Boeing announces a charge and an increase of the costs due to the grounding of the 737 MAX
The provisioned amounts are related to the increase of the estimated potential indemnities and other concessions granted to the customers, as well as to the consequences of the 737 MAX production rate decrease.
As a logical consequence of the accidents of Ethiopian Airlines, Lion Airand the 737 MAXfleet grounding, Boeing announced on July 19, 2019, the inclusion of an impact on its results for the second quarter of 2019 which will be announced on July 24.
Boeing will record an after-tax charge of $4.9 billion (or $8.74 per share) as part of the estimated potential indemnifications and other concessions granted to its customers due to disruptions caused by the grounding of the 737 MAX as well as registered delivery delays.
This expense will result in a $5.6 billion reduction in pre-tax sales and earnings for the second quarter.
If the entire estimated amount is recognized as an expense in the second quarter, the Group anticipates that indemnifications and other potential concessions will cover a number of years and take various forms of economic value. In addition, Boeing has estimated Boeing 737production costs increased by $1.7 billion in the second quarter, primarily due to higher costs and lower than expected production rates. Increased costs for 737 program will reduce the margin of this program in the second quarter and in the next quarters.
Boeing continues to work with the civil aviation authorities to ensure that the 737 MAX is returned to service safely, with the date of return to commercial service defined by these authorities. In the context of the second quarter financial results, the Group has relied on the assumption that the 737 MAX's return to service in the United States and other countries would be validated by the appropriate authorities from the beginning of the fourth quarter 2019.
This assumption reflects the Group's best estimations at this time, as the effective date of reinstatement may differ from these forecasts. In addition, the financial results for the second quarter will take into account, on the one hand, a gradual increase in production rates of the 737 from 42 to 57 units per month in 2020 and, on the other hand, the fact that aircraft built during the grounding period and included in the inventory will be delivered for several quarters after the return to service. Any changes to these assumptions could have an additional financial impact.
The financial forecasts previously announced by Boeing for 2019 did not take into account the impact of the 737 MAX. Due to uncertainties in the 737 MAX timing and recommissioning conditions, new forecasts will be released at a later date.