Fitch Ratings has affirmed Boeing’s (BA) Long-Term Issuer Default Rating (IDR) and senior unsecured debt at 'BBB-' and Short-Term IDR at 'F3'. Fitch has also affirmed the Long-Term IDR and senior unsecured ratings of Boeing Capital Corporation (BCC) at 'BBB-'. The Rating Outlook has been revised to Stable from Negative.
The outlook revision reflects developments over the past year in coronavirus vaccines, airline traffic recovery and the 737 MAX, said Fitch, which have narrowed the uncertainty in the rating agency’s forecasts. Combined with Boeing's liquidity position, they have also reduced the likelihood of a downgrade. Additionally, they also offset 787 delivery delays and a slow MAX delivery ramp-up, which are contributing to 2021 financial performance below some of Fitch's expectations. Going forward, Fitch believes that Boeing is past its peak debt level and mostly through the cash burn trough.
Factors supporting the ratings include Boeing's strategic positions, diversification, technology, liquidity, access to the debt and equity markets, and a large order backlog. The relative stability of the defense business also supports the ratings. Substantial cost reductions should help mitigate pressures on Boeing's financial position.
Concerns include Boeing's large debt balance, which leaves its rating exposed to adverse business or economic conditions until debt is reduced.
In the past year, the 737 MAX program's credit risks have lessened, supporting the Outlook revision. Since the first recertification in November 2020, flying has been allowed in more than 175 countries and the number of passenger flights has exceeded 125,000. Boeing has delivered approximately 200 MAX aircraft, and customers have placed about 650 gross orders. Fitch estimates the program's current order backlog covers 5-6 years of deliveries, and the backlog is up slightly from year-end 2020. Boeing and the US Department of Justice reached a 737 MAX settlement in early 2021, with financial terms lower than Fitch's expectations. Boeing also continued to pay down its MAX concessions and considerations to customers.
Notwithstanding the progress, Fitch sees several ongoing 737 MAX disappointments. The pace of deliveries has been slower than Fitch expected, partly due to the delay in China's recertification, which Fitch now expects will take place in late 2021 or early 2022. Boeing's inventory reduction has also been slower than expected, and Fitch expects the inventory will be burned off during 2022 and possibly into 2023. Fitch believes there is a risk the production increase to 31/month could be delayed.
The 787 program delivery delays partly offset the benefits from the ongoing recoveries with the MAX and global airlines. These delays are related to quality issues at both Boeing and some suppliers, and they have persisted for more than a year. In the last twelve months, Boeing has delivered only 18 787's. This compares with Boeing's production rate of 14 per month at the beginning of 2020. The lack of deliveries has negatively affected Boeing's financial results in 2021.
Boeing has an inventory of approximately 100 787s, some of which require rework before delivery. Fitch believes Boeing is subject to some contractual penalties because of the delays, and there is also cancelation risk. Additionally, there is a growing risk of a reach-forward loss, although this non- cash charge would not likely affect ratings by itself. Fitch's forecasts assume deliveries resume in the fourth quarter, although a further delay into early 2022 would not likely affect ratings. Fitch estimates deliveries could be abnormally high in 2022, before dropping in 2023 and 2024.
Fitch believes the 787 situation is not as serious as the 737 MAX crisis. The 787 is not grounded, and it appears to be one of the most used widebody aircraft during the pandemic. Also, the quality issues do not appear to be safety-related. In addition, order cancelations have been modest, and there have been some new orders so far in 2021. Fitch's discussions with Boeing's 787 customers indicate the airlines still want the aircraft, although the depressed long-haul market eases near-term pressures for additional 787 capacity.
Boeing has reduced its cost base during the coronavirus downturn, and Fitch believes the cost reductions have started to affect Boeing's results, including 2021 cash flow. The reductions include several voluntary and involuntary layoff programs, real estate footprint reductions, and consolidation of 787 production to one location (North Charleston). So far, Boeing has taken severance charges covering 19,000 workers.
The affirmation of BCC's ratings and revision of the Rating Outlook to Stable from Negative reflect the linkage with that of its parent, BA, and the fact that BA has provided unconditional guarantees for the due and punctual payment and performance of all of BCC's outstanding publicly-issued debt. In addition to the guarantee, BCC's role arranging, structuring, and providing financing to support the sale of BA's products, the high level of management and operational integration between the two entities, BA's track record of support for BCC, and the fungibility of funding between the two entities further support Fitch's view of BCC as a core subsidiary of BA.
Boeing is rated two notches below its most immediate peer, Airbus SE (BBB+/F1/Stable). This is largely the result of Boeing's execution challenges in the past several years, which have combined to weaken Boeing's quantitative rating factors compared with Airbus'. Cash flow generation is one of the key differentiators between Airbus and Boeing. In the past, Boeing consistently achieved better FCF and funds from operations (FFO) due to program execution and lower investment needs despite higher dividend payments. However, the 737 MAX grounding has severely affected Boeing's cash flow, and caused debt to rise significantly versus Airbus's.
Boeing's business profile has also been modestly stronger than Airbus's because of a more diverse revenue mix between commercial and defense, in addition to services. Airbus currently has a stronger balance sheet and liquidity position. Airbus generally operates with a higher net cash position than Boeing, and this has been widened by the 737 MAX situation at Boeing. FX exposure is also a key differentiator between Boeing and Airbus, with the former having little exposure and the latter has significant exposure, although Airbus has taken actions to address this.