Yesterday, Boeing announced that it would halt the production of the troubled Boeing 737 MAX 8 aircraft starting next month. Boeing stock, which fell 4.3% yesterday on the news, opened lower today but was trading flat at 10:46 AM ET.
Boeing is currently producing 42 units of the grounded aircraft every month. It cut this production rate from 52 to 42 in April after the grounding. It was grounded by worldwide regulators soon after Ethiopian Airlines Flight 610 crashed on March 10, killing 157 people on board. Just months earlier, Lion Air Flight 302 crashed in Indonesia due to similar issues.
Just a month ago, Boeing’s mood was more optimistic. Last month, it hoped to start deliveries of the 737 MAX 8 before the end of the year. The FAA (Federal Aviation Administration) shattered those hopes by ruling out a 2019 return for the aircraft. FAA Chief Stephen Dickson told CNBC last week, “There are a number of processes, milestones, that have to be completed.” He added that there are 10–11 milestones that must be achieved before the FAA can give the green light to the plane’s return to service. Dickson continued, “If you just do the math, it’s going to extend into 2020.”
What does the 737 MAX 8 production halt mean for Boeing and its suppliers?
Halting production has a direct effect on Boeing and other stakeholders. First, Boeing’s halting production means it will take longer to fulfill new orders once the aircraft is back in the skies. Second, the halting of production is a pessimistic signal. Boeing itself said in its statement that one of the reasons for its production halt was “uncertainty about the timing and conditions of return to service.”
Boeing’s suppliers are also at risk due to the halt, as Boeing may cut down on purchases of parts if it’s not producing the MAX 8s. General Electric (GE) supplies engines for the 737 MAX 8 planes. GE expects its cash costs related to the MAX grounding to be $1.4 billion in 2019. The halting of MAX’s production may further pressure GE’s aviation business. GE stock was marginally down at 12:02 PM ET. The stocks of some other suppliers, including Spirit Aerosystems and Allegheny Technologies, are trading deep in the red today.
What the 737 MAX production halt means for airlines and passengers
The halting of the Boeing 737 MAX 8’s production means airlines will have to wait longer to get deliveries of their orders. Boeing currently has an inventory of 400 aircraft produced since the grounding. The company wants to focus on delivering that first.
Boeing currently has over 4,500 unfulfilled orders for the 737 MAX 8 on its books. Southwest Airlines (LUV) has ordered 310 units, of which it’s taken deliveries of 34. United Airlines (UAL) has ordered 135, of which it’s received 14. American Airlines has ordered 100 and has received 24.
All these airlines have already canceled thousands of flights. Last week, American Airlines extended the cancellations until April. Today, Southwest Airlines followed suit. The halt means that these airlines may have to continue canceling flights even when the MAX is back in the skies, as most airlines design their schedules assuming the deliveries of new planes.
Ultimately, passengers will pay the price. A production halt means fewer MAX planes will be in the skies than earlier expected. MAX planes are fuel efficient and aid in low-cost air travel. Not having enough of them around means airfares could go up. Delta Airlines (DAL), which doesn’t hold any 737 MAX 8s, has benefited from the grounding. The production halt could continue to help Delta. It stock was up 0.7% at 12:36 PM ET today.
Pilots are another piece of the puzzle. They’re likely not happy with the 737 MAX production halt, as a continued grounding means a loss of income for some. The Southwest Airlines Pilot Association has already sued Boeing, and other groups may follow its example.
How does the MAX production halt benefit Airbus?
Airbus executives are likely a happy bunch. Airbus stock rose 1.76% on the Paris Stock Exchange today. The company’s American depositary receipts were trading 0.85% higher at 12:41 PM ET.
Airbus has trumped Boeing on deliveries so far in 2019. Boeing delivered 345 planes in the first 11 months of 2019 compared to Airbus’s 704. In November, Airbus delivered 56 A320s, which compete with the 737 MAX 8. Continued delays in getting the MAX 8 back in the skies could help A320s to increase their market share in the single-aisle segment.
Boeing has kept its NMA (New Midmarket Airplane), the 797, on hold until the 737 MAX 8’s return. Many carriers are waiting for it. In September, Delta Air Lines CEO Ed Bastian told Bloomberg that the carrier was still hopeful Boeing would construct the NMA. Bastian said that Delta could be looking at “200 aircraft over the next decade” while talking about demand for the NMA.
During his interview, Bastian admitted that Airbus was pushing hard for the A321XLR. He said, “Obviously Airbus is at the table and they are offering us product today, but we want to wait and see what Boeing can create.” It’s not just US carriers that are eyeing the Boeing 797. India’s SpiceJet is also looking forward to its release. However, any further delay in a decision on the model could force these 797 hopefuls to go ahead with the Airbus A321XLR.
Boeing’s reputation is at risk
Boeing has lost face following the 737 MAX crashes and the subsequent grounding. On October 18, a transcript of a 2016 conversation between a chief technical pilot for the 737 MAX 8 and his colleague became public. In the conversation, the duo discussed the 737 MAX 8’s problems. The pilot said, “I basically lied to the regulators (unknowingly).” This angered the FAA, which said it was disappointed. Weeks later, the FAA made changes to its aircraft certification process in a clear sign of a fallout between the two.
Boeing has also made airlines cautious about its other planes. Emirates President Tim Clark said at the Dubai Air Show, “I want one aircraft to go through hell on Earth, basically to make sure it all works,” while discussing the Boeing 777X. Boeing has also lost its reputation among passengers who are becoming wary of the idea of boarding a 737 MAX 8 plane. Given its faltering reputation in the eyes of regulators, airlines, pilots, suppliers, and passengers, Boeing’s path to redemption in 2020 is bound to be rocky.