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Boeing Considering Production Cut or Halt for 737 MAX

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Boeing (BA) is reportedly considering further cutting or even halting the production of its troubled 737 MAX aircraft. Citing anonymous sources, The Wall Street Journal reported on Sunday that the aircraft manufacturer could make an announcement today. According to The Wall Street Journal, Boeing’s board of directors is holding a two-day meeting, which started on Sunday, to discuss the issue.

A Boeing spokesperson said that the company is working with regulatory bodies for the safe return of the MAX to skies, The Wall Street Journal reported. The spokesperson added that “We will continue to assess production decisions based on the timing and conditions of return to service, which will be based on regulatory approvals and may vary by jurisdiction.”

The move would mark the second time since the MAX grounding that Boeing has reduced the monthly output of the troubled jet. In April, the aircraft manufacturer lowered MAX’s monthly output by 19% to 42 units.

Why could Boeing cut or halt MAX production?

The report of Boeing’s board meeting came days after the FAA (Federal Aviation Administration) squashed hopes for a 2019 return of the MAX. On December 11, FAA administrator Steve Dickson clearly said that the agency would not recertify the MAX this year.

He said there are nearly a dozen issues that Boeing needs to resolve before the MAX returns to service, according to a December 11 Reuters report. Dickson also noted that the agency is investigating a 737 MAX production issue at Boeing’s Renton, Washington, facility.

On December 12, Boeing announced it would not receive certifications for the MAX this year. The company’s announcement came just a few hours later after CEO Dennis Muilenburg’s meeting with Dickson, according to Reuters. In its statement, Boeing said it would “work with the FAA to support their requirements and their timeline as we work to safely return the Max to service in 2020.”

Production cut could hurt Boeing’s financials

The 737 MAX grounding is already weighing on Boeing’s financials. A production cut would further increase the company’s costs. The company has already taken on $3.6 billion in additional production costs due to its reduced output.

Additionally, delays in the return of the Boeing MAX to service could further increase the company’s compensation burdens. Carriers around the world are demanding compensation for their losses due to the MAX grounding.

In the US, Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL), together own 72 Boeing MAX airplanes. The three US carriers have faced thousands of flight cancellations and millions of lost seats since mid-March. Combined, Southwest and American estimate that the MAX grounding will cost them nearly $1 billion this year. United hasn’t disclosed the financial impact of the MAX fiasco.

In a recent development, Boeing has reached a confidential agreement with Southwest regarding damages caused by the MAX grounding. Boeing has agreed to pay a portion of the projected financial loss caused by the ongoing MAX crisis. Southwest expects the MAX grounding will reduce its fiscal 2019 revenue by $435 million.

During its second-quarter earnings release, Boeing disclosed it took a charge of $5.6 billion as an estimated compensation cost for MAX customers. However, the compensation amount could increase more due to further delays in the return of the MAX.

Southwest and United don’t see the Boeing MAX returning before March. Most recently, American Airlines extended its MAX flight cancellations until April 6.

Boeing MAX faces multiple hurdles

Boeing’s 737 MAX has been facing a global flying ban since mid-March, following two fatal crashes within five months. The company has been trying to fix a software problem in the plane’s flight-control system that caused the two accidents. The software updates need regulatory certification.

However, the aircraft manufacturer has encountered several delays in the certification process. The first setback came in June after FAA test pilots found that the updated software had a problem with delayed responses. The certification process was further delayed after regulators found several loopholes in documents submitted by Boeing for the certification audit.

Boeing encountered another hurdle on November 26, after the FAA toughened its scrutiny of MAX aircraft. The agency notified Boeing that it would individually certify every 737 MAX airplane assembled. The latest move is in contrast with the FAA’s traditional approach. Traditionally, the FAA certifies only an aircraft type, and delegates individual airplane certification to aircraft makers.

Stock performance

Boeing stock is likely to open lower today after the report by The Wall Street Journal. The stock has fallen 19.1% and lost $45 billion in market capitalization since the Ethiopian Airlines crash on March 10. Before the mishap, Boeing stock was a top Dow Jones 30 component, with a YTD (year-to-date) return of 31%.

However, as of December 13, its YTD gain had eroded to 5.9%. Moreover, the stock had slipped to 24th place among the Dow Jones 30. Boeing stock has also underperformed major US indexes. The Dow Jones, Nasdaq, and S&P 500 are up 20.6%, 31.6%, and 26.4%, respectively, YTD.

Analysts have changed their stance on Boeing stock following the worldwide grounding of the 737 MAX aircraft. Before the grounding, 76% of the 25 analysts covering Boeing stock suggested “buy,” and 24% suggested “hold.” That proportion has now changed, with only 43% suggesting “buy,” 48% suggesting “hold,” and 9% suggesting “sell.” Their average target price has also fallen to $374.45 from $440.

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