Boeing 737 Max Suspension: What Really Happened?

Mish

This week, Boeing announced it would suspend production of the 737 Max in January. The timing and details are unusual.

Three days ago I noted Boeing Will Suspend 737 Max Production: Thousands of Jobs at Risk.

On the surface the story does not seem to add up.

There were only a few hundred cancellations. And the backlog is over 4,500. To top it off, Boeing insists the 737 certification is on schedule.

Boeing 737 Max Order Backlog and Deliveries

Boeing makes at most 50 planes a month. In December it was down to 42. Thus, there is over a year's worth of backlogs.

Lead Times

The lead times on orders at Boeing and Airbus stretch out for for years. It's not as if an airline can cancel a Max and pick up the phone and get an Airbus a month later.

What's Going On?

Several industry insiders and analysts privately emailed me in response to the article.

It a combination of new certification rules and a shortage of skilled workers on top of storage issues and foreign uncertainty.

1: Shortage of Skilled Labour

The Seattle labor market, especially for aircraft skills, is very tight. The skills needed to fix and deliver the 400 already stored aircraft is not there.

This work requires special FAA licences. Boeing just hired over 200 mechanics and has called back retirees.

What is unusual is that they did so in early December before a 2 week paid holiday. Typically Boeing hires in January. We have not seen December hiring like this this in 50 years. Thus, Boeing is locking down skilled labor.

Boeing's production worker demographics is such that there is a very high number of older workers who could retire anytime.

2: FAA Certification Delayed

Boeing expected FAA certification of the fix in December. It now looks like April.

3: Individual Certification

The FAA announced it will certify each plane individually.

This takes a huge amount of time compared to mass certification of whatever fix the FAA ultimately accepts. Prior to the crashes, Boeing self-certified and the FAA blessed the process.

4: Storage Issues

Most of the new planes are at Plaine Field, Renton airport, Boeing Field and Moses Lake, WA. All are Boeing facilities. The key is to have aircraft stored as close as possible to Boeing facilities because that is where the skilled labor is. They could store the aircraft in Arizona and elsewhere, but remote storage is already an issue.

Besides the 400 aircraft produced since the crash, there are about 380 MAX aircraft owned by various airlines and stored all over the world. Those aircraft will be fixed on location. Boeing will send mechanics to each remote location when Boeing is already short of skilled labor.

5: Europe

Trump is in a huge tariff dispute with the EU. The WTO ruled against Airbus, but in a separate ruling the WTO is expected to rule against Boeing.

The EU will be in no rush to certify planes if and when the FAA does. And the EU will no longer accept Boeing's or the FAA certification process. This adds to the uncertainty and the delays.

Ripple Through Impact

The Wall Street Journal reports GE’s 737 MAX Problem Just Got Bigger.

General Electric Co. will likely take a significant hit to its cash flow from Boeing Co. decision to halt production of the 737 MAX jetliner, which has already dented the conglomerate’s finances.

GE makes all of the MAX’s engines through a joint venture with France’s Safran SA . When Boeing in April cut monthly production of the plane to 42 from 52, it reduced GE’s quarterly cash flow by $400 million. The suspension of production Boeing announced Monday, if prolonged, could reduce cash flow by much more as analysts warn that GE won’t receive payments made as the planes are being built.

“It is going to create a significant cash drag for GE,” said John Inch, an analyst at Gordon Haskett. He added, though, that “one engine program cannot make or break the fortunes of this company.”

Southwest Airlines Co. earlier Tuesday said it was removing the 737 MAX from its flight schedule through April 13 as the airline sees uncertainty around the timing of the aircraft’s return to service.

The extended grounding has already strained GE finances, cutting cash flow by as much as $1.4 billion this year as factories produce fewer engines and GE can’t get fully paid for them. The LEAP engine is a major growth driver for the company’s aviation unit, which accounted for $4.8 billion of GE’s roughly $7 billion in industrial profits in the first nine months of 2019. GE has more than 17,000 orders for the engine.

That engine is also used on the Airbus . That is one heck of a lot of orders.

Industrial Production Rebounds after GM Strike Ends

On December 17, I commented Industrial Production Rebounds after GM Strike Ends

Looking Ahead

The current rebound is artificial, but so is the strike that preceded it. Looking ahead, Boeing is going to have a significant impact in the first quarter.

Thousands of jobs and possibly as much as 1/3 of a point of GDP as Boeing Will Suspend 737 Max Production in January.

Mike "Mish" Shedlock

Comments (32)
Harry-Ireland
Harry-Ireland

Would it be justified by saying, Boeing inflicted this onto themselves? Greed over quality, tradewars and economic downturn can take down even a giant such as Boeing.

No. 1-14
Casual_Observer
Casual_Observer

It has to do less with skilled labor imo and more to do with delays in certifying the changes. It is possible the plane design itself is fatally flawed but the FAA will engage in another coverup with Boeing.

flubber
flubber

Pretty good article from the BBC detailing the issues causing the B737-Max accidents

ksdude69
ksdude69

I work in mfg and personally I think the whole skilled labor thing is funnier than hell. And for those that commented thinking this isn't an issue I assure you, it is. We can't hardly find help. The younger generation are total slackers and you know what? I can't blame them. After seeing what happened to their parents in '08 and losing their asses who could take any of this stupid crap seriously? When my friends dad was a mechanic for the airlines decades ago it was one layoff after another. Now you have companies bring in robots and automation. They cry for help on one hand and can't figure out how to get rid of you fast enough on the other. We just had our quarterly profit meeting and, of course, no bonuses for like the 4th year in a row, with a guest appearance by our VP with his 100k vehicle in the parking lot, telling us all how things have changed and how a good chunk could get automated in the future for even bigger profits with no bonuses and you think people are going to want to train for this garbage? I won't advise anyone to even think about it. Being fair you're always at risk working for someone else but the majority can't work for themselves. I suggest finding something easier on the body. Perhaps sitting at a desk sending worthless digital 1's and 0's for $50 hr back and forth all day.

lol
lol

Skille labor my ass lol,the only reason they're shutting it down ...they don't trust those offshored parts and the offshored software.Those Chinese parts are junk,and the Indian/Chinese engineers aren't qualified,but they are cheap at $7an hour.

Sechel
Sechel

no order is firm till it delivered. there is simply no clarity on when and if the plane gets the go-ahead from the faa let alone key regulators in europe, canada, and asia. boeing has not been on top of the public relation aspect of story since day one. it's very likely the plane never flies again. this has already gone on longer than anyone anticipated and for one very good reaon, boeing has never been completely honest about the problem and scope not with investors, not with airlines, not with the government and not with itself. probably because they can't admit to the initial error in judgment

TimeToTest
TimeToTest

Mish, While I enjoy your analysis it doesn’t make any pennies.

Boeing has 7.5 years worth of orders to fill. Why would they shut down production?

Reasons to shut down production on a product with this much lead time.

  1. Unknown future. There is a possibility these planes will never fly again
  2. No actual fix. All this talk of January then April then October and so on, looks like a stock price prop. If Boeing had a fix they would implement it on planes being build. With 4 months left until recertification why wouldn’t you put this fix into production. Refer to 1
  3. Storage problems. Labor and overhead to build these planes is very expensive. Shutting down production keeps labor cost while not producing a product. These planes can fly after being built. 100k (high side) each to transport(fly). So 5 million monthly to keep production. Or roughly 50? Employees annual overhead.

The whole process screams “protecting stock prices”. Hiring workers out of season may be more of a moral booster than anything. Hiring means “we”are not getting laid off. I am sure moral at Boeing production plants is very low at this point. Hiring adds a positive.

This plane shouldn’t be certified with its current CG. The EU might never.

Six000mileyear
Six000mileyear

Boeing may be ramping production to a plane similar to the MAX to keep customers. Manufacturers try to have as many common parts across their product lines so some long lead items may still be available in the pipeline.

Rvrider
Rvrider

MCAS was/is a further step in the direction of fly-by-wire, which was necessary for fighters and bombers with HUGE flight envelopes (very wide range of air-speeds speeds that caused flight control characteristics to radically change). It’s a hard sell to the public and regulators that fly-by-wire makes sense for people haulers, so Boeing executives can enjoy more wealth. The only way to win the public over is to offer a discount and term life insurance for passengers who agree to fly on the 737 Max ... at least for a while.

Brass Rabbit
Brass Rabbit

Good analysis of the manufacturing issues but it seems ot me that there are larger, perhaps more serious, issues. The problems with the MAX are short-term, fixable, and surmountable, the more serious problems are systemic. For example: 1) a major change to the Boeing business model back in the '90s; 2) hiring practices that created a demographic 'hole' in the workforce; and 3) the dissolution of in-house training divisions that both passed on accumulated knowledge and provided certifications and classifications.

  1. Boeing changed from a long term 'business growth' model to a 'shareholder value' business model. This generated lots of profit and product velocity but was disproportionately affected by other forces like product cycle and supplier management.
  2. In the '90s Boeing labor became a 'comodity' replacing older higher-paid workers with young inexperienced creating an age demographic that had no middle but plenty of 50+ yr old and 20-30 yr olds. This created a significant knowlege transfer gap. Additionally, and harder to quantify, the younger employees had far less loyalty to the company, and vice versa. The results of this brain drain is directly affecting production today.
  3. The internal training organizations have been 'turf warred' and defunded almost out of existence. There is no pathway for specialized division-specific issues and knowledge transfer, not to mention a means to certify (and monitor certifications) skill sets that help to prevent MAX-type disasters. In the training organizations the FAA had a central location for knowledge dissemination, monitoring credentials, providing latest updates, etc. It doesn't make for very exciting reading, but it's a disservice to the problem to lay this all at the feet of manufacturing without at least a wink and a nod to the implementation of business models that directly contributed. Boeing cannot manufacture it's way out of these kinds of problems. Boeing is not an innovator, it's a problem solver. Maybe it should take a big step (gasp...) backward.
Thalamus
Thalamus

This plane shouldn’t fly due to poor design.

Herkie
Herkie

Well, today the CEO of Boeing was fired. Some say resigned but make no mistake about it, his resignation was demanded. And there are now stories that NOBODY wanted to work with the guy, least of all regulators at the FAA who he had "tense" meetings with (call them shouting matches complete with threats). The failure of the Starliner space taxi seems to have been the last straw. He was fired the day after it failed.


Global Economics

FEATURED
COMMUNITY