BOEING'S CASH CRUNCH DEEPENS IF STRIKE CONTINUES

A strike at US factories could lead to a downgrade of Boeing's credit rating, raising interest rates and making it harder to raise more capital.

Since September 13, about 30,000 Boeing workers belonging to the IAM (International Association of Aerospace Workers and Machinists) union have been on strike . This group assembles 737 MAX, 777 and 767 aircraft at factories in Seattle and Portland. They are unhappy with the preliminary labor agreement that IAM leaders reached with Boeing last week.

This makes the job of new Boeing CEO Kelly Ortberg difficult. The US aircraft manufacturer is facing a series of problems, from rapid cash burn, supply chain difficulties to a crisis in production quality. From the second quarter of 2019 - when the fatal accident with the 737 Max caused the model to be grounded for 20 months - to May of this year, the company recorded an operating loss of nearly $32 billion.

Major credit rating agencies have warned that if the strike continues, they will downgrade Boeing’s bond rating to “non-investment grade.” With more than $45 billion in net debt, a downgrade would increase the planemaker’s borrowing costs and hamper its efforts to raise capital. Shares of the company fell nearly 4% to a two-year low on Friday.

Fitch Ratings said that if the strike lasts one to two weeks, Boeing's rating will not be affected. But if it lasts longer, they will have to reconsider. Moody's also expressed concerns about the US aircraft manufacturer's cash flow, placing the company's rating on review for downgrade. Boeing's cash flow is currently insufficient to pay $4.3 billion in debt due next year and $8 billion in 2026. Moody's predicted that the company will issue new bonds to make up for this shortfall.

Both Fitch and Moody's currently rate Boeing's debt just one notch above investment grade. Sheila Kahyaoglu, an analyst at Jefferies, calculates that each downgrade costs Boeing an additional $100 million a year in interest. The company paid more than $2 billion in interest last year.

The part that came loose during the Boeing 737 MAX 9 crash in the US on January 5. Photo: X/ FL360aero

Boeing spent more than $1 billion a month in the first half of this year. In July, it forecast a cash burn of $5 billion to $10 billion this year, largely due to a slowdown in 737 production as the company deals with quality issues following the Alaska Airlines plane crash in January.

The company is also struggling to produce its remaining models due to supply shortages and other issues. Boeing’s defense division, which makes F-15 fighter jets and Chinook helicopters for the Pentagon, is unprofitable. Its Starliner spacecraft faces an uncertain future after technical problems left two astronauts stranded on the International Space Station.

Chief Financial Officer Brian West said the company would soon make a second offer to workers. Last week, CEO Kelly Ortberg visited the plants, speaking with and listening to workers. In a letter to union members, he acknowledged the company’s mistakes that led to the current situation.

The parties are scheduled to resume negotiations on September 17. However, Ortberg does not have much time.

A Boeing 777 on display at the 2023 Paris Air Show. Photo: Reuters

Jon Holden, an executive at IAM, said Ortberg is in a difficult position as he tries to ease years of conflict between the union and the aircraft manufacturer's leadership. Longtime mechanics are angry about 16 years of union concessions that have reduced their retirement and health benefits. The cost of living has increased while starting salaries have remained stagnant. "It's hard to make up for the last 16 years," Holden said.

A prolonged strike would hit Boeing’s suppliers, which are just recovering from the pandemic and the grounding of the 737 MAX. Smaller parts makers would be hit hard, forced to lay off workers as orders dry up, and then have to rehire and retrain workers.

To avoid that, the US aircraft manufacturer has been holding back on parts orders, even as it has slowed production. That means the company is sitting on billions of dollars of unused parts. So as soon as the strike began, it told suppliers to stop sending parts.

RBC analyst Ken Herbert said CEO Ortberg will have to deal with the strike within a week to avoid damaging his reputation. The strike puts pressure on Boeing’s leadership, but it won’t derail Ortberg’s long-term efforts to make changes at the company.

"This is certainly not the start expected for Boeing's new CEO," Herbert concluded in the latest report.

Source: Ha Thu (according to WSJ, Reuters)