Boeing has announced it will record a cost of US$4.9 billion related to the grounding of the 737 Max aircraft following two fatal accidents.
According to the manufacturer, this charge will result in a $5.6 billion reduction in revenue and pre-tax earnings for the second quarter of the year. However, Boeing said “any potential concessions or other considerations” could come over a number of years and take “various forms of economic value”.
Additionally, the company’s costs to produce the 737 increased by $1.7 billion due to a reduction in the production rate, which will reduce the programme’s margins in the second quarter and in the future.
Boeing is still working with world aviation regulators including the US Federal Aviation Administration (FAA) on solving an issue with the aircraft’s Manoeuvring Characteristics Augmentation System (MCAS), which has been named as a potential factor in the Lion Air and Ethiopian Airlines crashes that killed a total of 346 people.
While testing a software update for the MCAS, the FAA reported it had found additional issues that would need to be addressed by Boeing before the 737 Max could be recertified.
Boeing has also pledged $100 million to support the families of those who died in the accidents, though it is facing a lawsuit filed by the family of a British UN worker who was killed in the Ethiopian Airlines crash.
Airlines have also been hit by the 737 Max grounding order. Ryanair announced this week that it would have to scale back its capacity for next summer and might even be forced to close some bases due to a pause in deliveries of the aircraft.
Meanwhile, American Airlines has cancelled 115 flights a day that were supposed to be operated by the 737 Max until 2 November, and Norwegian has previously said it intends to pass any costs related to the grounding on to Boeing.
Commenting on the impact of the situation, Boeing CEO Dennis Muilenburg said: “We remain focused on safely returning the 737 Max to service. This is a defining moment for Boeing. Nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes. The Max grounding presents significant headwinds and the financial impact recognised this quarter reflects the current challenges and helps to address future financial risks.”
CFO and EVP of enterprise performance and strategy Greg Smith added: “We are taking appropriate steps to manage our liquidity and increase our balance sheet flexibility the best way possible as we are working through these challenges. Our multi-year efforts on disciplined cash management and maintaining a strong balance sheet, in addition to our strong and broad portfolio offerings, are helping us navigate the current environment.”
Boeing says it will release its full second-quarter earnings, including updated full-year guidance, on 24 July.