The Boeing Company BA recently announced two significant strategic decisions in an attempt to return to its earlier growth trajectory. The company has decided to terminate 12,000 of its employees in the United States, including 6,770 involuntary layoffs. This is consistent with the company’s earlier announcement of cutting 10% of its worldwide workforce of 160,000 by the end of 2020 made in April.
In a separate press release, Boeing declared resumption of production of its 737 MAX commercial jet at its Renton, WA, plant at a low rate. These back-to-back announcements instilled new hope among the jet giant’s investors. The stock has been going downhill since last March.
Boeing’s shares rose a solid 3.3% to reach $149.51 on May 27.
What Led to the Job Cuts?
The global aviation industry took a big hit this year, after the novel coronavirus outbreak started to spread to different parts of the globe at a rapid speed beginning early March. This resulted in imposition of travel bans by governments across nations, which hurt airline stocks. In their struggle to survive, many carriers started delaying scheduled delivery of jets and even cancelled pre-signed orders as well as deliveries. As a result, commercial aerospace players, especially jet makers like Boeing and Airbus EADSY witnessed a slowdown.
No doubt, Boeing’s commercial aircraft business was hit hard in the first quarter. However, the COVID-19 pandemic alone cannot be blamed for the poor performance of Boeing’s commercial business. Notably, two fatal crashes involving the 737 Max jets led to subsequent grounding of this product line in March 2019 and eventually its production was temporarily suspended in January 2020.
Consequently, commercial deliveries plunged 66% year over year, resulting in 48% decline in the unit’s revenues in the first quarter.
To tackle thesedual headwinds, the company has been exploring all possible ways to slash its costs drastically and revive growth, one of whichis the aforementioned layoff decision.
Will 737 Production Offer a Breather?
Boeing has just started the production of 737 Max jets and that also at a low rate. The jet maker had announced in April that it expects to resume 737 MAX deliveries in the third quarter following regulatory approvals, before gradually increasing to 31 per month in 2021. In the same month, Reuters reported that regulatory approval for 737 MAX to resume flights is not expected until at least August.
However, considering the trend of COVID-19, there still remains a lot of uncertainties as to when trade restrictions across nations will be lifted. So,the entire process of Boeing getting the regulatory approval and subsequent delivery commencement hangs in the balance.
Moreover, Boeing currently expects that it will take 2-3 years for travel to return to 2019 levels and a few years beyond that for the industry to return to long-term trend growth. This indicates a deep cut in the number of commercial jets and services, which may lead to further layoffs. Considering its earlier announcement, there still remains room for further job cuts that the company might implement in coming days.
So, it is highly unlikely that the return of the 737 product line will add any significant impetus to Boeing’s growth, at least in the near term.
Nevertheless, the news of resumption of 737 Max production also boosted Spirit AeroSystems’ SPR share price by a solid 10.7% on May 27.The company is the supplier of fuselages for 737 Max.
Other Strategic initiatives
Boeing terminated its joint venture deal worth $4.2 billion with Embraer ERJ, which would have otherwise given Boeing an 80% ownership stake in Embraer’s commercial jet business. The company also lowered its rate of aircraft production, including 787, 777 and 777x, apart from suspending its share buyback program. These are some of the other strategic initiatives that Boeing has adopted, amidst the ongoing crisis, to reduce its losses.
Price Performance & Zacks Rank
Boeing’s stock has lost 56.4% in a year compared with the industry’s decline of 22.4%.
Boeing currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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