With the timeline for ending the grounding of the 737 MAX pushed further out, the potential that Boeing will reduce the production rate of its flagship plane has risen, analysts say.
The company is beginning to show the financial strain of the crisis, announcing Thursday that it would take a $4.9 billion charge in its second-quarter earnings to cover compensation to buyers of the plane, who have been forced to wait for delivery as Boeing works with aviation safety regulators to fix the problems that led to two deadly crashes that killed 346 people.
In April, Boeing dropped 737 output from 52 planes a month to 42, but that production still comes at a considerable cost that isn’t being matched by incoming revenue. Boeing typically only collects 1% to 5% of the purchase price of the plane as a down payment, with the final 50% due on delivery and the balance coming in payments as the delivery date approaches. Boeing also said Thursday that the smaller production runs had raised production costs for the program by $1.7 billion. Meanwhile, undelivered planes are stacking up in temporary storage, presenting Boeing with logistical and maintenance headaches.
“I’d be very surprised if there weren’t another rate cut ahead,” says Richard Aboulafia, an aerospace analyst with the Teal Group. “Probably down to 36 or so.”
Boeing kept the 737 production line fully staffed after its April rate cut, but furloughs would be a possibility this time, he says.
There may be signs of a pending slowdown already in the supply chain. Chris Olin of Longbow Research said in a note Thursday that small aerospace parts suppliers his firm canvasses reported a sharp drop in orders in July. That’s “seen by some high-level executives as a leading indicator for additional  production cuts” in the second half, Olin wrote.
General Electric and France’s Safran, which produce the plane’s LEAP-1B engine through a joint venture, could decide to lower LEAP production independently for 2020, Olin says. He downgraded his rating of the shares of the specialty metals producers Arconic and Allegheny Technologies to neutral over uncertainty in demand ahead.
Kevin Michaels, managing director of AeroDynamic Advisory, sees a “30% to 40%” chance of a rate cut if the 737 MAX’s return to service slips to December or January. “It would be modest because it needs to keep the supply chain warm,” says Michaels. “Perhaps something like 36.”
Boeing has given no indication that a slowdown is in the offing. In the announcement of its $4.9 billion charge, the company said it was planning to gradually raise production from 42 planes a month to 57 in 2020.
In May, it was thought that Boeing was on track to receive approval from the U.S. Federal Aviation Administration to end the grounding of the 737 MAX by late June, but the timeline has slipped amid an exhaustive review of the safety of the plane that has turned up new areas of concern. Late last month, FAA test pilots discovered a data processing problem in the plane’s flight control computer that could occur in the event of a microprocessor failure, which Boeing is hoping to address through a software modification.
Boeing said Thursday it’s assuming that it will receive regulatory approval by early in the fourth quarter for its fixes for that issue and the MCAS flight control program implicated in the two crashes. Speculation had risen earlier in the month that return to service could be delayed to early 2020.
Over the past week, American Airlines, United and Southwest scrubbed the 737 MAX from their schedules through early November.
Airbus could be poised to benefit if Boeing reduces 737 production again, Olin believes. That would open up production capacity in the supply chain that could help Airbus ramp up production of the competing A320neo to 70 a month.
The 737 MAX is the linchpin of Boeing’s commercial aircraft business, with a backlog of 4,547 orders. With the order book dwindling for the 737 NG, it can’t sustain the 737 line on that alone. Boeing only delivered 24 in the second quarter, and it lists just 49 outstanding orders for the 737-800 and 737-800A, and five for business jet versions.
Boeing shares rose 4.5% to close the week at $377.36, with investors apparently happy that the company provided concrete numbers on the extent of the financial damage from the MAX crisis. Boeing shares have fallen 11% since the crash of Ethiopian Airlines Flight 302 on March 10, but the stock is still up 16.5% on the year.
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