Boeing (BA +0.53%) hasn't been able to catch a break lately. The 737 MAX has been grounded since March 2019 due to well-known safety issues, the KC-46 military tanker has suffered major quality problems, and the COVID-19 pandemic has crushed jet demand. Unfortunately, Boeing still can't seem to get out of its own way. The company has recently acknowledged several production flaws affecting its 787 Dreamliner family that could prove costly, impeding its recovery.
New flaws come to light
The early history of the Dreamliner program was marked by massive development cost overruns, manufacturing problems, and production delays. Indeed, Boeing 787 production still hasn't broken even on a cumulative basis, let alone paid back its development cost. That said, in recent years, the 787 Dreamliner family has become a big cash cow for Boeing and an important contributor to the company's profitability.
The Dreamliner's surge to profitability in recent years came despite ongoing quality concerns, particularly related to poor safety practices at Boeing's assembly plant in Charleston, South Carolina (one of two factories that produce the 787 family at present). Many jets built there received faulty parts. Others had tools, metal shavings, or other debris inadvertently left inside the aircraft. Such so-called foreign object debris can represent a serious safety hazard.
Image source: Boeing.
New production problems have come to light in recent weeks. First, Boeing filled gaps between parts of the aft fuselage with shims that were not properly validated. Second, Boeing recently found that the interior fuselage skin on certain 787s was not as smooth as it should be. When these two flaws are found together, the aircraft structure might not withstand the maximum stress it could experience in certain rare flying conditions. The Air Current reported that late last month, Boeing told customers to ground eight 787 Dreamliners as a result of these findings. Third, The Wall Street Journal reported this week that Boeing has discovered problems with the way parts were clamped together in producing the 787's horizontal stabilizer.
The eight jets that were pulled from service require repairs that will take two weeks. Up to 900 Dreamliners -- that is, the vast majority of the total fleet -- could require enhanced inspections or repairs related to faulty shims. If many of those planes require work, the cost to Boeing could be quite significant. Furthermore, these quality lapses have forced Boeing to fix recently built planes that were thought to be ready for delivery.
New cash-flow headwinds
Boeing burned through $4.3 billion of cash in 2019 due to the 737 MAX grounding. Cash burn has accelerated this year, as the COVID-19 pandemic has caused airlines around the world to defer as many orders as possible. Boeing burned $10.4 billion in the first half of 2020. The outlook for the third quarter looks equally grim. The company delivered just 17 commercial jets in July and August combined, suggesting that it won't do much better than the 20 deliveries it managed in the second quarter.
Meanwhile, Boeing's order backlog has been shrinking this year. Hardly any airlines are looking to place new orders, while many are canceling orders and leasing contracts. This trend has hit the 737 MAX in particular, as delivery delays have given customers more contractual options. As a result, Boeing has been forced to dramatically trim its production plans for 2021 and beyond, which will weigh on cash flow for the foreseeable future.
By delaying deliveries, adding new costs for inspections, and potentially putting Boeing on the hook for substantial repair costs, the recently disclosed manufacturing problems for the 787 family will add to the cash flow pressure. So while Boeing stock is down 50% year to date, investors shouldn't bet on a turnaround from this troubled aerospace company.
