Business Insider
- Boeing is still deciding whether to apply for up to $17 billion in loans from the federal government, part of the coronavirus bailout package, or the CARES Act.
- The company, which has about $15 billion in liquidity available, may need to raise as much as $20 billion more this year in order to survive the COVID-19 crisis.
- The company is reluctant to accept the federal aid due to the strings attached. Signs over the past week have suggested that Boeing is seeking other options, including private loans, cost reductions through layoffs, and seeking available cash through forward payments.
- Visit Business Insider’s homepage for more stories.
As Boeing continues to debate whether to except aid under the federal coronavirus bailout, new signs suggest the company may be seeking to avoid what the company’s CEO has previously suggested are onerous terms associated with the assistance.
The company is considering a plan to reduce its workforce by around 10%, it has in recent days received a substantial payment from the US Air Force, and it is exploring new credit options.
While the federal bailout package — called the CARES Act — budgets $17 billion in loans for companies “critical to maintaining national security” — primarily Boeing, which is the largest manufacturing exporter in the US — the Treasury has the option to take equity in companies receiving aid.
Companies receiving aid under that provision are also required to keep at least 90% of their workforce through September, and would be prohibited from buying back stock or issuing dividends until after the loans are paid off.
In interviews both before and after the CARES Act was passed, Boeing CEO David Calhoun said that any provision in which the US government took equity in the company could lead the planemaker to decline federal aid.
“I don’t have a need for an equity stake,” Calhoun told Fox Business on March 24. “I want them to support the credit markets, provide liquidity. Allow us to borrow against our future, which we all believe in very strongly and I think our creditors will too. It’s really that simple.”
“If you attach too many things to it, of course you take a different course,” he added.
While the feasibility of Boeing securing funds outside of the bailout are largely dependent on the health of the private credit market, there were new indications Friday that it would pursue a variety of measures to try and avoid taking the bailout.
Boeing’s weakened standing
Boeing was on its back foot even before the COVID-19 crisis began, thanks to the ongoing 737 Max saga, and now finds itself in an especially endangered position.
The 737 Max crisis led to Boeing’s worst financial performance in decades, and worst order-and-delivery year in recent history, allowing Airbus to overtake it as the world’s largest airplane manufacturer. Former CEO Dennis Muilenburg was fired in December over his handling of Boeing’s troubles.
The company halted manufacturing of the 737 Max in January, as it was unable to deliver completed jets to customers and was running out of space to store them.
As the coronavirus has led to plummeting travel demand due to social distancing guidelines, border closures, and shelter-in-place orders, Boeing’s airline and lessor customers have been forced to ground large segments of their fleets, and are also struggling financially.
A separate $58 billion bailout package, consisting of equal parts loans and payroll grants, was allocated for US airlines under the CARES Act. However, the airlines will not be able to maintain their current size or scale of operations with those funds.
While the 737 Max remains grounded — Boeing previously said it expected the plane to return to service by “mid-2020” — commercial customers are likely to either cancel or defer orders of all types of aircraft.
Last week, for instance, the airplane lessor Avolon canceled an order for 75 Max planes, worth about $3.8 billion at list price, a major blow for Boeing.
The company has indefinitely suspended operations at its Washington state and South Carolina manufacturing facilities due to the pandemic.
Boeing currently has about $15 billion of liquidity, Calhoun said in an interview on CNBC late last month.
However, analysts have estimated the company may need to raise as much as an additional $20 billion to service its debt, support customers and suppliers, and address costs associated with its joint venture with the Brazilian plane maker Embraer.
Reducing the workforce by 10%
Boeing is exploring the possibility of cutting 10% of its workforce, according to a new report on Friday from The Wall Street Journal, as part of an effort to reduce costs.
The plan, which has not been finalized, according to The Journal’s sources, could involve buyouts, early retirements, and involuntary layoffs or furloughs.
The cuts are reportedly expected to take place mostly in Boeing’s commercial airplane arm, as opposed to its defense or global services divisions.
While the cuts would not preclude Boeing from accepting the aid — the CARES Act requires companies receiving the loans to maintain at least 90% of their workforces through September 30 — such job cuts could help the company reduce expenses as it seeks liquidity elsewhere.
Separately, the company announced voluntary layoffs late last week.
In a letter to employees, Calhoun said that the crisis has led Boeing into “uncharted waters,” and that employees accepting the voluntary layoff would receive a pay and benefits package.
Nearly $900 million in payments from the US Air Force
Late last week, the Pentagon said that it would release $882 million in withheld payments to Boeing in an effort to help manage the financial strain of the outbreak.
The payments had been withheld over outstanding flaws in the KC-46 aerial refueling tanker, which is based off of Boeing’s 767 civilian passenger jet.
The KC-46 program has been plagued by cost overruns and delays due to mechanical problems and failures. The Air Force temporarily grounded the plane in 2019.
While 33 KC-46 jets have been delivered so far, the Air Force had the right to hold back up to $28 million in payments per plane until the remaining problems were fixed.
The decision to release the payments despite outstanding problems was part of a broader Pentagon plan aimed at helping ensure the financial health of suppliers to the Department of Defense amid the COVID-19 crisis, Reuters reported.
“When COVID-19 hit obviously things changed for the entire defense industrial base,” Will Roper, assistant secretary of the Air Force for acquisition, technology and logistics, said in a teleconference last week, according to CNBC. “Cash flow is everything right now, liquidity is everything, and we’ve created policies in the Department of the Air Force to get as much cash out of our hands and to industry as possible.”
Boeing hires investment banks for advice
On Friday, The Wall Street Journal also reported that Boeing had tapped investment banks Lazard, and Evercore for help analyzing the CARES Act provisions and potentially securing funding from the private credit market.
The company will likely use the support of the banks to find the most effective way to secure the funds it needs, whether solely through the CARES Act, the private credit market, or a combination of both — for instance, the company could apply for only a few billion dollars from the Treasury, thus minimizing the stake taken by the government.
Both Lazard and Evercore specialize in advising clients rather than lending money directly.
Boeing’s market value was roughly $86 billion on Friday, down from $190 billion at the start of 2020.
“There are a lot of options for us in the private markets,” Calhoun told CNBC in the late-March interview, “but the credit markets have to be open.”
Will Boeing take the aid?
Boeing declined to provide a direct comment for this article, but a spokesperson said that the company would work with the Treasury department directly to discuss terms once the eligibility and procedures for the loans had been determined.
While signs may point to Boeing’s inclination to decline the aid, it was less clear whether the company would have many other options.
In a letter earlier this week, House Democrats representing Washington state, including Rep. Rick Larsen, the chairman of the House aviation subcommittee, urged Boeing to accept the government help.
“Given the severe harm the nation’s aerospace industry and hardworking women and men at the Boeing company are experiencing during this pandemic, we hope you will consider utilizing the economic assistance provided by the CARES Act to safeguard thousands of jobs at Boeing in Washington state and across the country,” they wrote.
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