Analyst reviews of Boeing’s latest results appear almost relieved – Vertical Partners said: “It could have been worse”. J.P. Morgan summed it up: “Nothing to Do but Wait”. Ok but…
The news that Boeing might temporarily stop MAX production was a key question since the grounding. The initial production slowdown reflected the complexities of dealing with a sensitive and carefully nurtured supply chain. Then yesterday: “As our efforts to support the 737 MAX’s safe return to service continue, we will continue to assess our production plans,” Dennis Muilenburg told investors in the Boeing earnings conference call. “Should our estimate of the anticipated return to service change, we might need to consider possible further rate reductions or other options, including a temporary shutdown of the MAX production.”
In typical Boeing fashion, things are good until they are not. And suddenly, things are not good. We project that the return to service for the MAX won’t come before year-end. Indeed, we estimate 1H 2020 and here is why. The hurdles include the multiple international government agencies that are supposed to work in concert on this. Bracketing this is the China/US trade kerfuffle. China will almost certainly take the opportunity to signal its displeasure and MAX is a perfect foil.
Then there is the EASA list of five items it wants fixed. What if Boeing has to replace the chip on the flight control computer on ~500 MAXs? EASA may want this even if Boeing believes a software-only solution will work. Guess who wins that decision.
This is a recipe for herding cats. We don’t see consensus coming quickly, as several agencies are performing independent reviews. Even once consensus is achieved on return to service, all the MAX’s delivered and those piling up from the factory all need to have the fixes implemented, and test flown again. Airlines also need to be ready to modify their schedules, train pilots, and take on new aircraft. Santa may be long gone before this is completed, as it isn’t easy for an airline to take on multiple aircraft in a short period of time.
There is another aspect of the Muilenburg comment that bears pondering. What else might it signal? It surely cannot be only what we see on the face of it. Was this a signal to Washington? After all the results were horrible – even if the financial analysts were expecting worse. The damage has already started and its reach is across the industry. Which, ironically, supports Muilenburg. The greater the threat to the industry the stronger the case to get MAX back in service. All those airplanes coming out of Renton and being parked are piling up. The threat to stop production scares everyone.
This may be a veiled message to the FAA to hasten its evaluation of Boeing’s solution, and quickly approve the modifications for a return to service irrespective of international regulators. The impacts on employees, both at Boeing and down the supply chain, could be significant. With 2020 a key election year, Boeing knows how to push the political pressure buttons in Washington.
That fear is especially highly damaging to Boeing’s line workers. They could get shafted, as has happened before. None of them were part of the MAX design compromises. But they will be the pawns sacrificed first. Imagine the state of mind of a line worker in Renton now? Not pleasant. Yet it is on their shoulders that Boeing and the MAX rest. Then there is the trickle-down the supply chain. Small wakes in Renton become tidal waves further down the supply chain.
Shutting down MAX production in the fourth quarter (increasingly likely in our view) would be the worst thing Boeing could do for public opinion and for labor relations – likely impacting line workers just before the holidays. It would also impact the political arena, as this would be a sore point for the current administration. This is very high stakes poker.
As Muilenburg ‘s words resonate everywhere we will see how Washington and the world reacts to the veiled threat.