News
News reports emerged today that Boeing may consider temporarily shutting MAX production if the plane’s return to service is delayed beyond the October forecast. We believe this may be likely amid previous reports that the grounding could last until early 2020.
Dennis Muilenberg, Boeing’s CEO, told analysis “if that estimate of (an October) return to service substantially changes, then we’ll have to consider alternatives. Those alternatives could include different production rates, they could include a temporary shutdown of the line.”
MAX production is currently at 42 aircraft per month, a reduction from the 52 per month prior to the grounding, and well short of the planned 57 per month rate Boeing plans for next year.
Analysis
Stopping production of the 737 MAX will be a difficult choice for Boeing. The 737 is the company’s “cash cow” and the faster Boeing can deliver airplanes, the better their cash flow. With most Boeing contracts having walk-away clauses for deliveries that are more than six months late, a delay past October would result in the potential for airlines to walk away from orders without penalty. That could be a convenient way out for disgruntled customers, albeit they would be unlikely to find replacement aircraft from Airbus, which has an even stronger multi-year backlog for narrow-body aircraft.
The fact that Boeing mentioned a potential for a shut down if the process takes longer than their initial plan indicated that the company may not be certain about the multi-agency certification review and outcome for their proposed software solution.
The supply chain, and particularly smaller suppliers, could be the hardest hit by a MAX production line shutdown. Some small suppliers have invested heavily to meet the new rates proposed by Boeing, only to see those rates cut and their revenues fall. A drop to zero from a production shutdown could put some companies in financial jeopardy. Boeing wisely has kept production at a level that can help its suppliers during a difficult time, rather than shut the line down. But there is a maximum point at which hundreds of completed and parked aircraft can lead to difficulties, and that point could be reached if the re-entry does not meet Boeing’s initial plans.
Insight
Boeing is hoping for the best but preparing for the worst in terms of the MAX. The company is hoping that software revisions to the flight control systems, including MCAS and the flight control computers, will not require a hardware change. There were some indications that the 80286 processor (also used by Airbus) in the Flight Control Computer was on occasion being overloaded and slow to process commands. The key question is whether this can be fixed by software alone or may require a hardware change. If the latter is mandated by international agencies, and the FAA is does not waver from its position of full international recertification simultaneously by multiple agencies, a shutdown may be possible.
The prospect of a shutdown and layoffs in the 4th quarter would also not bode well for future employee relations, particularly should a shut-down occur near the holidays. Boeing might be better off continuing to build aircraft, even if it needs to rent additional parking spaces, than risk an employee relations disaster before Christmas.
A negative impact on the supply chain would also result, with downstream layoffs possible if the shut down is protracted. Suppliers would clearly prefer production to be maintained, as they have been planning and investing for even higher production rates. A shutdown would be devastating to many small suppliers from a cash flow and inventory perspective.
The part of the equation that few analysts or media pundits have reported on is the ability of the airlines to absorb the new aircraft rapidly once they return to service. Airlines need to plan their schedules well in advance and may not be able to rapidly intake the aircraft as quickly as they might become available. There are a lot of logistics involved, from schedules that are sold months in advance to crew training, maintenance planning, provisioning and other factors.
We don’t envy the delivery planners at Boeing, who need to continually update their skylines on a daily basis as uncertainty around the MAX grounding continues. They’ve just been handed an alternative scenario to plan.
