Projecting 737 MAX Production and Deliveries

The 737 MAX has been a troubled program for Boeing, with two fatal crashes, a safety grounding, a massive inventory build-up, and, most recently, supplier quality issues with limited production. When we compare Boeing's production targets with actual results, the answer is that Boeing fell short of its guidance. Let’s look at history and see if it can help project the future, something of tremendous concern to suppliers, as each hiccough at Boeing results in cash flow issues down the supply chain. The program’s history includes an unprecedented 18-month grounding of the aircraft, and production and deliveries have been quite variable. The chart below shows monthly production and deliveries for the 737 MAX program. [caption id="attachment_79724" align="aligncenter" width="580"] AviationValues; AirInsight[/caption] Boeing’s 737 MAX production has been inconsistent since the early life of the program. The chart below shows the actual 737 MAX production by month, from the construction of the prototypes to the latest available month, November 2023. From 2017 through 2019, the program's trajectory was upward, albeit inconsistent in build rates. Then came the crashes and production levels dropping. The continued production with no deliveries from May 2019 through March 2020 built a considerable inventory, as production rates peaked at 48 per month in October 2019. Since the pause in production, the rate has still not recovered past a peak of 38 in May 2023. [caption id="attachment_79700" align="aligncenter" width="580"] AviationValues; AirInsight[/caption] The red trend lines shown on the historical monthly production graph clearly show the impacts of the grounding in 2020 and the quality issues experienced earlier in 2023. The current downturn in production is of concern. From a predictive standpoint, we need to ask when production will turn around, particularly since the MAX 7 and MAX 10 have both entered initial production in anticipation of FAA certification in late 2023 or early 2024. The wild card in production forecasting is the large inventory that Boeing built when it continued to produce aircraft for a period when the MAX was grounded. That inventory swelled to more than 400 aircraft, and at the end of November 2023, it had 203 aircraft in inventory, including some newly built 737-7 and 737-10 models awaiting certification. The following chart shows Boeing’s monthly inventory levels for the MAX program. [caption id="attachment_79701" align="aligncenter" width="580"] AviationValues; AirInsight[/caption] An inventory of 200 aircraft presents a wild card for forecasting. Boeing is working diligently to move these aircraft quickly. At its last quarterly earnings call, it indicated that the “vast majority” of those aircraft would be delivered by the end of 2024. If we translate that to 75% of the current inventory, that will translate to 150 deliveries or about 12.5 per month. That quantity can make a huge difference in cash flow and meeting delivery targets if the supply chain remains constrained. The current inventory includes 85 aircraft destined for Chinese airlines. Given the recent thaw in relations with the meeting between President Biden and Chairman Xi, the potential for China to take those orders in 2024 has now become a possibility as the first 737 MAX flights have resumed in China, which was the first country to ground the aircraft and one of the last to restore operational rights. At the third quarter earnings call, Boeing indicated that the MAX production rate would rise from 31 to 38 by the end of this year. So far, production data shows that is unlikely to happen, even with a year-end December push. Boeing has a constraint in that process - the FAA. After the initial MAX problems, the FAA withdrew and reserved the authority to certify new aircraft, meaning that Boeing cannot issue airworthiness certificates on its own for new aircraft. With the FAA reverting that capability to the agency, Boeing can no longer control the inspection and certification process as it once did. Until the FAA restores that element of Boeing’s production certificate, it remains at the mercy of the FAA in meeting schedules. Nonetheless, the FAA will appropriately staff to meet Boeing’s stated targets and oversight responsibilities. The relationship between the FAA and Boeing changed after the MAX debacle. The FAA leadership privately feels that Boeing lied to the agency, and senior management attempted a cover-up of the MCAS problems on the MAX. That relationship has not yet been fully repaired, albeit some progress is being made. So, a “trust but verify” attitude remains with the regulatory agency. The FAA has also faced international criticism and scrutiny after the MAX debacle and must maintain an arm's length, rather than the once cozy relationship with Boeing, to maintain international credibility and the reciprocity system. Approaching year-end 2023, the outlook for the 737 MAX is improving. Certification of two additional models appears imminent in early 2024, and the order book has rebounded well since the fatal crashes and flight control system issues. Demand for the aircraft seems robust, and Boeing is promising production rates, increasing from today’s project rate of 38 per month to 50 before YE 2025 or the beginning of 2026. But Boeing has been talking about higher rates for quite some time and routinely failing to meet targets. During the 2Q23 earnings call in July, Boeing projected production rates to average 40 per month for the year's second half. But in the five months from July-November, the company produced 128 aircraft, averaging 25.6 per month - about 2/3rds of the projected rate. Continuing supply-chain constraints and supplier quality issues negatively impact second-half production in 2023. Once again, Boeing will miss its rate goal. The key is what that means for future rate increases. The latest guidance from the supplier community is more aggressive, with Boeing asking suppliers to prepare for 42 per month in February 2024, 47 per month in August 2024, 52 in February 2025, and 57 in October 2025. We do not believe Boeing will meet those more aggressive rates on time. After several years of asking the supply chain to be ready for increases but not delivering on them, Boeing lacks credibility. When did Boeing last meet a promised quantity or timeline? I can’t think of one off the top of my head. Virtually every program is late in development and over budget. Two have suffered safety groundings post entry into service, and their two cash cow programs have had production impacts from quality problems that have emerged, stopping or dramatically slowing deliveries. Between design problems and supply-chain quality issues, Boeing’s credibility with the supplier community has virtually disappeared. Unfortunately, the supply chain is saddled with meeting capacity commitments from Boeing, which of late haven’t been taken up on time, thereby costing the suppliers negative cash flow, higher inventory costs, and reduced profitability. Past is Prologue Realistically, Boeing isn’t likely to meet its goals for 2024. Typically, a quality problem in aviation takes a significant amount of time to work through, usually about a year rather than just a few months. As a result, we do not expect Boeing to meet its target of 38 aircraft per month again until the second quarter of 2024 at the earliest. By the end of 2024, we would expect Boeing to be able to meet that rate and begin to increase production to 44 in early 2025 and to 50 by early 2026. That’s a far cry from the 44 in February 2024, rising to 57 by August 2025. If we were a buyer for a supplier, we’d plan on smaller quantities and be ready to pay an expediting premium in the event of a shortfall rather than purchase quantities that are too large. We advise being conservative and tempering Boeing’s rhetoric by adjusting projections more closely to their track record. The problem is the “unknown unknowns” that crop up in aviation. The MAX has not had a smooth market entry, and the aircraft and the company’s quality system are under unprecedented regulatory scrutiny. Boeing is slowly improving its quality processes but has discovered supplier quality issues for the 737 MAX and 787. Each time a variation occurs, a disruption to the supply chain occurs that reverberates throughout the industry. We must ask whether the quality issues have all been resolved or if additional problems will crop up. If the past is prologue, the production rates target at Boeing will push to the right between six to twelve months, with higher than expected variability in production rates. Until the program can be stabilized and the existing inventory is sold off, we expect continuing production rate volatility in 2024 and 2025.

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