What happened
Shares of Boeing (BA 1.51%) fell 9% on Wednesday morning on reports the company is planning a full drawdown of a $13.8 billion loan it secured last month. Even if the move is only precautionary, it speaks to the precarious situation Boeing finds itself in as global travel wanes due to COVID-19 coronavirus fears.
So what
Boeing's massive commercial aerospace unit has been a cash cow for the company for more than a decade, but troubles were surfacing well before the coronavirus outbreak rattled investors. The company's much-anticipated 737 MAX has been grounded for a year now following the crashes of two of the planes that killed all on board.
The MAX is expected to return to the skies by the second half of this year, but demand for the plane is no longer as certain as it once was. Outbreak concerns have caused demand for air travel to plummet, leading at least one prominent Boeing and 737 MAX customer, Southwest Airlines, to hint that it could defer deliveries of the jet if it doesn't see an uptick.
Boeing's 737 MAX. Image source: Boeing.
Airlines have been cutting flights and grounding planes through the summer months. While the falloff is not expected to be permanent, a U.S. recession could cause the companies to rethink their growth plans and make it much more difficult for Boeing to liquidate its stockpile of manufactured 737 MAXs once the grounding is lifted.
To wit, Boeing on Wednesday said Air Canada cancelled orders for 11 MAX aircraft in February, while other customers converted their orders to other planes. Overall, Boeing had more cancellations than orders for February.
There is also reason to worry that Boeing will never hit its goal of 57 airframes per month for the 737 MAX, decreasing the program's long-term profitability.
Now what
Boeing shares have now lost 40% of their value in the last month as the extent of the crisis has hit home with investors. I believe the airlines have the wherewithal to survive this crisis, but growth rates are likely to come down into the foreseeable future, and that is going to have a material impact on Boeing and its supply chain.
The company does have a massive defense arm to fall back on, and despite the recent cancellations, the order book for the 737 MAX remains robust. But this is a dangerous time for Boeing, and it is a prudent move for the company to access all of the available cash it can.
