Boeing (BA) was the only Dow Jones 30 component stock that survived the massive broader market sell-off on August 23. The stock gained on the day in anticipation of its troubled 737 MAX jets flying once again in October.
Boeing MAX could fly in October
On August 23, the Seattle Times revealed some internal information indicating that the grounded Boeing MAX planes could return to the skies as early as October. Citing anonymous sources, the newspaper reported that the FAA’s (Federal Aviation Administration) Flight Standardization Board “aims to issue in early September recommendations for exactly what MAX pilot training is needed before U.S. airlines can fly passengers on the airplane again.”
According to the Times, the FAA’s report “will have a comment period no longer than 30 days to gather input from the airlines and pilots before it’s finalized and made mandatory.” Citing the timeline information provided by sources, the newspaper stated that the return of MAX to the skies early in the fourth quarter looks realistic.
The timeframe also coincides with Boeing’s expectations of getting regulatory safety approval in early October. The company is currently working with the FAA to fix the software issue in the Boeing MAX flight-control system. It hopes to submit the final rectification file to the regulatory body by September’s end.
Before this, on August 22, Reuters reported that the FAA had invited Boeing MAX pilots from around the world to participate in a simulator test. The agency wants a team of seasoned pilots, as well as some less-experienced pilots, to conduct the final review.
Boeing plans to increase MAX output
Boeing also seems optimistic about getting regulatory approval in October, as is reflected in its new action plan. The company has reportedly discussed a new 737 production schedule with its part suppliers. On August 22, Reuters reported that the company had provided its production plans to over 100 suppliers during a web meeting on July 30.
Citing three anonymous sources, Reuters revealed that Boeing is planning to raise its MAX monthly output by five units to 47 jets in October. After that, it intends to increase the production rate back to its March 2019 level of 52 units in February 2020. Finally, the company is looking to raise the monthly output to a record 57 units in June next year. However, these production estimates are subject to its receiving regulatory safety approval.
In response to Reuters’ question, Boeing spokesman Paul Bergman said, “While the assumption reflects Boeing’s best estimate at this time, the actual timing of return to service will be determined by the FAA and other global aviation regulatory authorities and could differ from this assumption and estimate.”
Boeing hiring staff to ready MAX jets for deliveries
Last week, Boeing posted job listings for over 100 temporary workers to prepare grounded 737 MAX planes for shipment. The company is looking for experienced personnel from the aircraft mechanic, technician, and electrician backgrounds. The staff will help with aircraft maintenance and delivery preparations at the Grant County International Airport.
The airport is a former military base in Moses Lake where Boeing has stored most of its MAX planes. Boeing didn’t halt the production of its MAX jets even though air carriers around the world denied taking deliveries following the Ethiopian Airlines crash on March 10. Nonetheless, it reduced its monthly output by 19% to 42 units in April from 52 units in March.
The frozen deliveries for its 737 MAX planes have already cost Boeing billions of dollars. In the second quarter, the company registered a 54% YoY fall in overall commercial aircraft shipments due to the MAX fiasco. It recorded an after-tax charge of $4.9 billion during the second quarter as an estimated compensation cost for MAX customers.
According to an August 20 Reuters report, overall compensation costs to airlines have already crossed $8 billion. Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL) together own 72 MAX aircraft. All three US airlines are demanding compensation for their revenue and profit losses due to the MAX grounding. Southwest has registered over 20,000 flight cancellations since mid-March. United and American recorded 3,440 and 7,800 flight cancelations, respectively, in the second quarter.
The longer the MAX planes remain grounded, the bigger the trouble could be for Boeing in the form of a higher compensation burden. Therefore, Boeing intends to prepare itself in advance so that it expedites the delivery process once it gets regulatory approval.
Boeing stock has fallen significantly since March 10 following two deadly MAX accidents within five months of one another. The stock has lost nearly 16% of its market value since the Ethiopian Airlines tragedy. However, it gained solid momentum last week due to growing optimism that MAX planes could fly once again in October. Last week, its stock jumped 6.7%.
Nonetheless, the stock’s YTD return of 10.4% as of August 23 remains significantly lower than its level of around 31% on March 8. The stock has also underperformed the major US indexes as well as the iShares U.S. Aerospace & Defense ETF (ITA).
The Nasdaq and S&P 500 Indexes are up 16.8% and 13.6%, respectively, YTD. ITA has returned 24.6% in the year so far. The ETF has exposure to companies engaged in the assembling, manufacturing, and distribution of aerospace and defense equipment.