Boeing, the multinational Chicago based corporation had its ultimate hit back in 2017 when it had launched its most successful plane ever – Boeing 737 Max. This new aircraft had taken almost 5000 orders from myriad countries which had helped the company to earn revenue worth billions of dollars. This boon soon reached its downfall and turned out to be one of the reasons why Boeing went under huge debts. In spite of all of the obstacles that the company faced, Boeing came out as a potential game-changer in the corporate world and here’s how it turns out to be.
The reason behind Boeing’s sudden degradation:
The first prevalent reason behind the company almost completely shutting down and liquidating is the pandemic that has been spread all across the globe. Huge losses have been incurred to the US market because of this. The pandemic along with the 737 Max disaster, led to Boeing’s liquidation.
The 737 Max which had led Boeing to innumerous success. It became a huge disaster after there were two consecutive crashes within a span of a year. Lion Air Flight 610 crashed on 29th October, 2018 and Ethiopian Airlines Flight 302 crashed on 10th March, 2019 – both of which were models of the 737 Max. A total of 346 people had died because of these crashes.
What was the reason behind the simultaneous crashing?
The 737 Max used the Maneuvering Characteristics Augmentation System (MCAS) of flight control. This new system was not properly trained and reviewed with the pilots in order to save both time and cost. Furthermore, to reduce the cost of production, a safety system for the MCAS was also rejected by the company. As a result of which when the system malfunctioned, the pilots did not know what to do. The Joint Authorities Technical Review and the National Transportation Safety Board blamed Boeing for launching a new system without adequately training pilots and crew members. The FAA (Federal Aviation Administration) was also charged for their negligence and incapability to effectively analyze the flaws in MCAS, and for allowing its launch in spite of that.
The result and the loss suffered:
After the investigations came to an end, Boeing was found guilty of providing inadequate training to the crew members and for launching a new system with a malfunction in it. Soon after the second crashing in 2019, several countries started cancelling their orders. On March 2019, Boeing 737 Max was grounded worldwide. Certain changes were ordered to be implemented in the flight control system and pilot training. Even the production of the Boeing 737 Max was suspended from January 2020. This incurred heavy financial losses on the company and it went under huge debts. The company further suffered huge losses due to the coronavirus outbreak.
- 100 million dollars were contributed by Boeing to the families of the victims who died in the accidents. There were other costs too that were connected to the crashing and these kept on growing as time prolonged.
- A Saudi Arabian Airline cancelled their order of 50 Max jets in general and committed themselves to Airbus instead.
- Revenues are profits were declined by huge amounts.
- As a result of this Boeing even suffered three consecutive quarterly losses.
- Further compensation was demanded from Southwest and American airlines.
- The company went under huge debt and suffered a loss of almost $7.3 billion.
- The coronavirus outbreak added more to the issue. At the end of March, the company was saddled with a debt of $39 billion.
Turning point for Boeing:
The outbreak of a pandemic and flight disasters followed by a string of other accidents overburdened the debts of the company. To such an extent that Boeing itself knew that just the government aid would not be enough. So, the company sought commercial funding.
Raising capital through commercial funding:
The first measure that Boeing took in order to raise capital was through investors. The company started issuing bonds for investors and an estimate of $10 – $15 billion dollars was expected to rise. Yet, Boeing faced its first breakthrough when around 600 investors showed interest and the demand for the bonds reached more than $70 billion. There are a few factors present behind this break – through.
Firstly, these bonds were priced at premium to investment grade deals in order to attract more investors. This plan was successful and even people who used to invest in high yield bonds were also attracted to this, thereby helping Boeing to further raise its capital.
The next thing that came to the aid of Boeing’s capital raising plan was the credit rating agencies. Boeing was permitted to take a loan of around $25 billion by these agencies through bond issues. The amount of which was enough to maintain Boeing’s earlier investment grade rating (which was also important for Boeing to preserve for its reputation and for further investment deals in the future). This loan of $25 billion helped Boeing in attracting more investors to issue bonds.
Thirdly, the average spread for bonds according to Boeing’s credit rating is 306 basis points. Instead of following this, the company issued bonds that were priced differently and had different maturity periods with bond tranches within 450 – 593 basis points, further enhancing the plan of their capital raise.
These above strategies worked out extremely well for Boeing and the bond offering was so much successful. In the first week of May, the company announced that they did not plan to seek further additional funding from the US government or from the capital markets.
Initially, Boeing had claimed a loan of $60 billion from the US government for the entire aerospace manufacturing sector, which later on (as of now), it didn’t need after the commercial funding. But this does not mean that Boeing didn’t need or take any government aid at all.
Earlier in March 2020, the US government took out $2.3 trillion from their existing capital in order to provide relief to the already effected economy (due to covid19). This stimulus package provided a great deal of relief not only to Boeing, but also to other companies whose stature is important to the country, that have been badly affected due to this pandemic. Approximately $17 billion out of this came into the aid of Boeing and several other companies. The US capital markets were calmed to a great extent.
Since Boeing’s stability is important for national security as well. President Donald Trump relieved the company from a lot of constraints that it would have to deal with while withdrawing the loan of $25 billion from credit rating agencies. The $25 billion which was the actual game-changer for the company was actually an indirect form of government rescue.
Additional measures that the company took:
Apart from the government aid and commercial funding, Boeing took other measures too. In order to persuade the credit rating agencies and the bond investors into their funding and bond offering, the company had to revise their budgets. They took a risk by increasing the amount of interest payment to cajole them. This additional expense is expected to be covered up by the funding.
Moreover, in order to raise their own economy, they had shed the jobs of 16,000 of their employees. They had reduced their workforce by 10% as of this year. This was a cost effective measure from their perspective.
What does this say about the future of Boeing?
Boeing has proven to be a potential game changer in the corporate world. From about to being liquidated, it went on to deny further governmental aid (as of now). Furthermore, the company also did not completely rule out that option for the future.
It is assured that the company won’t liquidate for the remainder of the year as per the predictions of Boeing. Furthermore, according to recent sources, the company is currently trying to bring back the 737 Max and has started its slow production – this time making all the required improvisations and fixing the previously malfunctioned MCAS. In spite of all these, the future also remains a little unpredictable because it is unknown to us about how far or how badly the existing pandemic would affect Boeing, the capital market and the US economy as a whole. But the complete liquidation of the company seems unlikely, even after a year because the stability of Boeing is important for the financial and national security of the US.