The Boeing Company (BA) designs, produces, and sells airplanes and its related parts. According to Naim-Zade (2), the company is considered as the largest producer of aircraft and the leader in aerospace, security systems, jetliners, and defense. The present paper will examine the aerospace giant’s financial profile; clearly describing its current financial status, the most impactful decision made by the company, and its five year prognosis. In addition, the paper will also provide suggestions that should improve the financial viability of the company if efficiently implemented.
Boeing’s Current Financial Status
In the third quarter of 2019 fiscal year, Boeing Company reported an estimated revenue of approximately $20.0 billion (about 21% loss from its reporting in the third quarter the previous year), generally accepted accounting principle (GAAP) earnings per share of about $2.05 (50% loss from the 3rd quarter in 2018 financial year), and a non-GAAP core earnings/loss per share of $1.45 (59% drop). Its operating cash flows for the quarter was much lower ($2.4 billion) and spent $1.2 billion on dividends. Appendix A below presents a summary of the firm’s third quarter of 2019 financial results are reported by the Bloomberg.com (para. 2). According to Sheetz (para.1), the company experienced approximately 50% drop in profits- a figure that Sheetz describes as favorably as the firm had strong sales in space and defense units. Majorly, analysts expected a worse revenue reporting in the quarter as the company is recovers from the two 737 Max aircraft crashes.
On a per segment analysis, the firm’s commercial airplane segment reported $8,249 billion in revenue compared to the $14,071 in the same quarter the previous year (approximately 41%). The segment further reported a negative operating profit of $40 million in the quarter-a loss from the $2,033 billion profit in 2018. On the contrary, the defense, space, and security segment of the business reported approximately 2% increase in revenue-providing $7,042 in the quarter compared to the $6,937 the same quarter in the previous year. Besides, the segment’s operating margin was also up by approximately 10.7%. The last segment, the global service segment also continued to grow, providing a 14% increase in revenue ($4,658 billion up from $4,101 in the 3rd quarter of 2018). This was majorly as a results of the firm’s purchase of the KLX Aerospace Solution (Sheetz, para. 12). Illustrations in appendix B, C, and D provides the segment reporting of the company as illustrated by the firm’s quarterly report.
Most Impactful Decisions
The Boeing Company makes key decision that impact its operations regularly. Denning (para, 2) explains that the decision by the company to outsource, both internationally and locally to reduce costs and escalate development is among its recent decisions that lead to unexpected results. Its aim was to lower the development time of the 787 aircraft to 4 from 6 years and also reduce the production cost to $6 from $10 billion. In the end, the firm spent more than it anticipated in terms of money and time.
In the 1990s, Boeing lost market shares to Airbus and instead of reducing the cost of its existing products, it decided to go for a new aircraft to generate more revenue through value creation to its clients. This was a commendable decision for the firm as lowering the selling price and costs of its existing products could have led to its death. In this, it aimed to create a new and improved travel experience for its consumers through the utilization of composite material in the 787 aircraft to boost pressure and humidity in the passenger cabin, thereby, enhancing the travel experience.
Furthermore, the decision to manufacture the 787 aircraft also aimed at creating value for the firm’s customers through an enhanced efficiency, where it was to utilize composite materials and a lithium-ion battery electrical system. This was to reduce fuel consumption by approximately 10% and 20% for cost-per-seat mile and comparable flights respectively. All these were extremely good developments, which its consumers thought were achievable. In the end, this decision led to unexpected results as the lithium-ion batteries utilized in the 787 caused grounding effects, specifically the overheating alarm, which could not be ascertained as a fixable production bug or a grave flaw in the design (Denning, para. 8).
Economically, this decision bailed the firm from death after losing its shares to the Airbus in the 90s as the 787 Dreamliner aircraft later led in sales in the aircraft industry. Besides, by 2016 as Johnsson (para. 1) explains, the company reported a $2.1 billion after tax accounting costs from shambled designs, the 787 Dreamliner aircraft included. The company wrote off about two flight test aircrafts in the year, costing it approximately $847 million due to loss of buyers. Boeing made similar decisions with the 747-8 and the KC-46 aerial tanker, costing it a loss of $814 and $393 million respectively.
5-Year Prognosis and Recommendations
The aviation industry continues to grow due to the key drivers in the growth of air travel. These includes economic growth and the increased propensity for travel caused by the increasing globalization, trade, and enhanced air travel services that has been facilitated by the liberalization of air travel rights between nations. Apart from the recent 737 Max aircraft challenges, Boeing Company has had moderate business years in the past, experiencing net income growth rates of -4.96%, -5.43%, 72.79%, and 23.67% from 2015 through to 2018.
For the company to gain its feet and benefit from the current growth in the airline industry, it will have to get the shambled 737 Max aircraft into operation. There is good news on this as the company aims to increase the production of the 737 Max to approximately 57% by the end of 2020, indicating that it plans to get the aircraft back into operation soon Sheetz (para. 3).
Moreover, it is predicted that the industry should experience an increased demand of the wide-body planes in the near future, suggesting that Boeing’s 777X plane should be among the beneficiaries. Meanwhile, unit production costs are reducing for the less cost effective airplanes like the 787 Dreamliner aircraft, and there is also a rise in margins for the company as it has ramped up production for the wide-body planes from 12 to 14. Consequently, with the pending decisions on the 797 that should be replacing the 767 and 757. The company should experience a wind of aircraft sales in the next five years if the prediction is right.
Moreover, the company has plans of reducing supply chain costs while expanding its production footprints and the ongoing plans on its supplier margin. Additionally, the company aims to achieve its sales target of $50 billion in global services through an increase in sales by approximately 8-11% this financial year (achieving approximately $19.00 billion), which is much closer to the $50 billion five year target.
Based on the 2019 guidelines, global services is forecasted to have an operating margin higher than 15% (which exceeds the initial forecast of approximately 14.5-15%). Besides, the forecast is predicted to outperform the defense, space, and security segment. This means that the growth in the company’s global services will potentially lead to an overall revenue growth for the whole firm. Therefore, with all its airplanes back in operation and an increase in demand for the wide-body planes, the market will play to the Boeing’s strengths, allowing it to grow within the next five years. Appendix E, F, and G provides the 5-year financial prognosis for Boeing Company.
Bloomberg.com. "Boeing Company: 3rd Quarter Results." Bloomberg.com, 23 Oct. 2019, www.bloomberg.com/press-releases/2019-10-23/boeing-company-3rd-quarter-results. Accessed 2 Jan. 2020.
Denning, Steve. "What Went Wrong At Boeing?" Forbes, 21 Jan. 2013, www.forbes.com/sites/stevedenning/2013/01/21/what-went-wrong-at-boeing/#4df5d2147b1b. Accessed 2 Jan. 2020.
Investors.boeing.com/. "Boeing Reports Third-Quarter Results." Boeing Company - Investors - Overview, 23 Oct. 2019, investors.boeing.com/investors/investor-news/press-release-details/2019/Boeing-Reports-Third-Quarter-Results/default.aspx. Accessed 2 Jan. 2020.
Johnsson, Julie. "Boeing Sees $2.1 Billion Cost on 787 Dreamliners, Air Tanker." Bloomberg.com, 21 July 2016, www.bloomberg.com/news/articles/2016-07-21/boeing-sees-2-1-billion-accounting-loss-from-787-747-tanker. Accessed 2 Jan. 2020.
Naim-Zade, Kamal. "Case study: The Boeing company strategic analysis." 2018. Florida Institute of Technology, PhD Dissertation.
Sheetz, Michael. "Boeing Misses Big on Earnings but Remains Optimistic for 737 Max Return." CNBC, 23 Oct. 2019, www.cnbc.com/2019/10/23/boeing-set-to-report-earnings-before-the-bell-amid-737-max-crisis.html. Accessed 2 Jan. 2020.