As the COVID-19 pandemic continues to ravage the aviation industry, Boeing has added one of its most reliable sources of revenue — its bulwark against demand drops and other problems — to the loss column.
The division of Boeing that provides aftermarket services for airlines and other customers reported a massive loss for the second quarter, demonstrating weakness in a division that previously seemed well positioned to serve as a bright spot during future times of turmoil for Boeing.
Boeing Global Services posted a $672 million loss for the quarter, a sharp reversal from the $687 million profit during the same quarter in 2019. That represents nearly one-third of the $2.4 billion total loss Boeing reported for the quarter.
Global Services, which offers maintenance, data analytics, supply chain resources, and other services to current and former customers, provides an ongoing revenue stream after an airline or lessor purchases a plane. The division can make money through ongoing normal maintenance or repairs, or from bigger projects like converting passenger aircraft to freighters. The aftermarket work is particularly lucrative because it offers higher margins than selling brand new planes, CNBC reported in 2018.
Most years, it generates billions of dollars in revenue, serving as a sort of backstop on any losses that result from dropping sales of new aircraft. Even as Boeing saw demand for its commercial jets plummet in 2019, largely caused by the ongoing worldwide grounding of the 737 Max and the trade dispute between the US and China, Global Services remained a bright spot. It produced nearly $2.7 billion in earnings last year, on $18.5 billion in revenue.
"As the size of the worldwide commercial airline fleet continues to grow, so does demand for aftermarket
services designed to increase efficiency and extend the economic lives of airplanes," Boeing wrote in its 2019 annual report for investors. "Airlines are using data analytics to plan flight operations and predictive maintenance to improve their productivity and efficiency. Airlines continue to look for opportunities to reduce the size and cost of their spare parts inventory, frequently outsourcing spares management to third parties."
That analysis didn't account for the spread of the novel coronavirus. As airlines have grounded large portions of their fleets and slashed flights from their schedules, demand for Global Services has fallen. Airlines are putting less wear-and-tear on their planes, postponing capital expenditures, and cutting operating expenses wherever possible. This past quarter, the division took a $923 million charge related to "asset impairments and severance costs," Boeing said.
Global Services is still getting some demand from government contracts, but not nearly enough to offset the loss of commercial work. Boeing did highlight one order from DHL, which is looking to convert four newly acquired passenger 767-300 jets into freighters. In the age of the pandemic, that's an awfully small bright spot.