Why Boeing is Hovering Just Above Junk Bond Status

Embattled US aircraft manufacturer Boeing plans to raise as much as US$35bn (£26.8bn) through a credit agreement and share sale to boost its balance sheet.

The struggling aircraft manufacturer faces a cash crunch caused by a continuing strike and production delays.

Boeing has agreed a US$10bn credit facility with a consortium of banks as it scrambles to shore up its balance sheet and avoid the looming threat of a downgrade into junk territory, which would increase its borrowing costs.

“These are two prudent steps to support the company’s access to liquidity,” Boeing announced.

The bank credit arrangement alone will help Boeing maintain its credit ratings, which are presently one notch above junk. 

Last week, Boeing unveiled plans to cut 17,000 jobs or 10% of its workforce ahead of full-year losses of US$5bn. 

Financial pressures have been mounting since US regulators demanded Boeing slow down its manufacturing after a door panel blew off one of its 737 Max jets mid-flight in January.

Kelly Ortberg, 64, who took over as chief executive of Boeing in August, is in a standoff with unions. Over 30,000 Boeing workers walked out at the company’s factories in Seattle last month in a row over pay.

The strike is costing the company about US$1bn a month, according to one estimate, and Boeing is thought to have US$10.89bn in the bank as of 30 June.

Assuming Boeing reaches its target of raising US$35bn over the next three years, the cash injection won’t come a moment too soon. 

Emirates Airlines President Sir Tim Clark told aviation website The Air Current that “unless the company is able to raise funds through a rights issue, I see an imminent investment downgrade with Chapter 11 looming on the horizon”. 

Nick Cunningham, analyst at London-based equity research firm Agency Partners, a London-based equity research firm, told City A.M. bankruptcy was “very unlikely in the near term,” especially given the funding received from the banks. 

However, Cunningham added the company was in a “vulnerable state to cope with any external shocks, such as an unexpected recession”. 

Cunningham also pointed out that “the vagueness and breadth of the shelf announcement” as implying that the banks are struggling to sell the share issue.

Boeing posted operating cash flow losses of more than US$7 billion for the first half of 2024 and had about US$60 billion in debt.

Why Boeing is in such financial trouble

Boeing is facing a multitude of serious challenges in 2024, including safety issues, regulatory scrutiny and problems with manufacturing and production.

Safety and quality control

• In January 2024, a door plug blew off an Alaska Airlines 737 MAX mid-flight, prompting investigations and temporary groundings
• Issues were identified with de-icing equipment on 737 MAX and 787 Dreamliner planes
• A United Airlines 737 MAX reported jammed flight controls during landing
• A LATAM 787 Dreamliner flight experienced a mid-air plunge, injuring 50 passengers

Regulatory scrutiny

• The Justice Department has opened a criminal investigation into Boeing
• The Federal Aviation Authority is conducting extensive audits and has expressed frustration with Boeing’s responses
• Multiple federal probes are ongoing into the manufacturer

Manufacturing and production

• A whistleblower alleged critically flawed manufacturing processes for the 787 Dreamliner, claiming Boeing ignored his warnings
• Production of the 737 MAX has been reduced following the door plug incident
• The 787 Dreamliner production has faced delays due to supply chain issues
• The 777X programme is significantly behind schedule, now aiming for a 2025 launch instead of 2020

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