Boeing Company (BA) — Q2 2019 Earnings Call Transcript

Thank you, John, and good morning. Welcome to Boeing's second quarter 2019 earnings call. I'm Maurita Sutedja and with me today is Dennis Muilenburg, Boeing's Chairman, President, and Chief Executive Officer; and Greg Smith, Boeing's Chief Financial Officer and Executive Vice President of Enterprise Performance & Strategy. After management comments, we will take your questions. In fairness to others on the call, we ask that you please limit yourself to one question. As always, we have provided detailed financial information in our press release issued earlier today. And as a reminder, you can follow today's broadcast and slide presentation through our website at boeing.com. Before we begin, I need to remind you that any projections, estimates, and goals we include in our discussion this morning are likely to involve risks, which are detailed in our news release and our various SEC filings and in the forward-looking statement disclaimer at the end of this web presentation. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures that we use when discussing our results and outlook. Now, I will turn the call over to Dennis Muilenburg.

Thank you, Maurita, and good morning. Let me start with the 737 MAX. The accidents that occurred in Indonesia and Ethiopia continue to weigh heavily on us. We will always be sorry for the lives that have been lost and the families that have been impacted. These accidents affect all of us personally and reinforce the importance of the work that we do. We know lives depend on it and nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes. We're also committed to supporting the families and communities affected by the Lion Air and Ethiopian accidents. Earlier this month, we pledged $100 million in funds to help support those families and communities. And last week we announced that $50 million from this pledge would be dedicated to providing near-term financial assistance to families of the victims. And we have partnered with renowned experts Kenneth Feinberg and Camille Biros on disposition of these funds. Now let me turn to the latest on the MAX technical updates. Last month the FAA directed us to address a specific condition of flight unrelated to MCAS that the planned software update did not previously address. We agreed with the FAA's decision and we are currently working on the software changes to address this requirement. In addition, we are working with the FAA and other regulators to complete as many elements of the certification process as possible in parallel with the development of the software update. We will submit our final certification package to the FAA once we have satisfied all of their requirements, which we currently estimate will be in the September time frame. However, as we have consistently emphasized, it is the FAA and other global aviation regulators that will determine when the 737 MAX returns to service and we are working tirelessly to meet their requirements. The process is dynamic and involves constant dialogue on outstanding questions and open issues that will continue in the days and weeks ahead. We are committed to working with these regulators to satisfy all of the requirements and to ensure the 737 MAX's safe return to service. As I mentioned last quarter, as part of our commitment to continually improve safety as we have always done, we've established a new Board committee to review Boeing's policies and processes for the design and development of airplanes. The committee has sought input from outside experts, from both industry and government and is working expeditiously to conduct its review and provide any recommendations it deems appropriate. In preparation for the safe return of the 737 MAX to service, we've conducted a dozen customer conferences with MAX operators around the world and nearly 225 simulator sessions to develop, test and demonstrate the software. In addition, we conduct weekly technical calls with our customers worldwide to ensure that all the appropriate steps are being taken so that the fleet is fully prepared to return to service when the grounding is lifted. This involves having the necessary technical kits and expertise on hand while adopting a new airplane entry-into-service mindset in partnership with our customers. This also includes a comprehensive package of training and educational resources. In April, we reduced the 737 production rate to 42 per month to accommodate the pause in MAX deliveries. Both within Boeing and our supply chain, we are using this time to improve the production system health and stability. As we said in our pre-release last week, our best current estimate is a return to service for the MAX that begins early in the fourth quarter. Based upon this estimate and other factors, we expect to be able to maintain our current production rate of 42 deliveries per month to be followed by incremental rate increases that would bring our production rate to 57 during 2020. As our efforts to support the 737 MAX's safe return to service continue, we will continue to assess our production plans. Should our estimate of the anticipated return to service change, we might need to consider possible further rate reductions or other options, including a temporary shutdown of the MAX production. The grounding has also impacted our customers and their flight schedules. The production rate adjustment to 42 per month will also cause associated airplane delivery delays in the future. We've been in constant contact with our customers to support them during this difficult time and we'll continue to work closely with all of our customers around the world and deal with the impact individually customer by customer. As we announced last week, we are recognizing impact to our second quarter results from both the longer-than-expected lower production rate and also estimated potential concessions and other considerations to customers. I want to personally thank everyone who continues to be our partner in this journey, from our airline customers and their pilots, flight attendants and others who have been impacted by these groundings, representatives from all levels of government who share our commitment to safety, the flying public, and everyone in the aviation community impacted by these events. We are grateful for your support and we will continue striving to earn and re-earn your trust. Now let me turn to an overview of our second quarter operating performance, followed by an update on the business environment and our expectations going forward. After that Greg will walk you through the details of our financial results and how we are maintaining financial discipline and prudently managing liquidity as we work through the safe return to service of the MAX.

Thanks, Dennis, and good morning everyone. Before we discuss the second quarter results let me also touch on the 737 MAX and explain how the grounding has impacted our financials to date and what we're doing to focus on today and going forward. Let's move to slide 4 please. As previously announced, BCA revenue and earnings were reduced by $5.6 billion of pretax charge related to our estimate of potential concessions and other considerations to customers or disruptions related to the 737 MAX grounding and associated delivery delays. As Dennis mentioned, we will deal with the impact individually, customer by customer and we will look at various forms of economic value that we can provide. While the entire estimated amount has been recognized as a charge in the second quarter, we will expect any concessions or other considerations to be provided over a number of years. Therefore, you can expect the impact on our cash flow to affect 2019 and beyond. We currently see this impact to be more front end-loaded in the first few years, but of course it will depend on individual discussions with our customers on considerations. We also booked an additional $1.7 billion of program costs on the 737 in the second quarter. This increase is primarily due to higher costs associated with the longer-than-expected reduction in the production rate. These include additional fixed costs and other items such as labor escalation support, parts, and material. These costs will be spread across the undelivered aircraft in the accounting block of approximately 3,100 units and therefore reduce the 737 program margin. As you know, when the program margin is adjusted it will affect the current quarter and the booking margin for subsequent periods. Also as Dennis said, we continue to work with the civil aviation authorities to ensure the 737 MAX's safe return to service and these authorities will determine the timing and condition of return to service. For the purpose of our second quarter financial results we have assumed that the regulatory approval in the U.S. and other jurisdictions begin early in fourth quarter 2019. While this assumption reflects our best estimate at this time, I just want to reiterate that the actual timing and condition of return to service will be determined by the regulatory authorities and could differ from this assumption and our estimate. Our current second quarter results also assume a gradual increase in the 737 production rate from the current 42 per month to 57 per month in 2020. We will also assume airplanes produced during the grounding, which are stored and included in our inventory will be delivered over several quarters following return to service. Any changes to these assumptions could require us to recognize additional financial impact. With regards to cash, lower cash receipts due to fewer 737 deliveries and lower production rate combined with building and storing 737 aircraft adversely impacted operating cash in the quarter. Looking forward, the key drivers of our financial impact related to the 737 continue to be the return-to-service timeline and conditions. The delivery ramp-up which will be dependent on how fast we can deliver the aircraft once the fleet returns to service and how fast our customers can accept the aircraft, but also the 737 production rate profile I discussed going forward; and discussions with customers regarding potential concessions and other considerations. We expect our financial results to continue to be adversely impacted until we safely return the 737 MAX to service, ramp up production rates and resume deliveries to customers. We continue to perform detailed scenario planning around return to service and production rates, including analyzing the implications on our supply chain, customer fleet, and deliveries to fully understand the range of financial outcomes. We will continue to assess our current production plans and incorporate any new insights such as return-to-service timeline, storage capacity, and supply chain in our analysis to help inform us on whether further rate reduction or other options including a temporary shutdown of the MAX production are needed. As discussed last quarter, we've taken steps amid current challenges to preserve the future value and growth of this important franchise program for our company and for our customers. The production rate adjustment to 42 per month we instituted starting in April has helped our factory health and also supply our progress to getting back to master schedule and improving consistency and stability. We've also taken actions to prudently manage our liquidity and increase our balance sheet flexibility including raising additional debt. These actions also include even sharper focus on productivity and strategic prioritization of spending. We will continue to diligently review all levers available to minimize the financial impact. As discussed last quarter given the dynamic 737 MAX return-to-service timeline and activities we're not in the position today to provide forecast of the impact of the 737 MAX grounding on our full year 2019 financials. We will provide you with an updated full year 2019 financial forecast when we have returned to service the MAX fleet and our production plans and delivery ramp-up profile and corresponding financial impacts. Returning MAX safely to flight continues to be priority one for us. It has been a team effort that leverages the best talent from across Boeing and also outside experts. The operating rhythm and the momentum of our cross-functional team has not let up since day one. The team continues to meet daily with our Executive Council fully engaged. We will continue to apply whatever resources are required to return the 737 MAX safely into the fleet and take the time necessary to do so working hand-in-hand with our customers.

All right. Thank you, Greg. These are challenging times, first and foremost for the families and loved ones affected by these recent events, and also for our dedicated people who work tirelessly to deliver on our mission to connect, protect, explore, and inspire the world all with a relentless focus on quality and safety and doing so with the utmost integrity. This is a defining moment for Boeing, and we're committed to coming through this challenging time better and stronger as a company. We'll stay true to our enduring values, while driving operational excellence across the enterprise. The safe return to service of the 737 MAX is our company's top priority. I want to thank my Boeing teammates, who are delivering on this priority and on our other commitments of executing on our key priorities for our customers driving growth and operational excellence across the business in close partnership with our customers and suppliers and returning value to our shareholders. From engineers to analysts, to our factory teams and field service reps, to designers and planners, and to everyone at Boeing who has worked tirelessly to apply our culture of continuous improvement and learn from these events to innovate, to challenge, and to improve you have my sincerest thanks. I'm humbled and inspired by the response of the people of Boeing and our many partners. The shared responsibility of safety binds us together and reinforces our purpose and mission as an aerospace leader. The long-term fundamentals for our businesses remain strong and our key priorities are unchanged. Our One Boeing advantage has never been clearer, and we will leverage this unique strength to deliver and improve on our commitments to our customers and our partners around the world. With that, we'll take your questions.

Hey, good morning gentlemen.

Good morning.

Hi, Carter.

Hi. Greg, can you help us understand the relative degree of confidence you had or used to reach the financial impacts you announced last week and maybe how you thought about the variability in outcomes there, especially, I guess in the context of a temporary line stoppage that you both mentioned in your prepared remarks. And then I guess related you said the phasing of those impacts would be front end-loaded, but can you maybe help us understand how you're thinking about that impact on the kind of higher-level multi-year cash flow trend you've talked about in the past? Thanks.

Yeah, absolutely. Yeah, look obviously our booking position for the second quarter is our best estimate. And that's our best estimate based on a variety of inputs that we take into consideration and our engagement with the regulators, our software schedule, and our production plans the storage that you brought up all of that coming together in the second quarter. And again, that's our best estimate at this time. Now, as I said and Dennis said, obviously, some of those assumptions could change from here and if they do, they could have financial impact further than what we've booked in the second quarter and we'll keep you up-to-date if that's the case. But again, based on all that information, that's the best estimate we've got right now. And as far as the path forward on the customer concessions as we've said, we're working and will continue to work with each of our customers and talk about how we can help through this period around the grounding of the aircraft, but also as we move deliveries out. And those will be individual conversations customer by customer, but likely be multiyear-type I'll say financial outcomes and particularly around cash. As we see it today, it’d probably be a little more front-loaded into 2019 and some of the early years, but then phase out over that period. But again, this will be based on individual conversations and we'll pull that together as those conversations become more mature. As you look at the cash profile going forward, I maybe step back a little bit and take the MAX out of the equation for a second, and tell you that the balance of the company and I'd say the key puts and takes that we saw pre-MAX remain intact. So, all those fundamentals are still intact. The real obviously outlier here is the MAX. And if the MAX returns to service based on the estimate that we have right now, then you'll obviously see significant cash in 2020 that will really be driven by those airplanes being delivered off the ramp at a higher rate, but as well as the production rate increases that we've talked about. But until we have complete clarity on exactly that return-to-service date, and then the associated deliveries and production plan it's obviously TBD at this point. But again, the fundamentals remain intact and the objective certainly remains intact as well of having this year-over-year long-term cash flow objective. And like I said, the operating engine outside of MAX continues to achieve the results we expect. And again lots of puts and takes as we move into the future years, but those are bounded very similar to the way they were pre-MAX. So it really is dependent on MAX return to service, and then that ramp-up from there. And as I said, we'll continue to keep you posted on that.

So it basically just sounds like the working capital reversal and the phasing of the settlements are the two big moving items for 2020?

Yeah. Certainly, yeah as you think about 2020 like I said delivering off the ramp and not only our ability to deliver off the ramp at a higher rate, but as I said the customers' ability to take those; the concessions and considerations as you said; obviously lower advances at this lower production rate that you're seeing currently and you'll continue to see; and then the 777, 777X schedule that Dennis talked about. So yeah, there's lots of moving pieces within there, but we're continuing to work it. And like I said, the 777 continues to remain strong. It's certainly helping us through this period. And then the 777X skyline we talked about our priorities when it comes to widebodies in the market and certainly 777X and 787 continue to be high priority of filling in that skyline. So like Dennis said, we're disappointed considering the progress that's been made on the program. And these investments, we made to de-risk the development phase of the program, we're seeing the benefit of that today, but we're disappointed by where we are with that – with this engine. So we're trying to get ahead of this Cai and putting mitigating actions in place and really again minimize the impact on us, and ultimately on our customers.

And as Greg said, the encouraging thing is the current 777 continues to do well in the marketplace. So we still expect our factory to be running a five per month production rate next year as we said our delivery rate of about three and half per month this year and we'll be looking at the exact delivery mix next year within that production rate the exact delivery mix of 777 to 777X. And so that's work that's still underway. We've got some work to do.

Thanks so much.

Thank you everybody. Good morning.

Good morning, Hunter.

Hi, Hunter.

Regarding the comment around potentially suspending the MAX line, when will you need to make a decision on that? What are some of the gating factors? And then – and once you resume deliveries what's the bigger concern between the customer's ability to accept and your ability to deliver it? Thanks.

Yeah, Hunter first of all, when we take a look at the overall MAX plan and return-to-service plan as we said, our current best estimate is that, we return to service early in the fourth quarter. And as long as we remained solid on that assumption, we believe we can maintain our current 42 per month production rate, and as we said incrementally step back up to 57 a month as we go into 2020. Now, if that estimate of return to service substantially changes then we'll have to consider alternatives. And every day, we are doing scenario planning, working through every dimension of this program. We're looking at the ongoing software update development, the regulatory approvals, the certification process, the return-to-service process, working hand-in-hand with our customers, supply chain health, production system health every dimension of the program. And we have that knit together. We understand it. We understand the ripple effects of any changes to the schedule, and we're going to continue to monitor that on a day-to-day basis. Currently, and as I said daily, we're working with the FAA, EASA and other regulators as we step through the certification process headed back to ungrounding the fleet. We have a clear understanding of the work that has to be done, but there is still uncertainty in the time line. And we do have to go through a multi-regulator approval process and it's a complex process and one that will take time to get done. The important thing here is everything is based on safety of the airplane. We are confident that when the 737 MAX returns to service, it will be one of the safest airplanes ever to fly. That is the most important thing here. We're going to take the time necessary to ensure its safe. And as I said if any of the time line assumptions change significantly from a start of the fourth quarter return to service, then we'll have to evaluate alternatives. And those alternatives could include different production rates. They could include a temporary shutdown of the line, not something we want to do, but an alternative that we have to prepare for, I think it's a smart part of our thorough and disciplined process here to make sure we're covering all scenarios.

Thank you.

Good morning. Thanks for taking my question. So Dennis, you talked about a software fix for this latest issue that the FAA identified. Are you sure it's a software fix at this point and not also potentially a hardware fix? And then, it's also being reported that EASA has five mutual requirements before it'll lift the MAX grounding. Is that in fact accurate? It seems to be more encompassing of what the FAA is talking about. And if so, is that accurate, they have these five requirements? And if so, is meeting those lineup what the September timeframe that you've outlined? Thanks.

Yes, David, let me provide some context. First, regarding the software update, we are confident that it is indeed a software update and not a hardware one. Our process involves having regulators come to our simulator to test various conditions as part of the certification. During these simulator sessions, we identified an additional scenario that led us, in consultation with the FAA, to implement this software update to reduce a potential risk. This update addresses a simulated failure in the airplane's microprocessor that we previously reported. We are currently working through this update. The timeline for its approval and the completion of certification is still uncertain as we are finalizing details with the regulators. The FAA has also organized several collaborative sessions with multiple regulators, including EASA, Transport Canada, and Brazilian authorities, to address all their questions. The inquiries you're referencing from EASA, along with those from other regulators worldwide, are being consolidated and discussed with FAA leadership. We have considered all this feedback in our timeline analysis, which aligns with our plan to submit our certification package in September and aim for a return to service in October. However, we acknowledge that there is still some unpredictability in the exact process the regulators will go through.

Thanks very much and good morning. Follow-up on a couple of questions that have been asked already and hopefully not be too repetitive. But just in terms of how you think about the rate and where the line should be? I appreciate the fact that you guys have to be very disciplined and thorough in your planning. But as we've seen over the past few months, it's not surprising to see the dates move around here and there. And when you balance some of the risks of continuing to producing 42 without delivering versus the risk that would emerge on the supply chain if you were to cut the rate significantly, I mean, is it safe to say that the type of slips that we've seen already which is a couple of months here and a couple of months there don't necessarily affect the rate?

Yes. Seth, I guess the way to think about that is, we're continually assessing all of these different pressure points in the system and supply chain health is certainly one of the key considerations for us as we think about the production rate. We're also taking a look at storage capacity and our ability to take care of the airplane from the field, our return-to-service timeline, and the effect that will have on our customers and the work that needs to be done on preparing the airplanes. So we're taking a look through all dimensions of these pressure points around the schedule. And no one item is going to drive the schedule. This is balancing all of the inputs in perspective. So, I won't make any dramatic assumptions around any one parameter. It's more of a balancing act as we continue to look at all of these dimensions.

Thank you.

Good morning.

Good morning.

Hey Rob.

Dennis, you've mentioned a couple of times during the call that you expect to have the fix by September and hopefully recertification in October. Since the FAA is currently collaborating with you, what will happen during that one month? Will they have already reviewed most aspects before receiving the official submission? Additionally, is the discovery phase completed and we are now in the implementation and testing phase, or is new discovery still ongoing? Thanks. Yes. I would describe this as an iterative process. We are in daily communication with the FAA and other regulators. Our teams are consistently working on software updates and conducting simulator sessions. A significant amount of certification documentation still needs to be completed. All of this engineering work is currently in progress. As we finish this work and document what is called the system safety assessment, we will move into the final formal certification process, which will include a certification flight test. After that test, we will submit the final documentation for the FAA's standard approval process. At the same time, we will conduct several pilot evaluations. There is a joint operational evaluation board that will assess the training aspect of bringing the MAX back into service. These activities are happening simultaneously alongside the regulators, but it remains an iterative process. During these iterations, we may uncover new items. Our objective is to eventually resolve uncertainties and address questions from regulators. We are making steady progress and are seeing convergence, indicating that we are advancing. However, until we complete all certification activities, there remains some risk of new issues arising. Therefore, we strive to maintain a disciplined engineering process as well as scenario planning to account for any potential uncertainties. We will not return to service until we finalize the certification step and confirm the airplane's safety. This is the critical factor at this point.

Thank you.

Thanks, everyone. Dennis, can you give us some perspective on the widebody market please, some thoughts on why you're not over supplying as some of your competitors might have suggested and also how you're achieving what some have suggested are very aggressive prices? And then just a little bit also on the near-term versus long-term dynamics in that market, including China. Why is that a near-term driver and then more of a replacement dynamic in the 2020s? Thank you.

Yeah. You bet Jon. Well, a couple of things. One, as you look at our current market outlook as I mentioned in my comments, we continue to see strong overall growth. And if you look at the next 20 years, the world needs about 44,000 new commercial airplanes, up from about 43,000 in our previous forecast. So directionally the market continues to expand. The fundamentals are solid and passenger traffic in particular continues to expand. A key part of that future demand is the widebody marketplace. We continue to see a significant wave of replacement demand early in the next decade as we've said before. And we believe our 787 and 777X families are perfectly positioned for that replacement wave that's coming. And you can see that our products are winning in the marketplace. Despite a fairly tough marketplace in terms of overall orders, so far this year our widebody segment has been doing well. And we've been winning in the marketplace with both the 787 and the 777X and I think that speaks to the value that we're providing customers. So I can't comment on our competitors' comments that you mentioned but I can comment on the fact that our customers see value in the 787 Dreamliner and 777X. That's showing up in orders. And while we still have work to do on the skyline as we noted for both 777X and 787, we feel confident in the production rates that we've laid out.

Thanks. I’ll stick to one.

Yeah, hey good morning guys.

Good morning Ron.

So one thing that really hasn't come up too much in the call is where do we stand on NMA. And on NMA when we kind of stand back and look at it, given the difficulties that we run into on the MAX and the difficulties on 78 and the difficulties on 74-8 and the difficulties on KC-46, how do we get comfortable around NMA? And can you just talk about that?

Yeah Ron. First of all to put it in context, we continue to have a dedicated team that's working on NMA, working through our business case. Our assessment of the market opportunity hasn't changed. We see a potential market there for 4,000 to 5,000 aircraft and we continue to see significant customer interest in that marketplace. But in terms of relative priorities, it's clear that our top priority is getting the 737 MAX return to service safely and so we have prioritized that in terms of resourcing and focus for our company. And that will be first and that is ahead of our NMA work. That said, we're continuing to progress on building our business case and when and if that business case closes, we would make a launch decision. We still see it as a two-step decision process as we've described previously. And we're not going to run to any artificial timeline. We're going to make decisions based on disciplined data and as the business case close. Part of that business case is addressing development program risk as you noted and we are investing significantly in improving development program performance.

Okay. Thank you.

Thank you, good morning.

Good morning, Doug.

On the MAX, as you look toward presumably the September timeframe, one of the issues that's been out there has been training requirements. And if you look across a number of aviation authorities there, appear to be very different views also across airlines. When you consider different scenarios for what training requirements will be whether they're full simulator computer-based, how could that affect your ability to deliver even if we get certification in the timeframe that you're hoping it will occur?

Yeah, Doug. That's another area that we're paying close attention to and working daily. So as part of our ongoing work, not only the software update on the MAX, we've also made a comprehensive update to the training materials and expanded educational resources. And that is being done in concert again with regulatory authorities and with our customers around the world. In fact, we've conducted, as I mentioned earlier, hundreds of simulator sessions with customer pilots around the world to get their inputs on the training packages and some of the updates that we're making. So that work is going on in parallel. The next significant waypoint in that process is something that's called the Joint Operational Evaluation Board. That is a convening of regulators and government pilots that will fly the airplane with the updated software. They will evaluate the training curriculum and will make final recommendations on the overall training requirements. And we have prepared a comprehensive set of computer-based training modules that we're confident will address the training needs for the MAX. But in addition to that, we've also prepared options and are continuing to work through options for simulator-based training for airlines that may want that or regulatory agencies that may require it. And we do expect in the end that we'll have a consistent set of computer-based training that all airline customers will use and there will likely be some selective use of simulator-based training. It depends on the maturity of the fleets and whether they already have MAX aircraft or whether MAXes are new to their fleet. It depends on their pilot training curriculum. Some airlines will use simulator training as part of their normal recurrent training. Some may want training upfront before they fully return the fleet to service. So that can be a pacing item, Doug, as you noted and it's another one of those uncertainty elements that we're working our way through. That's why when we say return to service early in the fourth quarter we have to work through all of these uncertainties: the software update and the certification of the airplane itself as well as the training curriculum as well as preparation for all of our customers to get the fleet back up and running. And we have good understanding of each of those workflows. We know the work that has to be done. We are on it on a daily basis. But the exact timeline for completing all of that and getting regulatory approval across the board is still uncertain, and that's why we keep saying we've made our best estimate of that timeline, but we're also protecting for uncertainty of that timeline with our scenario planning.

Okay. Thank you.

Thanks. Good morning.

Good morning.

Good morning.

I would like your thoughts on whether you've made any adjustments to the suppliers you're keeping at a rate above 42 a month with the updated timeline. Additionally, could you explain the reasoning behind opting for a temporary shutdown instead of a more significant reduction in your production rate of 42? Thank you.

Our approach to supply chain planning and scenario management varies by supplier. Some suppliers are providing at our production rate, while others are operating above our target of 42 units per month. Each plan is customized for the specific supplier. We've had instances where certain suppliers were delayed, and we've taken the chance to align them with our master schedule. Examples include CFM with engines and Spirit with fuselages, where we've improved production health and stability by increasing their output. With CFM, we are also focused on maintaining this higher production rate to ensure we have enough engine spares for when we return to service. Each of these plans is part of our broader strategy for supply chain health, which encompasses over 600 suppliers involved in the MAX program. Regarding production planning, our approach is influenced by the timeline we expect to follow. If we can uphold our early fourth-quarter return to service, we will maintain the production rate at 42 units per month. If there are significant changes, we might explore other options. Lowering the production rate below 42 units presents challenges for synchronizing our supply chain and workforce, particularly related to future ramp-up considerations. In specific cases, a temporary production line shutdown might prove more efficient than sustaining a lower production rate. This could help minimize the outflow of airplanes and storage needs while preserving supply chain health and workforce consistency. We are carefully evaluating these factors and ensuring that all scenarios are considered.

Operator, we have time for one more analyst question.

Thank you. Good morning.

Good morning, Sheila.

Just to elaborate on the global demand environment a little bit more, what are your thoughts on air traffic decelerating close to the 4% to 5% long-term rate? What are watch items there? And as it relates to that, how do you think about the service business and implication from the MAX to that segment? Thank you.

Yes, Sheila, on the overall market, the fact that we've been operating at a 4.6% passenger traffic growth through May, is not surprising to us. We expected some slowdown in the early part of the year. Some of this has been driven by local effects. The MAX, to a degree, has played into this. Local airport shutdowns in a couple of key locations have impacted it. But we don't really see a macro driver behind the passenger traffic numbers year-to-date and it is consistent with the longer-term trend of continuing to grow it faster than GDP. So our overall confidence in the market and our 20-year growth outlook, our current market outlook, remains solid. And I wouldn't read anything more than that into the passenger traffic stats that we've seen so far this year. And the second half of your question was?

Service business.

On the services business. So, on the MAX impact, we have seen some impact of the MAX grounding on our services business. Things like engine overhauls, for example, have been pulled back a bit as we have customers who are keeping existing airplanes in service longer, because of the less capacity in their fleets. They're deferring some engine overhaul work, so some ripple effect into our services business. I wouldn't say it's extensive, but some impact that we've seen. And again, we expect that to be localized and temporary, nothing that we're seeing as a long-term trend change.

Thanks, John. Good morning. We'll continue with questions for Dennis and Greg. For those in media, if you have additional queries following this session please call our team at (312) 544-2002. Operator, we're ready for that first question. And in interest of time, we ask that you limit everyone to just one question.

Hi. Dennis, you've talked in the past about how the MAX experience has been. The last few months have been gearing for your personally, but just an enormous challenge for Boeing. And there's been some discussion of lessons learned and I think a lot of people would like to actually hear a little bit more about what those are. And what's changed in terms of how Boeing operates and how it approaches designing and certifying aircraft?

Yes, Julie, let me make a few comments on that note. I appreciate the question. Certainly, it's been a challenging time for us as a company, but more broadly across the aviation industry. And one, I think this whole situation has certainly reinforced the importance that we place on safety and quality and reminded us of the importance of the work we do. And we know that lives depend on the work we do and this is just further reinforcing that and reinforcing our commitment to safety and quality. And in the end, that's going to make us a better, stronger company. We are taking a look at all of our airplane design and certification processes end-to-end. As you know, we have a Board Committee that we've stood up and they're doing a lot of hard work right now, looking through all of our processes. We also have a number of external government reviews that are ongoing, looking at certification processes. Any learnings from that we will certainly incorporate going forward. And then, we're also taking a look at things around communications and integration and how we can make sure safety issues if found or recognized, those quickly come to the surface, can be dealt with, that we have effective communications with our customers and all the constituencies that are involved. And those are changes that we'll be making as well for any lessons learned. This is all about ensuring that we have the right safety and quality culture for the future. We have a very solid foundation of that today, but we also know we can always get better and that's our focus.

Hi. Thank you. Dennis, so do I understand it correctly that you have to sell more 777 freighters to avoid a slowdown in 777 output due to the 777X delays? And how easy is that at a time of global trade tensions?

Yes, Eric, as I said, we look at the skyline mix through 2020. With the delay in first flight of the 777X, it's obviously going to put pressure on entry-into-service timing. We're still holding 2020 for first delivery. But we know there's clear pressure on that, given the delays in first flight. So we are taking a look at production skyline mix in 2020. And as we mentioned earlier, we anticipate that means we'll probably build more current-generation 777s, 777 freighters in that time frame. The good thing is the market signals are positive there. We've made progress on continuing to sell 777 freighters including during this last quarter. We continue to see strong demand signals there. And so our ability to maintain the production system at five a month and alter the delivery mix between 777s and 777X. We're confident we can do that. We have work to do to fill out the specific orders and delivery slots. But the good news is that the 777 bridge is strong and we continue to see a lot of demand for the 777 freighter.

Good morning. The information you've shared today presents us with two contrasting scenarios for production in Renton. In one scenario, there could be a potential shutdown, while in the other, you're increasing production from 42 to 57 units a month within a year. I'd like you to clarify some of the optimistic assumptions involved. You hope to have a plane ready for flight in September, but typically, following a flight test, it takes weeks for the FAA to process the paperwork and analyze the flight data. Therefore, it seems optimistic to expect entry into service in October. Additionally, ramping up from 42 to 57 units in a year appears equally optimistic, as it normally requires substantial incremental steps, often taking about six months to achieve that increase. What will determine which scenario unfolds in Renton? If entry into service is delayed until next year, does that imply a shutdown?

There's no single trigger to point to. We are considering various scenarios given the different factors involved in our schedule. Currently, our best estimate is that we will deliver our certification package, including the flight, around September and aim to return to service early in the fourth quarter. After the certification flight, the process typically takes several weeks as the regulators, including the FAA, review the data, validate it, and grant us approval to resume service. We have incorporated this best estimate into our analysis and the numbers we shared today. We're monitoring this daily and collaborating closely with the FAA. Our timeline depends on the FAA and other regulators, and we will work diligently with them. If there are significant changes to this timeline, we will need to reconsider other scenarios. Although there’s no specific trigger, we are continually assessing the best solution for our customers, prioritizing flight safety and a smooth return to service. We are also focused on maintaining the health of our production system, both at our Renton factory and within our supply chain, which includes the well-being and stability of our workforce, as well as other logistical factors. We will keep balancing all these elements. Regarding ramping up later, we have previously operated at higher production rates, experiencing rates of up to 57 per month and 52 per month. This knowledge gives us confidence in our ability to ramp back up, which we’ve also factored into our analysis. Even though we’ve reduced our production rate to 42 per month, we have retained our workforce in Renton because we greatly value their contributions. We are making every effort to preserve that workforce and maintain their expertise for future production increases, and all these considerations are part of our decision-making process.