S&P Global Ratings today said the announcement that Boeing Co.'s (BBB-/Negative/A-3) machinist union rejected a contract offer and voted to strike does not immediately affect our issuer credit rating or negative outlook on the company.
The strike will likely delay Boeing's recovery, including its goal of increasing Max production to 38 planes a month by the end of the year. We view the company's plans to increase and stabilize its aircraft production volumes as necessary for it to generate free cash flow. A shorter strike, on the order of weeks, would likely be manageable for Boeing and not lead to a negative rating action. However, we believe an extended strike would be costly and difficult to absorb, given the company's already strained financial position.
We previously expected Boeing would generate sizable cash outflows in 2024 prior to the announcement of the strike. This reflects that the company is building up its working capital to support the increase in its Max production. In addition, its defense business remains unprofitable as it is currently working to address cost overruns on its fixed-price development contracts. Inefficiencies, due to the company's low commercial aircraft output, have also contributed to its weak financial results. That said, we expect Boeing's cash flow will benefit from the unwinding of its working capital and the receipt of customer advances when it increases its Max production next year.
We note that the company's liquidity is supported by its $12.6 billion of cash and securities and undrawn $10 billion credit facilities as of the end of June 2024.
Our rating on Boeing rests on our assumption that it will expand the deliveries of its Max planes and generate positive free cash flow in 2025. The rating is also supported by the company's massive order backlog and effective market duopoly with Airbus because the two companies manufacture the vast majority of narrow and widebody aircraft globally. Management has also committed to maintain a capital structure consistent with the current rating. We are encouraged by the company's willingness to use equity to fund its pending acquisition of Spirit AeroSystems Inc. after initially planning to use cash. Based on its public comments, we assume Boeing is also open to potentially issuing additional equity.
We could lower our rating on the company if it fails to reach an agreement with its union and the strike continues for an extended period. Under this scenario, we would expect a corresponding delay in the expected recovery in Boeing's cash flow and credit measures beyond this year.
