Boeing CEO denies any ‘technical slip’ in 737 MAX crashes, as grounding cuts into profit and cash reserves

April 25-- Apr. 25--Boeing chief Dennis Muilenburg denied Wednesday that the two recent crashes of the 737 MAX were due to any "technical slip" by Boeing during the jet's design or certification.

Muilenburg conceded that erroneous information was fed to the airplanes on both flights by a faulty sensor on the fuselage, and that this false signal activated a new flight-control system on the MAX that repeatedly pushed the jet's nose down.

Still, he adamantly denied that any fault in the design led to the deaths of the 346 people aboard the two planes.

"There is no technical slip or gap here," Muilenburg said on an early morning conference call with Wall Street analysts following release of Boeing's first-quarter earnings. "We understand our airplane. We understand how the design was accomplished, how the certification was accomplished, and remain fully confident in the product."

He added that "actions not taken" contributed to the crash, a seeming reference to Boeing's contention that the crews on each flight should have been able to stop the system pushing the nose down using a standard procedure.

A Seattle Times story last month pointed to serious flaws in the design of the new flight-control system on the MAX -- known as the Maneuvering Characteristics Augmentation System, or MCAS -- and in the way the system was certified. And even some Boeing engineers who worked on the MAX questioned elements of the design, especially its reliance on a single sensor.

Yet Muilenburg's remarks make clear that though he has publicly declared Boeing responsible for the safety of the MAX -- "We own it," he has said repeatedly -- the company does not accept blame for the accidents.

Aviation analyst Richard Aboulafia of the Teal Group said Muilenburg's take shows "the legal side of the company is fully in control."

That's unfortunate for Boeing, he said, in part because a narrative has gained ground outside aviation circles among nontechnical people that the 737 MAX has some kind of inherently unstable airframe because of its larger engines.

"That's nonsense. This is a good product with a flaw, a mistake made," said Aboulafia. "The best way forward for Boeing would be to acknowledge the mistake and to say, 'We need to fix it and we will.'"

"But the lawyers seem to be preventing that better outcome," he said.

Financial hit

Muilenburg's comments came as Boeing outlined the immediate financial hit to its business in the quarter ended March 31.

The worldwide grounding of the 737 MAX has quickly rippled through Boeing's finances, depleting its cash reserve by nearly $1 billion in just the first three weeks, the results show.

Boeing's profit margin in the commercial airplane unit dropped from 15.6% of revenue in the final quarter of 2018 to just 9.9% last quarter, compared to 12.8% in defense and space and 14.1% in aftermarket services.

Boeing made a profit for the quarter of $2.15 billion, which is 13% lower than a year earlier. That met the latest expectations of Wall Street analysts, which were substantially reduced following the MAX grounding. Earnings per share were $3.75, down 10% from a year earlier.

After the earnings news, Boeing shares closed Wednesday up less than 0.4% at $375.46.

In a note to investors, Rob Stallard, a financial analyst with Vertical Research Partners, wrote that the muted positive reaction represents "relief that there was no mega MAX charge" in the earnings release.

But he added that the financial impact of the MAX grounding remains unclear because no one knows yet when it will lift.

"Until we get more clarity, we could see the shares stuck in a holding pattern," Stallard wrote.

Following the crash of an Ethiopian Airlines jet on March 10, and regulators' grounding of the plane soon after, the company ended the quarter with $0.9 billion less in available cash than when the year began. The commercial airplane unit delivered at least 50 fewer 737 aircraft than originally planned, and took in $1.1 billion less revenue than it did in the same quarter a year earlier.

The financial impact was relatively small because the MAX grounding came near the quarter's end and the ensuing production slowdown began in April. Next quarter will see a bigger hit.

Boeing withdrew its previous financial guidance for 2019, citing "the uncertainty of the timing and conditions surrounding return to service of the 737 MAX fleet."

With cash draining, Chief Financial Officer Greg Smith said Boeing has now "temporarily paused our share-repurchase program" until the flow of 737 deliveries resumes. During the quarter, Boeing bought back $2.3 billion of its own shares to boost the stock price -- all of those purchased before the MAX grounding.

Boeing estimates that cutting the production rate from 52 to 42 jets per month, thereby allocating the fixed costs of building the planes over fewer aircraft, will add about $1 billion in extra costs to the program, which it will spread out over the next 3,100 planned deliveries.

Even after the grounding of the MAX is lifted, it will take time for Boeing to gradually step up production again and this will have to be coordinated with when airlines want deliveries.

"We expect our financial results to continue to be adversely impacted until we safely return the 737 MAX to service, ramp up production rates and resume deliveries to customers," Smith said.

A software fix, or an improvement?

Getting the plane back in the air is top priority for Muilenburg.

"We want to make sure we can get back up and flying safely. And we know we have some work to do to earn and re-earn the trust of our customers and the flying public," he said.

He added that Boeing is making "steady progress on the path to final certification for a software update for the 737 MAX," which is essentially a redesign of MCAS.

Muilenburg said more than 135 test and production flights with the software update have been completed, and Boeing is working with aviation regulators around the world to test the software and finalize the required pilot training that will be needed.

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Boeing has said its software update will change significantly the way MCAS operates: It will be activated by input from two sensors instead of a single one. It will operate only once, not multiple times, if the sensor reading remains stuck at a high value. And the power of the system will be limited, so that the pilot can always pull back on the control column with enough force to counteract any automatic MCAS nose-down movement.

While these changes address what seem like specific flaws in the design that were missed during certification, Muilenburg insisted that "both accidents were a sequence of events" in which MCAS was only one factor, and that the MCAS update represents an improvement in safety, not a fix for a fatal flaw.

"There are areas where we can improve, and that is the source of the software update," he said

"There was no surprise or gap or unknown here or something that somehow slipped through a certification process," Muilenburg added. "We know exactly how the airplane was designed. We know exactly how it was certified. We've taken the time to understand that. That has led to the software update."

Boeing's other businesses move along

Muilenburg said Wednesday that the crisis over the 737 MAX has not affected development of the 777X, which is due to have its first flight soon.

The first two flight-test 777Xs have already rolled out of the factory, and the third and fourth are under assembly. That new widebody jet's planned entry into service next year remains unchanged, he said.

During the first quarter, a new order for 18 777X airplanes from British Airways parent company IAG brought the total orders and commitments for the jet to 364.

Likewise, Muilenburg said Boeing is still planning its next new airplane, dubbed the New Midmarket Airplane (NMA), or unofficially the 797, for a service entry in 2025.

However, no decision has been made yet to go forward with the NMA and right now, he conceded, the 737 MAX is the primary focus. The aviation industry had been anticipating the launch of he 797 at the Paris Air Show in June, but it seems likely that decision could be pushed out now.

"Certainly, the higher priority, the highest priority for us, is the 737 MAX safe return to service," Muilenburg said.

Meanwhile, Boeing's other current jet programs continue production.

Boeing's widebody 787 Dreamliner program showed progress that will help offset the reduced 737 revenue. The Dreamliner production rate was hiked up near the end of the quarter from 12 jets per month to 14.

And 787 program costs deferred into the future dropped by just over $1 billion, to $24.6 billion. With 36 of those jets delivered in the quarter, that's $29 million recouped per airplane, which Bernstein Research analyst Doug Harned said indicates "a substantial improvement in cash margin for the program."

During the quarter, Boeing won orders for 38 Dreamliners, including 20 for Lufthansa of Germany and 10 for Bamboo Airways of Vietnam.

However, though Muilenburg spoke of a "healthy global demand" for commercial jets, Smith did concede that Boeing has deleted from its backlog 210 aircraft ordered for India's Jet Airways, a once-premier carrier that has run out of money.

Boeing's quarterly filing shows the jetmaker wrote off $250 million in the quarter for customer financing gone south. The airline involved was almost certainly Jet Airways.

Boeing's defense and services businesses compensated somewhat for the MAX financial hit to the commercial airplane unit.

However, the troubled KC-46 aerial refueling tanker program, which delivered just seven tankers to the Air Force during the quarter following discoveries of debris and tools left inside the finished planes, kept the defense unit's results lower than hoped for.

Free cash flow -- a key quarterly financial metric that investors focus on, which is the company's cash receipts minus its cash operating expenses and its investments in plant and equipment -- which had been surging to record levels, this quarter was down $455 million compared to the same quarter a year earlier.

As a measure of its operational performance Boeing cites its "core earnings," meaning profits excluding certain pension items. By this measure, core profits for the quarter were $2 billion, down 21 percent from a year ago, and core earnings per share were $3.16, down 13 percent from a year ago.

Muilenburg said that even as Boeing works its way through "this challenging time," his attention remains on "running a healthy sustained growth business built on strong, long-term fundamentals."

Dominic Gates:

206-464-2963 or [email protected]; on Twitter: @dominicgates.

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