Aerospace & Defense

GE warns of cash flow hit from grounded Boeing 737 Max

Key Points
  • GE expects a $400 million hit in each of the third and fourth quarters if the 737 Max remains grounded.
  • Regulators grounded the planes in mid-March following two fatal crashes.
  • GE cut production of the 737 Max engines it makes with French manufacturer Safran.
Grounded Boeing 737 MAX aircraft are seen parked in an aerial photo at Boeing Field in Seattle, Washington
Lindsey Wasson | Reuters

General Electric's cash flow took a hit from the grounded 737 Max, and the manufacturer of the engines for the popular planes warned on Wednesday that the trend would persist through 2019, as the fallout from two fatal crashes ripples through Boeing's supply chain.

The jetliners, Boeing's best seller, have been grounded since mid-March after the second of two crashes within five months. Together the two crashes killed 346 people.

Boeing halted deliveries of the planes and slashed production of the 737 Max by nearly a fifth to 42 a month after the grounding. GE said that prompted it to lower production of the Leap-1B engines on the planes it makes in a joint venture with French aerospace company Safran. GE said its cash flow took a roughly $600 million hit in the first half of the year and that if the grounding continues this year it would lower cash flow by $400 million per quarter in the second half of 2019.

Boeing expects the planes to fly again by the end of the fourth quarter, but regulators have not said when they plan to lift the grounding. Last week, Boeing warned it could pause production of the jets altogether if there are more delays to the planes' return, which could have a greater impact on suppliers and airline customers.

GE, which reported stronger-than-expected profits in the second quarter, has other exposure to the grounded planes through its aircraft leasing unit. The company said it has $2.1 billion in net assets tied to the Max but said it did not post any impairment charges in the first half of the year.

"We continue to monitor these developments with our airline customers, lessees and Boeing," GE said in a securities filing.

Another Boeing 737 Max supplier, Spirit Aerosystems, said the grounding squeezed the margins on its fuselages unit. The Wichita, Kansas-based company has tried to cut costs amid the grounding by freezing hiring, offering voluntary retirements, pausing share repurchases and deferring spending.

"Making such a quick adjustment to the production schedule creates significant disruption in a complex production system like the 737," Spirit CEO Tom Gentile said in a quarterly earnings release Wednesday. "We will continue to take full advantage of this pause in [737 Max production] rate increases to focus on improving quality, factory efficiency, and supply chain health."

Spirit said its revenue rose 10% in the quarter ended in June, to $2 billion, thanks to higher production of Boeing 787 and 777 wide-body planes.

Boeing Q2 earnings fall short of expectations
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Correction: GE had a cash flow hit of about $600 million in the first half of the year from the 737 Max grounding. A previous version misstated the figure.