By Ankit Ajmera and Eric M. Johnson

(Reuters) -Boeing Co on Wednesday posted its first quarterly profit in almost two years as revived domestic travel fueled 737 MAX deliveries, and shares rose 5% despite festering U.S.-China relations and depressed long-haul travel.

The 737 MAX is integral to Boeing’s financial recovery. The U.S. planemaker is scrambling to recoup billions of dollars in lost sales from the pandemic and move beyond the safety scandal caused by two fatal 737 MAX crashes. It also must deal with structural defects of its bigger, more profitable 787 planes.

Higher defense and services sales boosted results and Boeing still expects to turn cash flow positive in 2022. Shares were up roughly 5% at $234 in afternoon trading even as the Dow Jones Industrial Average dipped.

Chief Executive Officer David Calhoun told employees in a message that Boeing plans maintain stable staffing with a workforce of around 140,000. Previously the company had targeted a reduction to 130,000 by the end of 2021.

Calhoun told investors on a conference call, “The U.S. domestic market is showing remarkable recovery” but cautioned that international travel could take longer to pick up. He added that Boeing was worried about COVID-19 variants and a labor shortage in its sprawling supply chain.

“We anticipate a multi-year recovery,” Calhoun said.

Boeing’s 737 MAX remains grounded in China, where trade tensions between Washington and Beijing have stunted sales. Calhoun said he still expects the 737 MAX to win approval before year-end.

“Hopefully bigger trade issues don’t get in the way,” Calhoun added.

Before the 737 MAX was grounded in March 2019, Boeing sold a quarter of the planes it built annually to China buyers. For years, simmering geopolitical tensions between Washington and Beijing have caused uncertainty.

Boeing also faces tougher regulatory scrutiny and weak demand for its delayed 777X mini-jumbo, and months of costly repairs and forensic inspections to fix production-related defects on its 787 program.

Boeing reiterated plans to cut 787 production to an unspecified rate lower than five jets per month after finding a new problem, first reported by Reuters, and to deliver fewer than half of the lingering 100 or so 787 Dreamliners in its inventory this year – instead of the “vast majority” it had expected.

“Good news, the inspections are done, toe to tail,” Calhoun said. “The underlying causes are getting understood and resolved.”

Calhoun added that Boeing may need to rethink its plan for production rate increases if the 737 MAX is not approved in China by year-end.

Boeing said it has delivered more than 130 737 MAXs since a safety ban on that jet was lifted in November 2020, and that it was building 16 737 MAX jets per month at its Seattle-area factory. It aims to increase output to 31 per month by early 2022.

“Defense markets are strong and they’re successfully conserving cash,” said Teal Group analyst Richard Aboulafia. “Much depends on the angle of the commercial recovery.”

Looking to build momentum, Boeing is preparing to launch its delayed CST-100 Starliner astronaut capsule to the International Space Station on Friday in a crucial do-over test following a near “catastrophic failure” during its 2019 debut.

Calhoun said he is “optimistic, confident” about Friday’s launch after software flaws and NASA reviews sidelined its Starliner for 18 months, and about Boeing’s ability to compete against newer space players such as billionaire entrepreneur Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin.

Boeing’s core operating profit was $755 million in the second quarter, compared with a loss of $3.32 billion a year earlier. Revenue rose 44% to about $17 billion.

Analysts had on average expected Boeing to report a quarterly loss of $454.8 million on revenue of $16.54 billion, IBES data from Refinitiv showed.

Boeing’s commercial airplanes division, its traditional profit powerhouse, reported a quarterly loss of $472 million, but its defense business earned $958 million and its services division took in $531 million.

(Reporting by Eric M. Johnson in Seattle and Ankit Ajmera in Bengaluru; additional reporting by Tracy Rucinski in Chicago; editing by David Holmes, Jason Neely, Steve Orlofsky and David Gregorio)

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