Boeing’s Ongoing 737 Max Crisis Prompts Agencies to Downgrade Company’s Credit Rating

The downgrade by Moody’s and S&P is expected to increase the aircraft manufacturer’s borrowing costs
Updated: Thu, 12/19/2019 - 09:59
 
 
Southwest Airlines grounded Boeing 737 MAX 8 aircraft fleet held in storage at Victorville, California, as of May 4, 2019.

The Boeing Co.’s ongoing woes with its troubled 737 Max aircraft have led two major rating agencies to downgrade the company’s credit rating.

Both Moody’s Investors Service and S&P Global Ratings have downgraded the company’s credit rating by one notch ― with Moody’s lowering it to A3, from A2; and S&P dropping it to A- from A. Even with the downgrades, the company’s credit rating for debt remains in the investment grade category, but the credit dings resulting from the 737 Max crisis do have the effect of driving up Boeing’s borrowing costs.

“The downgrades follow the extension of the grounding of the 737 MAX into 2020, the announced plan to shut down this important program for some interim period, and the uncertainty and elevated risk ― both financial and operational ― for Boeing and its broader supply chain over the ensuing period,” says Moody's lead analyst, Jonathan Root.

In the case of S&P, the ratings outlook for Boeing is considered “developing,” which means it could be raised or lowered in the future, depending on whether 737 Max production continues without significant damage to the company’s competitive position. Moody’s, however, raised Boeing’s rating outlook from negative to stable, reflecting its “strong liquidity and financial flexibility” and its “stability in the defense business.” Still, Moody’s said a further downgrade of the company’s credit rating could occur if the 737 Max grounding extends in the second half of 2020.

Boeing announced earlier this week that it will suspend production of new 737 Max aircraft starting in January 2020 and will prioritize the delivery of the 400 aircraft it now has in storage, company announced. Boeing says at this time no layoffs or furloughs are expected.

Boeing’s factory in Renton where the planes are produced employs 12,000 workers across three shifts. The company has continued to assemble about 40 of the 737 Max aircraft a month at the plant since the passenger jet was grounded this past March following two fatal crashes in Indonesia and Ethiopia in less than half a year that together claimed the lives of 346 people. 

“The suspension of assembly of 737 Max [aircraft] for an unspecified timeframe that Boeing announced on Dec. 16 will increase costs for the program, including ongoing financial support to many suppliers; and increase risk in the production system, currently, and in the ramp-up phase once assembly re-starts,” Moody’s said in announcing its credit-rating downgrade for the company. “The extended grounding will increase airlines’ and lessors’ claims for compensation.

“Moreover, Moody’s considers that Boeing’s reputation can be adversely affected as the grounding extends and from its governance missteps with broadening social considerations related therefrom, which could have a more lasting impact on the company's business.”

 

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