Fitch Ratings has affirmed the Boeing Company's (NYSE: BA) long-term ratings at 'A-' and short-term ratings at 'F2'. Boeing Capital's (BCC) long-term ratings have also been affirmed at 'A-'. The Rating Outlook has been revised to Negative from Stable.

The Outlook revision is based on continued regulatory risk and uncertainty regarding the timing and global sequencing of the 737MAX' return-to-commercial service (RTCS). On Jan. 21, Boeing issued a statement that it now expects the ungrounding will begin in mid-2020. This is later than Fitch's base case assumption, but it does not trip our downgrade guidelines. Boeing's statement appears to be driven partly by conservatism. Nonetheless, the unexpected statement adds to Fitch's concerns for the possibility of additional delays that push the ungrounding beyond mid-year.

The logistical challenge of returning the planes to service and catching up on deliveries also drives the outlook, particularly considering the risk of rising supplier challenges with an extended 737 MAX production suspension. BA's substantial debt build-up over the past nine months is another concern. There is also uncertainty over the ultimate amount of concessions BA will make to airlines, with additional training requirements potentially adding to previous expectations. The MAX situation, including recently-released internal emails, is also likely to increase business risk from fines, litigation, weakened competitive position, or reputation damage.

The rating affirmation reflects the performance of Boeing's other businesses, which provide significant support at the current rating level. In addition, affirmation incorporates expectations that BA has the potential to strengthen its credit profile via cash generation and debt reduction in the three to four quarters after 737 MAX deliveries resume. Overall, BA had a strong credit profile for its 'A' rating before the MAX grounding, and Fitch's ratings for the company incorporated the periodic stress periods that arise in the commercial aviation sector. Fitch's forecasts include significant conservatism for potentially higher cost related to the 737 MAX situation. Access to the capital markets and financial flexibility also support the rating. Fitch believes the lack of material 737 MAX cancelations since the grounding illustrates the aviation industry's continued support for the aircraft, which also supports the rating.

The MAX will likely be a concern throughout the aviation credit sector into 2021 as the airline industry catches up on delayed MAX deliveries. The MAX situation has reduced much of Boeing's financial cushion in the 'A' category, leaving the company more exposed to other unforeseen events or industry developments. In addition to the MAX, the company has a challenging agenda, including the Embraer S.A. (ERJ, BBB-/Rating Watch Negative) transaction, 777X development, potential New Mid-Market Airplane (NMA) launch, and several planned production rate increases. Fitch also expects there will be a lingering operating margin impact for several years even after the MAX returns to commercial service. Other concerns include various lawsuits and investigations.

Fitch expects Boeing's debt nearly doubled in 2019 to around $27.0 billion as a result of $10.5 billion of long-term debt issuance and several billion dollars of CP issuance. Debt will continue to rise in the first and second quarters of 2020, potentially peaking at more than $32 billion-$34 billion, before beginning to decline. In late 2020 and 2021, Fitch expects Boeing will pay down debt and reduce much of its CP balance. Share repurchases remain a significant source of financial flexibility.

Liquidity needs will likely peak in 1Q20 or early 2Q20 as a result of continued MAX-related cash usage, the payment related to the close of the ERJ joint venture (JV) transaction, and a debt maturity. Boeing could issue additional debt, which is incorporated into Fitch's forecasts.