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Boeing’s actions highlight severity of aviation cash and liquidity turbulence

The aviation sector is one of the industries worst hit by the COVID-19 crisis. In March, the UK’s Flybe and both Trans States Airlines and Compass Airlines in the US announced they would ceasing operations, while Virgin Australia entered voluntary administration just last week.

Of course, the fallout in the aviation sector affects more than just the airlines themselves. Even the largest commercial aircraft manufacturers in the world are not immune to the sharp financial decline in the sector. This week, Boeing announced that it had terminated its Master Transaction Agreement (MTA) with Embraer, under which the two companies sought to establish a new level of strategic partnership. The parties had planned to create a joint venture comprising Embraer’s commercial aviation business and a second joint venture to develop new markets for the C-390 Millennium medium airlift and air mobility aircraft.

Under the MTA, 24 April 2020, was the initial termination date, subject to extension by either party if certain conditions were met. Boeing says it exercised its rights to terminate after Embraer did not satisfy the necessary conditions.

Boeing president and CEO, Dave Calhoun, issued a letter to employees that addressed aerospace market realities, including the following:

“The pandemic is ... delivering a body blow to our business - affecting airline customer demand, production continuity and supply chain stability. The demand for commercial airline travel has fallen off a cliff, with US passenger volumes down more than 95% compared to last year. Globally, commercial airline revenue is expected to drop by $314 billion this year.”

These stark numbers reveals why Boeing needed to act. The development can be viewed as a positive for Boeing because it will reduce the external capital needed for investment by more than US$4bn.

The ratings agency view

Writing about Boeing’s action in its 30 April Credit Outlook, ratings firm Moody’s notes that foregoing these partnerships, which were delayed at least partly because of the European Union Competition Commission’s extended review of the commercial aircraft partnership, will keep Boeing from writing a cheque for about US$4.2bn. Moody’s says that it is not changing its annual cash burn estimates for 2020 through 2022 because of this change in plans. The firm had excluded the US$4.2bn from its cash flow projections when it concluded the review for downgrade on 10 April with a downgrade to Baa2 and negative outlook. Moody’s estimated US$30bn of cash burn in 2020 and in its 14 April credit opinion for Boeing.

The Credit Outlook states that the coronavirus pandemic will take its toll on commercial aviation and Boeing for years to come. The Embraer tie-up is a near-term casualty. Demand for new commercial aircraft relative to pre-coronavirus levels will be affected for at least the next three years, and longer if a vaccine countering COVID-19 is not available in the talked-about time frame of the next 12 to 18 months.

Restoring the balance sheet will be the company’s priority in coming years and will crowd out investments as all free cash flow is used to retire debt, Moody’s notes. The hit to demand across the commercial aviation sector for at least the next three years will slow growth, productivity and innovation in all commercial aerospace industry segments, lessening the strategic priority for the tie-up. Lower activity will also relieve pressure on the need to maintain engineering head count in the short- to medium-term.

Q1 earnings show the initial damage

On the Boeing Company Q1 2020 earnings call on 29 April, Greg Smith, CFO and executive vice president, Enterprise Performance & Strategy at Boeing reflected on how the COVID-19 crisis had made the firm’s cash flow situation even more challenging in 2020.

“Operating cash flow for the first quarter was negative US$4.3bn driven by the lower commercial airplane delivery volume, advanced payments and impact of COVID-19, and timing of receipts and expenditures,” Smith said. “[The pandemic] also caused delivery and production disruption in the quarter. Also in the quarter, we spent US$428m on capital expenditures, paid US$1.2bn in dividends which were declared last December, and paid US$2.2bn of debt maturity.

The COVID-19 crisis has seen Boeing take a number of actions to accelerate and conserve cash.

“In March 2020, we suspended payment of our dividend until further notice,” Smith said. “Since April 2019, we’ve suspended our share repurchase programme, and in March 2020, our Board of Directors terminated its prior authorisation to repurchase shares of the company’s common stock.”

The company has also taken actions to reduce production rates in its commercial business and furloughed certain employees. Further workforce actions will follow, through a combination of voluntary layoffs, attrition and involuntary layoffs as necessary. In pursuit of the CARES Act, Boeing is also deferring certain tax payments.

Boeing’s actions not only reveal their plight and that of the aviation industry, but also highlight the extreme pressure that the COVID-19 crisis is having on corporates in a variety of sectors. Cash and liquidity management is critical for companies to navigate the extreme volatility and uncertainty, which in turn is putting treasury management as a whole under extreme pressure.


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