What happened

Shares of Boeing (NYSE:BA) traded up 5% on Wednesday morning following the aerospace giant's first-quarter earnings release. The results, as expected, were lousy, but investors were encouraged by production rate cuts that were less than feared and management actions to streamline the company and prepare for a commercial aerospace downturn.

So what

Before markets opened, Boeing reported a first-quarter loss of $1.70 per share on revenue of $16.9 billion, falling short of consensus expectations for a $1.61-per-share loss on revenue of $17.3 billion. Investors came in bracing for the worst: Shares of Boeing have lost more than half their value year to date as airlines have been forced to retrench due to the COVID-19 pandemic.

A Boeing 737 MAX in flight.

Image source: Boeing.

CEO David Calhoun said in a statement that the pandemic "is affecting every aspect of our business, including airline customer demand, production continuity and supply chain stability." Airlines are deferring or cancelling new plane orders, deferring elective maintenance, and buying fewer spare parts because their fleets are partially grounded.

Boeing is adjusting the business to reflect lower demand. The company said Tuesday it would cut production rates for its 787 Dreamliner and 777 aircraft and said when production of its now-grounded 737 MAX resumes, it will resume slowly. Boeing had at one time envisioned making upward of 57 737 MAX planes per month but now hopes to make 31 planes per month in 2021.

The company did boast a backlog of $438 billion at quarter's end, but that is down from $463 billion at year's end. The backlog could come under further pressure if airlines and aircraft leasing companies cancel orders in the months to come.

Boeing said it is seeking to reduce its total workforce by about 10% through a combination of voluntary layoffs, natural turnover, and "involuntary layoffs as necessary." The cuts will be deeper in areas heavily exposed to the commercial operations, an indication the company does not see a quick rebound in plane sales.

Now what

As bad as the quarter was, it could have been worse. Boeing burned through $4.7 billion in free cash in the quarter, better than the $5 billion estimate being discussed prior to earnings. And while production cuts were inevitable, Boeing didn't slash as much as some had feared.

The company's net debt increased to $38.9 billion at quarter's end compared to $27.3 billion on Dec. 31, and Boeing is continuing to seek additional funds to help it through the downturn. The dividend is gone and unlikely to return for a few years, and Boeing is still working through issues at key defense programs, including the KC-46 tanker.

The outlook for Boeing is challenged, and the company could be facing a lost decade in terms of commercial sales growth. But the markets on Wednesday are cheering that the report was not worse. Investors should avoid buying into the rally.