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How Airlines Are Defending Dormant 737 MAX Jets From The Ravages Of Corrosion, Insects And Time

Boeing 737 MAX planes have been stuck on the ground now for five months. With the likelihood rising that they won’t return to service before the winter, some airlines may soon have to deal with the danger that the planes could literally become stuck to the ground.

Tires of planes that are parked for long periods of time can freeze to the tarmac during subzero weather, warns a Boeing maintenance manual for the previous generation of 737 aircraft. It advises maintenance workers to place sand or a coarse fiber mat under the tires and covers over the wheels and brake assemblies to protect them from the corrosive effects of rain and snow.

With the end of summer drawing closer, Air Canada is considering moving its 24 737 MAX planes south to the gentler climes of a desert storage yard, a spokesperson told Forbes. WestJet says it’s content to keep its 13 planes in Canada, spooling up the engines every week and taking them for a spin on the apron around their hangars.

Airlines have had 387 MAX planes sitting quietly at airports and storage facilities around the world since March, when the second of two horrific crashes led aviation authorities worldwide to ground Boeing’s best-selling plane. Boeing is storing roughly another 200 that it has assembled but can’t deliver.

Planes are built to move. Making sure these aren’t damaged from their prolonged grounding has become the mission of a small army of maintenance staff. The longer the planes’ wings are clipped, the more needs to be done. Among the main tools, as prescribed by the 737 manual: copious amounts of yellow 3M vinyl tape No. 471 to seal off gaps and sensors, and an array of lubricants.

Southwest Airlines, the largest operator of the 737 MAX, is storing its fleet of 34 planes in the dry heat of the high Mojave desert at an airfield in Victorville, California. Once a week, maintenance workers power up the Leap-1B engines, which their maker, CFM International, a partnership between General Electric and Safran, recommend should be idled for 15 to 20 minutes to vaporize any moisture that may have collected in the oil and fuel systems and to cover engine parts with a new coat of oil to prevent corrosion. Southwest technicians also boot up the flight computers and auxiliary power units weekly.

The doors of planes stored in the desert are generally opened during summer days so the cabins aren’t damaged by the heat, says David Querio, president of Ascent Aviation Services, which operates at Pinal Airpark in Arizona, one of the largest aircraft storage yards in the world.

Birds sometimes nest on a plane, and, rarely, an animal will take advantage of an open door to take up residence inside. “They’re removed the same day if they’re stupid enough to do that,” says Querio.

As the timeline for the 737 MAX’s return has receded further over the past few weeks, some airlines could decide to put their planes into a state of deeper storage, with the engines preserved and batteries and other sensitive parts removed, says Tim Zemanovic, president of the Minnesota aircraft disassembly firm Fillmore Aviation. Because it requires fewer regular maintenance tasks, this type of storage generally runs half the cost of active storage, at roughly $1,000 a month per plane, he says, but it means it would take more time to ready the planes to fly again when aviation regulators sign off on Boeing’s fixes for the 737 MAX.

In long-term storage, the engines, the single most valuable part on an airliner, are “pickled”: The oil is drained and replaced with an oil mixed with a corrosion prevention solution, and desiccant bags—larger versions of the moisture-removing silica packets put in consumer goods—are placed in the inlets, with gauges that monitor humidity levels. Then the ends are covered to keep out the elements, animals and insects, says Zemanovic, who used to run a storage and maintenance facility at Pinal Airpark.

When planes are dormant for more than two months, Boeing’s 737 maintenance manual calls for gaps in the fuselage to be sealed with vinyl tape and screens placed over drain holes. A protective coating is sprayed onto unpainted metal surfaces. The cabins go dark, with the window shades closed and cockpit windshields covered with aluminum foil tape or other reflective material. Cotton covers are put over the seats and runners protect the carpets.

Planes at a storage yard typically get visited at least once a day to make sure the exterior coverings are intact, says Querio.

The 737 manual lays out a schedule of maintenance procedures to be done at regular intervals that’s heavy on lubrication of myriad parts.

Every week the plane should be scanned for corrosion; every two weeks, electrical systems powered up for two hours. Every 30 days the plane should be moved a third of a wheel’s turn, to prevent the tires from getting flat spots; carpets and seats checked for mildew; and water drained from the sumps of fuel tanks to prevent growth of bacteria or fungi, which can have the consistency of mayonnaise and plug fuel filters.

Every 90 days, the flaps, rudder and other control services need to be exercised.

If the grounding extends to a year, the landing gear may need to be flexed, says Zemanovic, with the plane propped up on giant jacks placed under the wings and the nose. Boeing and Airbus recommend that some models should be restored to operating condition after a year before being shut down again, says Querio.

Boeing expects aviation regulators to sign off on its fixes for the 737 MAX and a revised training regime early in the fourth quarter, but given previous delays and new technical issues that have arisen over the past few months, some industry watchers think the plane’s return to service could slip further. Southwest Airlines has taken the 737 MAX off its flight schedule till January 5; Air Canada has scrubbed the plane through January 8.

A Southwest spokesman said that once the U.S. Federal Aviation Administration declares the model airworthy, the airline expects it will take 120 hours of work on each plane to get them ready to fly again, and 30 to 60 days for the airline’s whole fleet.

One giant task: cleaning the planes. Dust can collect inside planes stored in the desert if the doors are vented, requiring a thorough vacuuming, says Zemanovic, and if the storage facility doesn’t have a concrete wash pad with drains to properly dispose of large amounts of soapy water, workers may have no choice but to wipe down the plane by hand, a laborious process that he says could require a “couple hundred” man hours. Two necessities for the job: 27-foot high work platforms and a mammoth supply of cleaning wipes.

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Source: How Airlines Are Defending Dormant 737 MAX Jets From The Ravages Of Corrosion, Insects And Time

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Plane Talk: 737 MAX In Focus For Boeing Q2, With F-35 Top Of Mind At Lockheed

Getty Images
Getty Images

Key Takeaways:

  • Lockheed and Boeing are reporting Tuesday and Wednesday
  • Boeing’s troubled 737 MAX likely to be in spotlight
  • Lockheed navigating geopolitical issues

It’s a tale of two planes this week as Boeing (BA) and Lockheed Martin (LMT) earnings line up on the runway.

After months of grappling with 737 MAX troubles, Boeing (BA) doesn’t seem likely to get much of a lift from earnings season when it reports Wednesday. Thanks to BA’s announcement last week of a nearly $5 billion charge related to the situation, some of the financial mystery surrounding the crisis is out of the way as earnings approach.

At LMT, geopolitics are a potential challenge for sales of the popular F-35 jet fighter and might be a discussion point on its earnings call Tuesday.

Boeing Quarter to See No Contribution from Key Airliner

For BA, Q2 is the first this year to fully reflect the complete grounding of the troubled 737-MAX plane after two deadly crashes.

Last Thursday, Boeing said it will record an after-tax charge of $4.9 billion, or $8.74 per share, connected with its estimate for potential concessions and other considerations to customers for disruptions. This charge will result in a $5.6 billion reduction of revenue and pre-tax earnings in the quarter. The entire estimated amount will be recognized as a charge in Q2.

The good news—if you can find any in a situation like this—is that BA also said it expects to get the plane back into service by early in Q4, which is earlier than some analysts had expected. Before BA’s announcement, some media reports speculated it wouldn’t get into the air again until next year. Also, the charges might look relatively small compared to BA’s $210 billion market capitalization.

Big Drop in Q2 Deliveries for Boeing

Maybe even harder to swallow for BA and its investors is the competitive impact of the crisis. Deliveries of BA’s airliners slid 37% in Q2, even as Europe’s Airbus (EADSY)—the world’s other leading aircraft manufacturer—made solid strides.

Airbus said it delivered 389 planes in the first half, up 28% from 303 a year earlier. It’s on pace to deliver a record number of planes this year. Meanwhile, BA’s deliveries went the wrong way in the first six months of 2019, falling to 239, from 378 a year earlier. Deliveries of the company’s 737 model fell by more than half.

BA reported no orders of the 737-MAX in June for the third-straight month since the separate crashes that killed 346 passengers earlier this year and in 2018. The company continues to work through software issues with the troubled jet, including another flight control issue involving failure of a microprocessor announced by the Federal Aviation Administration (FAA) last month.

BA’s earnings conference call is probably going to sound more like a “737-MAX” conference call, so consider listening closely for any updates on fixes to the jet. Some analysts say BA is doing the right thing by not focusing too much on timetables and emphasizing a quality outcome over timing.

Even if BA can satisfy the government that it’s taken all the necessary steps to make the plane safe again, airlines would need more than a month in many cases to get the planes back into flying condition, The Wall Street Journal reported recently. Several airlines have now pushed back their estimates of when they can get the 737 MAX back into their rotations, with Southwest (LUV) the latest to do so. Last week, LUV pulled the plane off of its flight schedule into early November, a month longer than it had expected in June. LUV is the largest U.S. operator of the jet.

BA’s Q1 earnings report barely reflected the 737-MAX issue, because the plane wasn’t grounded until nearly the end of that quarter. In Q2, it was on the tarmac for all three months, so now investors can get a sense of the full impact.

However, even in Q1 things weren’t all that positive, with BA noting then that cash flow fell nearly 10% from a year earlier due to lower 737 aircraft deliveries. Revenue came in slightly below expectations in Q1 and fell $500 million from the same quarter in 2018.

This time around, struggles could get worse, if analysts are correct. Beyond that, BA—like other industrial companies—faces the challenge of higher materials costs due in part to U.S. tariffs on steel and aluminum from China. These are important components of aircraft building.

If you’re looking for any good news from BA, perhaps it’s worth noting that the company did deliver a record 18 of its 787 Dreamliner jets in June, with monthly production of that jet now at 14.

Boeing Earnings and Options Activity

When BA releases results, it is expected to report adjusted EPS of $1.78, down from $3.33 the prior-year quarter, on revenue of $19.99 billion, according to third-party consensus analyst estimates. That revenue would represent a 17.6% drop from a year ago. These earnings projections don’t reflect the charges announced by BA last week.

The options market is implying about a 3.1% stock move in either direction around the upcoming earnings release. Implied volatility was at the 22nd percentile as of Monday morning.

Looking at the July 26 weekly expiration, put volume has been light overall, but heaviest at the 365 and 370 strikes. Call volume has seen a little more action, most heavily at the 375 and 380 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

No Turkish Delight for Lockheed

Like BA, Lockheed Martin (LMT) faces a possible headwind from tariffs on materials it uses to build products. It also has its own issues with a plane, though arguably they’re nowhere near the level of BA’s concerns.

LMT’s F-35 fighter jet, which makes up about 30% of the company’s sales, recently came into the spotlight when the U.S. government halted delivery of two F-35 planes to Turkey. This was in response to Turkey making a multi-billion dollar deal to buy a Russian missile system. The issue becomes more serious for LMT because Turkey also faces the forfeiture of 100 promised F-35 jets, CNBC reported.

Complexities build for LMT when you consider that the F-35 is financed and manufactured partly by Turkey. That means LMT could need to replace the manufacturing done in that country.

For now, LMT sounds hopeful about its fighter jet despite the Turkey controversy.  “We continue to see strong demand both from our existing partners and potential new international customers and are confident the F-35 program will continue to grow,” a company official told the WSJ.

However, the company’s earnings call tomorrow could include questions from analysts about any deeper financial impact LMT might face.

A couple other factors to consider going into the call include whether the recent strong dollar is having an impact on foreign demand for LMT products, and whether business is seeing any impact from the U.S./China tariff situation.

There’s a sense that LMT and other defense companies could be getting helped by rising defense budgets, including in the U.S. However, the U.S. defense budget for next year remains contested in a battle between Democrats who control the House of Representatives and President Trump and congressional Republicans. Democrats in the House passed a $733 billion defense budget bill earlier this month that Trump and Republicans oppose. Trump had proposed $17 billion more in spending.

The House and Senate have a few weeks left to reconcile their competing versions of a defense bill. Any delay on a new budget agreement might raise questions about demand for LMT’s products in the coming months.

Lockheed Earnings and Options Activity

Lockheed crushed estimates in Q1, with earnings up 49% from a year earlier. At the time, LMT updated its forecast for 2019 financial results, with earnings anticipated between $20.05 a share and $20.35 a share. Expected full year revenue was also increased, to a range between $56.8 billion and $58.3 billion.

One thing to watch when LMT reports tomorrow is whether any of that guidance changes.

Lockheed Martin is expected to report adjusted EPS of $4.77, up from $4.05 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $14.2 billion, up 6% from a year ago.

The options market is implying about a 2.5% stock move in either direction around the coming earnings release. Implied volatility was at the 18th percentile as of Monday morning.

thinkorswim chart

TREADING WATER: Boeing shares (candlestick) have basically been treading water for a few months now, as this year-to-date chart shows, while Lockheed shares (purple line) have retreated from recent highs. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

thinkorswim

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

I am Chief Market Strategist for TD Ameritrade and began my career as a Chicago Board Options Exchange market maker, trading primarily in the S&P 100

Source: Plane Talk: 737 MAX In Focus For Boeing Q2, With F-35 Top Of Mind At Lockheed

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