Regulators, Prosecutors

Still, there’s the risk that investors will lose patience if regulators are slow to clear the 737 Max to fly. Boeing has redesigned software linked to the two crashes to prevent it from erroneously misfiring and overwhelming pilots. The changes face a rigorous review from a technical panel, convened by the U.S. Federal Aviation Administration, with members from eight countries and the European Union.

Meanwhile, U.S. prosecutors and congressional investigators are exploring how the flaws in the system, known as MCAS, escaped notice. That leaves open the possibility of additional damaging revelations.

“This whole episode shows the danger of relying on just tons of increasing cash flow to generate shareholder returns,” said aviation consultant Richard Aboulafia. “To their credit, they’re also funding new product development with the 777X, which is more than Airbus can say right now,” he said of Boeing’s European rival.

Inventory Jump

Free cash flow, which has guided the money Boeing returns to investors and is tied to executive compensation, will probably be dented until the Max grounding is lifted and commercial flights resume. For now, Boeing must absorb manufacturing costs for 737 jets it isn’t yet able to sign over to customers. About 225 of the undelivered aircraft could be in storage by the end of June, according to analyst Ken Herbert of Canaccord Genuity.

Boeing’s ratio of inventory to assets had already ballooned to a record 51 percent as of late 2018, according to data compiled by Bloomberg. The measure of overstocking is the fifth highest among members of the S&P 500 Index, reflecting dozens of KC-46 tankers parked as Boeing awaited Pentagon sign-off and 737s that lacked engines at year-end.

While Boeing has temporarily slowed its 737 final assembly line by 19 percent to build 42 planes a month, the company is also picking up the bill as Spirit AeroSystems Holdings Inc. and other suppliers continue at the previous pace of 52 a month. The strategy will add to Boeing’s inventory costs as Spirit stashes extra 737 frames near its factory complex in Wichita, Kansas.

Keeping the supply chain running hot will make it easier for Boeing to quickly ramp up output as the crisis abates. It also helps insulate smaller suppliers, which are already under pressure from discounts that Boeing has demanded this decade.

“They’ve been sticking it to suppliers since 2011, now they need suppliers more than ever,” said Kevin Michaels, managing director at AeroDynamic Advisory. “There’s less working capital in the supply chain to be able to deal with this kind of crisis.”