue a bailout.

The company released a statement thanking Trump, Mnuchin and Congress for taking "swift bipartisan action to support the American economy," including Boeing and its suppliers. "The bill’s access to public and private liquidity, including loans and loan guarantees, is critical for airlines, airports, suppliers, and manufacturers to bridge to recovery."

The Treasury Department did not respond to requests seeking comment on how a deal might be structured.

Is a Boeing bailout necessary?

The key question is whether Boeing can stabilize itself, or whether the company needs or should receive the government's helping hand.

In 2019, Boeing posted its first full-year loss since 1997 – a total of $636 million  – after the safety crisis kept the Max jets grounded while engineers pursued a fix.

The company is clearly facing financial distress, said Seth Crystall, a senior credit analyst at restructuring research firm Debtwire who has been studying Boeing’s finances. But he said it appears Boeing could take a series of steps to preserve cash without taking a bailout. 

After recently drawing a $13.8 billion bank loan, Boeing has about $24 billion in cash on hand, according to Debtwire estimates. 

“Right away that begs the question – that sounds like a lot of money, why do they need to borrow money from the government if that’s the case?” Crystall said.

Boeing “has access to plenty of money,” said longtime aerospace industry analyst Richard Aboulafia, who advises financial institutions on aerospace market conditions for Teal Group. “It’s just a question of whether the country simply wants to see the economic damage associated with halting jetliner production for a year or two.”

Without a bailout, Boeing would likely be forced to temporarily close entire factories to reduce its expenses, Aboulafia said.

In the case of previous companies that received bailouts, they were hemorrhaging cash and didn’t have the option of staying afloat with a temporary halt to production, he said.

"(Boeing) could lose the factories, fire the workers, have their suppliers close their factories and fire their workers" for the duration of the financial crisis to ensure survival, he said. But that would deal "another huge blow to the U.S. economy" that may be unacceptable given the human and defense consequences.

Still, there are measures the company can take to minimize its need for help.

On Thursday, Boeing offered buyouts to employees in a bid to cut costs, saying it would provide details to workers within three to four weeks.

To preserve cash, the company has already suspended its dividend, which paid out $4.6 billion to shareholders in 2019. It also has suspended its share buybacks, which totaled nearly $21 billion from 2017 through 2019, including $2.7 billion before they were suspended in April 2019. Companies typically do share buybacks to return money to shareholders and boost the value of their stock.

The company is also still moving toward closing a $4.2 billion deal with Brazilian regional aircraft maker Embraer to form a joint venture that would be 80% owned by Boeing. The company views that deal as strategically important for its future, but the deal could be canceled – and the purchase price pocketed – for a breakup fee of $100 million, Crystall said.

Boeing could also issue stock to shore up its finances, a move that could raise between $5 billion and $10 billion, Crystall estimated.

“So the thought would be they have enough cash” to ride this out without a bailout if the company takes aggressive steps to preserve its finances, he said.

But Boeing does not exist in a vacuum since it sells planes to customers like Southwest and Delta, whose daily operations have been limited by the pandemic. 

McNally said that "if Boeing’s customers had remained healthy, the urgency for additional funds probably would not exist," but the sudden economic crisis for airlines has plunged the company deeper into the red and necessitated action.

To be sure, the defense division of Boeing's business is in better financial shape than its commercial aircraft unit. But defense, space and security represented just over a third of Boeing's revenue in 2019, meaning it's likely not enough to sustain the company without airline customers coming back.

Boeing was already experiencing a decline in orders from airline customers before the coronavirus crisis began. During 2019, Boeing's backlog of orders for commercial planes fell by about 8% to about $377 billion. Delivery of finished planes outpaced new orders during the year. The company said in its annual report that orders of new 737 Max planes had declined and that it was at risk of losing significant orders if the planes remain grounded.

For Boeing, the pain could continue for years.

"Aircraft purchases won't be significant for another two or three years, at least," Aboulafia said in an email. "The only thing that matters is deliveries, which will fall too, but not nearly as drastically as orders."

But orders don't necessarily translate into significant revenue. When airlines order planes, they typically make a down payment of a few percentage points of the value of the purchase, then they make "progress payments" in the following years that rise up to about half the value of the jet, Aboulafia said. When the airline takes delivery of the plane, it makes the rest of the payment.

As of Dec. 31, Boeing expected to convert only about 17% of its backlog into revenue in 2020, according to a public filing. That has likely fallen since then.

In total, the industry has about 10,000 jets currently on backorder, Aboulafia estimated.

"A lot of them are years out, which means they’ve only put a couple percent down, which means their ability to defer or cancel is pretty strong," he said.

Both Boeing and its rival, Airbus, have "a large order book that stretches for years ahead," said John Grant, senior analyst for aviation data provider OAG. But he said the companies are likely hoping for airlines to make "a reassuring purchase" that would help restore confidence.

"In previous events such as 9/11 some airlines placed orders at heavily discounted levels that allowed them to secure both places on the production line and really sharp prices," Grant said in an email. "And we may see that in the next few months," possibly from Chinese airlines, he added.

Like Boeing, Airbus has taken aggressive steps to conserve cash in recent days. The company announced March 23 that it had suspended its dividend and secured access to a new 15 billion-euro revolving credit facility.

With that financial maneuver, the company said it had 30 billion euros in available liquidity.

"By maintaining production, managing its resilient backlog, supporting its customers and securing financial flexibility for its operations, Airbus intends to secure business continuity for itself even in a protracted crisis," Airbus said in a statement.

While there's no indication that Airbus is maneuvering for a bailout, the company said it "highly welcomes governmental efforts around the globe" to stabilize the aerospace industry, including by providing support to its suppliers.

While Airbus and Boeing are fierce competitors, Airbus hasn't necessarily capitalized on Boeing's misfortunes. Since the 737 Max crisis started, some orders were shifted from Boeing to Airbus, McNally said. But "nobody of any note shifted" any significant orders, Aboulafia said.

Grant said the airlines "simply cannot replace a whole fleet of Boeing with Airbus" or pivot to "a mixed fleet as that just increases operating costs."

Critics assail Boeing management

Critics say Boeing's mishandling of the 737 Max crisis and its spending on stock buybacks, dividends and acquisitions increased the company's chances of needing a bailout from taxpayers.

They are also frustrated over comments from Boeing's CEO, Dave Calhoun, who told Fox Business on March 24 that Boeing doesn't "have a need for an equity stake" for the U.S.

"They are using it as a cover to address past issues, not only in terms of the 737 Max but just in terms of responsible corporate management," said progressive commentator and Boeing critic Richard Eskow, who writes for the Institute for Public Accuracy and hosts a radio show. "As executives, they have a fiscal responsibility to plan for elements of risk. Risk management is part of the job. They failed to do that and instead went on an orgy of self-interest."

The 737 Max was grounded shortly after the March crash of an Ethiopian Airlines flight. In October 2018, a Lion Air 737 Max crashed into the Java Sea. Combined, the accidents killed 346 passengers and crew.

In both cases, blame has focused on a new computerized system called the Maneuvering Characteristics Augmentation System, or MCAS.

A test pilot for Boeing reportedly knew about problems in the 737 Max development process and spoke of "basically" but unknowingly lying to regulators, according to records provided to Congress.

“Staff are continuing to review these records, but similar to other records previously disclosed by Boeing, the records appear to point to a very disturbing picture of both concerns expressed by Boeing employees about the company’s commitment to safety and efforts by some employees to ensure Boeing’s production plans were not diverted by regulators or others," the company said in a statement in December.

Anger over bailouts for companies that have made missteps is not new. And manufacturers that made considerable mistakes but were deemed crucial to the country's economic or national security have been bailed out before.

In 2008 and 2009, the U.S. provided about $80 billion to the auto industry, including bailouts of General Motors and Chrysler for which the federal government received partial ownership. The bailouts were credited with saving hundreds of thousands of jobs, but critics said the companies should have been forced to go out of business. Of the total auto industry bailout, about $70.7 billion was repaid, while about $9.3 billion was lost, according to the Treasury Department.

In Boeing's case, even the company's critics say Boeing must be preserved as a going concern because it plays a crucial role in America's national security as a major defense contractor. It also serves as a lifeline for thousands of aerospace suppliers.

In addition to its employees – of whom nearly half work in the state of Washington, where the company's Puget Sound facilities are temporarily closed due to COVID-19 – Boeing says it also relies on 17,000 suppliers, such as Honeywell, Spirit AeroSystems and Hexcel.

The aerospace product and parts manufacturing industry accounted for about 486,000 jobs with an average annual salary of $83,740 in 2018, according to the U.S. Bureau of Labor Statistics.

While agreeing that Boeing needs to be preserved to prevent massive fallout, critics argued that government funds, if any, should come with strings attached.

Steve Ellis, president of the advocacy group Taxpayers for Common Sense, said Boeing should not be “dictating the terms,” calling Calhoun's comments “the height of arrogance.”

“It also has to recognize that many of the problems that Boeing is facing are ones of their own making that have nothing to do with the pandemic,” Ellis said. “The 737 Max was a problem well before anybody even heard of COVID-19 or coronavirus, and they were ham-handed in how they handled that.

“Whatever kind of assistance, it shouldn’t be trying to make them whole or to fix past misdeeds,” he said, adding that Boeing is better equipped to sustain the recession than many other companies.

A U.S. Senate aide familiar with the legislation said that if Boeing chooses to take direct loans, it will be required to provide equity to the federal government, subject itself to limitations on executive compensation and severance and abstain from stock buybacks and dividends. The aide requested anonymity because they were not authorized to speak publicly about the matter.

Mandy Smithberger, director of the Center for Defense Information at the Project On Government Oversight, a nonpartisan watchdog, said the funds for the company are not necessary and questioned whether there would be accountability. 

“Especially when we’re talking about a public health crisis, it’s important to look at whether companies have been responsible and thoughtful about public safety,” she said. “And I think what we’ve really learned through the 737 Max was that Boeing was not acting responsibly. They were not putting public safety first.”

Boeing has apologized for the fatal crashes and has said it accepts responsibility for the situation.

Contributing: Michael Collins, Chris Woodyard

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.

This article originally appeared on USA TODAY: Boeing bailout: Does the aircraft maker need emergency funds?