If investors thought the arrival of COVID-19 vaccines and the recertification of the 737 MAX had put Boeing (NYSE:BA) in the clear, the aerospace giant's first-quarter earnings report disabused them of that notion. Indeed, Boeing posted another quarterly loss and continued bleeding cash rapidly. And while the 737 MAX family captured some much-needed orders last quarter, Boeing's revenue, earnings, and cash flow are unlikely to recover to the peak levels of a few years ago.
New problems, same result
For much of 2019 and 2020, the 737 MAX grounding and resulting halt in deliveries caused Boeing to lose money and burn cash rapidly. The onset of the COVID-19 pandemic in early 2020 added to its woes by torpedoing demand for wide-body jets. Most notably, the company burned $6.6 billion over the last nine months of 2019 and another $19.7 billion in 2020.
In the first quarter of 2021, Boeing delivered 63 737s. While that's a far cry from its pre-crisis delivery pace, it represented a big improvement over 2019 and 2020.
Alas, a slew of quality problems for the 787 Dreamliner forced a multimonth delivery halt for Boeing's top-selling wide-body. The company delivered just two 787s in Q1, down from 29 a year earlier. As a result, total revenue fell 10% year over year to $15.2 billion last quarter -- including a 31% plunge in revenue from the commercial airplanes division -- despite the resumption of 737 MAX deliveries. Furthermore, Boeing recorded a core loss per share of $1.53 and burned another $3.7 billion of cash.
Boeing has finally resumed delivering 787s and hopes to deliver most of the roughly 100 787 Dreamliners in its inventory by year-end. On the other hand, it recently halted 737 MAX deliveries again due to newly identified electrical issues. Boeing does expect to implement a fix soon, enabling it to catch up to its previous 737 MAX delivery plan by the end of 2021.
Commercial aviation challenges aren't going away
Sooner or later, Boeing is likely to sort out the execution woes that have plagued its commercial airplanes unit recently. However, poor execution is just one facet of the division's problems.
First, regulators in China still haven't recertified the 737 MAX. That's particularly unfortunate, because the Chinese domestic air travel market has fully recovered from the pandemic. It also highlights the risk that Boeing could permanently lose market share to Airbus (OTC:EADSY) in this massive market as a casualty of ongoing trade tensions.
Second, the Boeing 737 MAX is unlikely to recover the market share it has lost to Airbus' A220 and A320neo families. Airbus' narrow-body backlog is nearly twice the size of Boeing's today. And while Boeing executives hope that recent 737 MAX orders in the U.S. are a harbinger of future orders abroad, very few foreign airlines have the financial strength of their U.S. counterparts. Even fewer have the same level of loyalty to Boeing.
Third, the wide-body market -- a big source of revenue and cash flow for Boeing as recently as 2019 -- will never recover to its former size. Order activity slowed dramatically long before the pandemic. Many long-haul airlines that were growing quickly a few years ago have retrenched or gone out of business. Most importantly, Airbus' upcoming A321XLR will offer unprecedented range and unit costs for a narrow-body jet. That may allow it to cannibalize a big chunk of the wide-body market over the next decade.
Better times ahead, but headwinds remain
The resumption of 787 Dreamliner and (hopefully) 737 MAX deliveries should help Boeing reduce its cash burn going forward. Even so, management doesn't expect the company to return to positive free cash flow until 2022. At that point, Boeing will have to start addressing a net debt position that now exceeds $40 billion (compared to just $1.1 billion at the beginning of 2018).
Moreover, it will have to pay down debt in 2022 and beyond with much less free cash flow than it enjoyed during the boom years of 2017 and 2018. As noted above, Boeing will have to settle for a lower share of the narrow-body market, while the wide-body market will be much smaller than it was previously.
To be fair, Boeing's defense unit is performing reasonably well. However, it isn't big enough to offset weakness in the commercial airplanes division. Before the 737 MAX was grounded, Boeing generated more than twice as much revenue from commercial jets as it did from its defense and space business -- and at higher margins, to boot.
In short, Boeing will be a smaller, more indebted, and less profitable company for the foreseeable future. With Boeing stock currently just 31% below where it stood three years ago -- during the company's peak period of profitability and cash flow -- investors have better opportunities elsewhere.