Boeing Company (The)

Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's third quarter 2020 earnings conference call. Today's call has been recorded. The management discussion and slide presentation, plus the analyst question and answer session, are being broadcast live over the Internet. To ask a question on today's conference, please press the digit 1, followed by the digit 0 on your touchtone telephone. Again, it is 1-0 for questions. After pressing 1-0, you will hear that you've been placed in the queue. Pressing 1-0 again will take you out of queue and may prevent you from being able to ask a question. At this time, for opening remarks and introductions, I am turning the call over to Ms. Marita Sutasia, Vice President of Investor Relations for the Boeing Company. Ms. Sutasia, please go ahead.

Thank you, John, and good morning. Welcome to Boeing's third quarter 2020 earnings call. I'm Marita Zutaja, and with me today are Dave Calhoun, Boeing's President and Chief Executive Officer, and Greg Smith, Boeing Executive Vice President of Enterprise Operations and Chief Financial Officer. After management comments, we will conduct a question and answer session. 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 discussions this morning are likely to involve risks, which are detailed in our news release, in 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 certain non-GAAP measures. Now, I will turn the call over to Dave Calhoun.

Thank you, Marita, and good morning, everyone. Before I get started today, I want to take a moment to remember those who lost their lives on Lion Air Flight 610 and Ethiopian Airlines Flight 302. Tomorrow will mark the two-year anniversary of the Lion Air accident. Not a day goes by that we don't remember, reflect, rededicate ourselves to ensuring accidents like these never happen again. Our deepest sympathies are with the family members and the loved ones today and every day. It's been about nine months since the onset of the COVID-19 pandemic. I hope you're all continuing to stay safe and healthy during these very challenging times. Let's turn to our business update on slide two. The pandemic is having broad and deep impacts across the globe on health, on the economy, on global trade, and of course, our travel industry. We're focused on the health and safety of our employees and our communities. while working closely with our customers and suppliers to navigate through this global pandemic to rebuild stronger on the other side. There's no doubt that this moment is among the most difficult in our more than 100-year history. Through it all, I remain confident in Boeing's long-term future. Let me start today by providing some key updates from across the business. As you know, the COVID-19 impacts on our commercial customers continue to be devastating. and airlines have cut back operations dramatically. We are engaged with our customers every day to understand their short-term, their medium-term, and their long-term fleet needs so that we can align our supply and demand. We're also working together across the industry to enhance the safety and well-being of passengers and crews during the COVID-19 pandemic. Through our Confident Travel initiative, We are collaborating industry-wide to develop multiple layers of protection to minimize health risks for passengers and crew throughout the travel journey. Boeing aircraft are designed to maximize cabin air quality using high-efficiency particulate air, or HEPA, filters that trap 99.9% of particulates. And the air in an airplane is exchanged a minimum of 20 to 30 times per hour. That compares to two to five times per hour in a typical building environment. As we further enhance health measures, we have also entered into patent and technology licenses with partners in this field to manufacture an ultraviolet or UV wand to better sanitize airplane interiors. Of course, in-cabin technologies like the HEPA filter and this UV wand also have to be combined with personal responsibility of passengers and crews, including wearing face masks and taking other precautions, all of which are critical to creating a safe travel experience. We're seeing encouraging industry data validating the safety of air travel. Recently, IATA published data outlining that of the over 1 billion people who have traveled by air this year, There have been fewer than 50 documented cases of transmission. This research was reinforced by a recent study by the US Transportation Command and United Airlines that found the risk of contracting COVID-19 while flying is very low. We know this will be top of mind for anyone traveling, and we're here to support our customers every step of the way. This period of reduced air travel underscores how fundamental the aerospace industry is to the global economy, to global trade, and to global cooperation. Our airline customers and suppliers not only employ millions of workers, they also serve as a connecting and driving force to the entire global economy. That's why we fully support our airline customers in their continued discussions with the US and global governments on potential additional support during this pandemic. I'm certain leaders at every level of government understand the important role airlines serve in our country. We're also doing everything we can to support our global suppliers and their stability remains a very key watch item. It only takes one part of our one part to delay production of an aircraft or delay service delivery. So we have to work together as an industry to get through these difficult times. Internally, we're also taking tough but necessary action to adapt to the new market reality and transform our business to be sharper and more resilient for the long term. As we shared last quarter, we continue to resize and reshape our business to align with our smaller market. COVID-19's continued impacts have had a more prolonged and deeper impact on our industry and will have to further reduce our workforce. Each of our business units and functions will carefully make staffing decisions that prioritize natural attrition and stability in order to limit the impact on our people and our business. With this approach, we expect additional voluntary and involuntary reductions. Combined with natural attrition, these reductions will bring the size of our workforce to around 130,000 employees by the end of next year. We will continue to assess our market and adjust our plans as appropriate. These decisions are not easy. They represent critical actions to ensure we're able to navigate through this global pandemic and be in a position to deliver for our customers on the other side. As we work through these challenging times, our focus on our values and our priorities has not and will not waver. We are working tirelessly to strengthen our culture, to improve our transparency, rebuild trust and ensure we are always delivering the highest safety and quality standard. We continue to implement a series of meaningful changes announced one year ago to strengthen the safety practices and culture of our company. As we've shared, we stood up our new product and services safety organization and brought together over 50,000 teammates into a single engineering organization. We're also making significant progress on our enhanced enterprise safety management system with an initial focus on our commercial airplanes business. We are working to ensure our system meets the regulator's tougher standards and reflects industry best practices, as well as lessons learned from a number of independent reviews that have taken place over the past 18 months. We've also developed a racial equity and inclusion action plan This will raise the bar for progress on key measures of equity and inclusion for our people and hold us accountable for clearing that bar. We also remain focused on sustaining critical investments in our business, innovating and operating to help make the world a better place for future generations. This quarter, we appointed a Chief Sustainability Officer, a leadership position dedicated to galvanizing and advancing our environmental, social, and our governance priorities. This is an important step as we continue to elevate our focus on sustainability and partnership with our customers, our suppliers, and our communities. In the face of tremendous challenges we are all confronting, I am incredibly proud of how our teams have remained focused on meeting our customers' commitments. Working closely with the FAA and other global regulators, we're continuing to make steady progress toward the safe return to service of our 737. Over the past year and a half, there have been around 1,400 test and check flights, over 3,000 flight hours completed on the airplane. While we still have work ahead of us, we're encouraged by the rigorous certification and validation flights conducted by the FAA, by Transport Canada, and the European Union Aviation Safety Agency, EASA. The joint operational evaluation board featuring civil aviation authorities from the United States, from Canada, Brazil, and the European Union also conducted its evaluations of updating crew. We also continue to work closely with other global regulators, including the Civil Aviation Administration of China, among others. These are important milestones in the certification process. as our global regulators progress through a comprehensive, robust, and transparent process. And we will continue to follow their lead in the steps ahead. Our assumption has not changed from last quarter. We continue to expect the necessary regulatory approvals to be obtained in time to support resumption of deliveries during the fourth quarter of this year. Of course, the actual time will ultimately be determined by the global regulators. In addition to the 737, we're making progress across our commercial, defense, space, and services businesses. And I'll highlight a few. Our 777-9 flight test program progressed through this quarter as the final test airplane joined the fleet. The U.S. Air Force and Boeing team were awarded the Collier Trophy for aerospace excellence for the X-37B autonomous space plane. Our Boeing Defense Systems team secured an important contract for eight F-15EX advanced fighter jets for the U.S. Air Force. And also in the quarter, our T-7A Red Hawk advanced trainer earned the first E-Series designator from the U.S. Air Force, given to an aircraft that is designed, engineered, built, and tested along a digital thread. And our global services team signed an agreement with GE Capital Aviation Services for 11 Boeing converted freighters and secured a six-year support contract for Australian P-8As. On the 777X, we continue to work with the regulators on certification work scope, including reflecting the learnings from the 737 CERT process. As with any development program, there are inherent risks that can affect schedules. While we continue to drive towards entry into service in 2022, this timing will ultimately be influenced by certification requirements defined by the regulators. In addition to making progress across our programs, we're also taking action across the enterprise to transform our business and create additional competitive advantages. Greg will provide more details in his remarks. With that update in mind, let's turn to the next slide to discuss the industry environment. Earlier this month, we released our 2020 Boeing Market Outlook, which forecasts a total market value of $8.5 trillion over the next decade, down from $8.7 trillion a year ago due to the impact of the pandemic. Most of the adjustment in the near term. Overall, the defense and space market remains significant and relatively stable, and we continue to see solid global demand for our major programs. Nonetheless, the scale of government spending on COVID-19 response has the potential to add pressure on global defense spending in the future. Broad support for our defense portfolio is underscored by the $5 billion of orders that BDS booked in the third quarter across key franchise programs. The market outlook for our government services business also remains stable, driven by both domestic and international military aircraft fleet expansions. Our government services defense and space programs will help provide critical stability for us moving forward. Turning to the commercial market, while many of our key long-term fundamentals remain intact, we project near-term market pressure with COVID-19. Airlines globally have begun to recover from the trough of greater than 90% decline in passenger traffic and revenue earlier this year. In fact, earlier this month, the TSA streamed over 1 million passengers for the first time since mid-March. However, the overall recovery has been at a slower pace than we originally anticipated. As the domestic market recovery continues, the international markets remain at all-time lows. August domestic passenger traffic was 49% of 2019 levels, a 51% decline, whereas international passenger traffic was only 12% of the prior year, an 88% decline. International passenger traffic recovery remains challenged by the absence of a coordinated global policy on cross-border entry protocols. IATA recently lowered its 2020 passenger traffic forecast to a 66% decline versus prior forecasts of 63, based on lower fourth quarter expectations and less international traffic. Regional dynamics continue to evolve with bright spots in China where domestic traffic has returned to around 2019 levels, while recovery in other regions has pulled back as COVID cases reemerge and government travel restrictions remain fluid. Airlines are incrementally returning their parked fleets to service, with approximately three-quarters of their pre-crisis fleets now active. At the same time, the active fleets are only seeing about 60 to 70 percent of their normal utilization rates, keeping global operations around half of pre-crisis levels. These mixed trends will continue to drive an uneven recovery. The path ahead will be heavily dependent upon not only the virus, but also wide-scale progress on rapid testing, coordinated policies to alleviate travel restrictions, and timing and availability of a vaccine. As we look to the medium and long term, we see our original prognosis more or less still holds. Consistent with IATA and other industry groups, we still expect it will take around three years for travel to return to 2019 levels, and a few years beyond that to return to long-term growth trends. Demand for narrow-body aircraft is expected to recover faster than wide-body demand, as domestic and regional markets will outpace longer-haul international routes. Availability and wide distribution of a vaccine may help accelerate the demand improvement. However, in the near term, we expect continued uncertainties as the situation remains very dynamic with many variables. Our 10-year commercial airplane market outlook is approximately 11% lower than what we assumed a year ago, with wide bodies more significantly impacted than narrow bodies. From a 20-year perspective, we still see the impact of COVID, but to a lesser extent as traffic reverts to long-term trends over time. Near term, we also anticipate accelerated retirements, driving replacement demand up to approximately 48% of deliveries over the next 20 years. That compares to 44% as previously projected. As our customers focus on retiring their oldest and least efficient airplanes, new airplanes will allow the industry to reduce emissions and make future flying even more environmentally sustainable. Airplanes that we plan to deliver this year will be as much as 25% to 40% more fuel efficient than the airplanes they're replacing. As we see airlines adapt to these market realities, product differentiation and versatility will be key. Our market-leading product line remains well-positioned to meet our customers' needs and supports airline plans to gain efficiencies as they reach for their emission goals. Our attractive portfolio and the diversity of our backlog provide a strong foundation for long-term success. In the commercial services market, although we believe we've seen the low watermark in terms of demand, the recovery has been slow and we continue to anticipate we'll take multiple years to reach previous demand levels. Accelerated retirements will also result in a newer fleet as we emerge from the pandemic impacts which will reduce services demand and prolong its market recovery. Digital solutions are emerging as a critical enabler as customers focus on leaner operations. Life cycle services and support will help customers scale their operations to meet efficiency and cost objectives aligned to market recovery trends. Our broad services portfolio and deep customer knowledge position us well to support these customer needs. Now let's turn to commercial airplane production rates on slide four. We've maintained our prior assumptions regarding our production rate plans across all commercial airplane programs. However, the market continues to be dynamic, and we will monitor as we prudently balance supply and demand. We're closely watching the international passenger traffic recovery, which so far has been weak. to assess downside risk to our wide-body program production rates, in particular the 787. We still expect to produce the 737 at very low rates for the remainder of 2020 and gradually increase the rate to 31 by the beginning of 2022 and expect further gradual increases to correspond with market demand. We will continue to assess the delivery profile for 2021 as it will help inform if we need to adjust our 737 production rate ramp up. We will continue to keep our supply chain apprised of our plan. At the end of third quarter, we have 3,400 aircraft in our 737 backlog. Although this remains an unprecedented and uncertain time, we are confident air travel will return. And when it does, we will be positioned to support our customers. And with that, let me turn it over to Greg.