Boeing Will Suspend 737 Max Production: Thousands of Jobs at Risk

Mish

Boeing has over-promised and under-delivered on getting the 737 Max back in service. In Jan, it will suspend production.

The Boeing 737 Max was grounded by Trump on March 13 following fatal crashes in Indonesia and Ethiopia that claimed a combined 346 lives.

Boeing expected flights to resume in a couple months, then by October, then December.

Boeing is the largest U.S. manufacturing exporter and one of the nation’s top private employers. The MAX is Boeing's best-selling plane.

On December 16, Boeing announced 737 Max Production Will Be Suspended in January.

“It would be hard to have any other single company stop the production of a single product and have it hit the economy as hard as this would,” said Luke Tilley, chief economist at investment-management firm Wilmington Trust. He estimated that stopping MAX production for one quarter would shave 0.3 of a percentage point from quarterly annualized GDP growth.

“It’s not catastrophic, but we don’t need anything more corrosive in manufacturing right now,” said Diane Swonk, chief economist at Grant Thornton LLP. “It erodes our ability to grow because it’s such a big-ticket item.”

Boeing had 4,545 MAX orders in backlog as of Nov. 30 and had been building the aircraft at a rate of 42 a month since April, according to the company. Most MAX suppliers had already cut output in line with that rate, which allowed some—such as engine maker CFM International, a joint venture between General Electric Co. and Safran SA —to catch up from production bottlenecks that hobbled deliveries last year.

GE has said it expects the grounding to drain as much as $1.4 billion from its cash flow this year as its factories produce fewer engines for the aircraft and can’t get paid for them in full.

Supplier Impact

Boeing said it would shift workers to other planes and that layoffs would not be necessary.

However, supplies complain that stopping machinery would be harder than lowering production, and that restarting assembly lines would be costly.

Cancelled Flights

Carriers around the world have pared routes, paused expansion and canceled thousands of flights they had planned to operate with the grounded aircraft.

Southwest Airlines Co. and United Airlines Holdings Inc. aren’t planning to fly the MAX commercially until March. American Airlines Group Inc. has removed the MAX from its schedule until early April.

Southwest last week said it reached an agreement with Boeing to address $830 million in lost operating income resulting from the grounding this year. The airline didn’t disclose the terms of that deal but said it would distribute $125 million to employees.

Boeing 737 Max Order Backlog and Deliveries

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.

Big Compensation Losses

Gary Kelly, Southwest’s chief executive, said in an interview last week that the airline and Boeing will have to reach a further agreement on compensation for losses from the grounding next year. “It will be a big number,” he said.

Judging from the order backlogs, this suspension seems to make little economic sense unless the 737 is going to be suspended indefinitely or permanently grounded.

Order Cancellations?

In November, the WSJ reported that Boeing announced 200 cancellations.

OK, but 200 cancellations out of a backlog of 4,500 planes with only 47 a month being produced doesn't seem like much of a reason halt production.

The only thing I can come up with is there's absolutely no place to park the finished planes.

A reader proposes a criminal investigation, but I do not think that's it.

I thought of another angle this morning. Boeing wants to pressure Trump to pressure the FAA. Production will be back on as soon as the FAA says OK.

Mike "Mish" Shedlock

Comments (47)
No. 1-20
Six000mileyear
Six000mileyear

Production halt and loss of business settlements on a flagship product should have resulted in much more share price decline.

Casual_Observer
Casual_Observer

Your behind Mish. There is a criminal investigation into the max 737 and Boeing by the DoJ. There is your reason to halt production.

Sechel
Sechel

Amazing how a decision to save the company some money in engineering and development has cost the firm so dearly and not just in the pocket book but reputationally as well. This is what happens when the bean counters and lobbyists wind up running the company and the engineers are silenced. Yea some people earned some fat bonuses but this is a huge black eye which will be with the company for years. I still don't believe Boeing is being honest. This plane is never being returned to service. Nobody will trust it. The cost to good-will on the balance sheet is still open ended. The best thing Boeing can do is redesign a new plane from the ground up. The company should never have been allowed to lobby the FAA to not independently review and certify the plane as safe in the first place. This idea of self-certification is ridiculous. And its being expanded to meat, produce etc. There's a huge conflict of interest that cannot be managed.

Sechel
Sechel

Boeing just doesn't have to deal with the FAA permitting the return of the 737 but Europe, China and Japan to name a few. It will never happen

Blurtman
Blurtman

Comments in the local newspapers by current and former Boeing workers blame the infestation of GE and McDonald Douglas execs and the toxic culture they bought into the company.

ottertail
ottertail

I suspect this is the end of Boeing. They've lost the confidence of the flying public. Good luck getting it back. It might also be the seminal watershed mark that signifies the end of the latest era of lawless excess. Time will tell on that score.

TimeToTest
TimeToTest

“The only thing I can come up with is there's absolutely no place to park the finished planes.” Not sure if this is sarcasm or not.

The FAA will allow Boeing to transport planes through air. They can grant special permits for this.

I don’t think the Max is fixable without major changes. If the cost of reworking is high higher than the cost of shutting down the call is made. Just like Boeing poor choice on the Max this is about the dollars.

thimk
thimk

quite an order backlog , yet no cancellations , seems demand is still there. but what will replace the worlds aging fleets? either fly the MAX or transport on older planes ?

frozeninthenorth
frozeninthenorth

Everyone should remember two things: The Boeing management is now based in Chicago, none are "aircraft guys" and their real drive over the past 3 years was to raise the share price with massive (US$ 20 billion) share buyback. Second, and more importantly, everyone knows how complicated cars are today...well aircraft are 100x worse! Fixing the problem was never going to be an easy fix, and with all such events once you open the kimono, other stuff surface that were best forgotten.

This is going to hurt Boeing -- what is really surprising, and its speaks at how dysfunctional the capital markets are, the share price of the company has hardly suffered

Tony Bennett
Tony Bennett

"The only thing I can come up with is there's absolutely no place to park the finished planes".

...

Yes, something sounds fishy here. Wonder how firm those orders are? Saw where a Russian airline suing Boeing for damages and get out of order. Maybe other airlines following?

HAL9000
HAL9000

Boeing's recent products and their associated sales pitches:

“You need a tanker? No problem! This puppy over here, well we started building it in 1978, state of the art! Oh, the floor fell out? Well not a really big deal. By the way, we’re missing some tools, so if you find them, let us know!”

“You need a new short-to-medium haul jet? Well look at this 737, Max savings there! Haha, you know, we first started this line of aircraft in 1964, and we just keep giving it plastic surgery like Joan Rivers. Really tried and true! And it’s self-grounding when things go wrong. wink wink nudge nudge”

“So you want a new, big jet? Well we have this old 747 over here, queen of the skies. Let’s make a version of it, we’ll call it the 800. You know we first started this line in 1969? How cool is that? What do you mean you’re not really interested?”

“So you want a long-range twin? Well yeah, that A350’s sweet, but watch what happens when we take this ol’ 777 of ours and make some changes to i—what do you mean the fuselage blew apart during the stress test on the wing? The engines aren’t working, you say? Oh, sorry, trust us, it’s a super cool plane, be ready this ye—uh, next year, definitely.”

SMF
SMF

I suspect a good chunk of the issues now are purely political in nature. You mean Airbus/Europe could benefit from this?

In the history of aviation, no airplane has ever been grounded for so long.

And in between this story, the issues with Airbus airplanes get buried.

Mish
Mish

Editor

A reader proposes a criminal investigation, but I do not think that's it. The plane is good or it isn't. Criminal investigation is about management.

I thought of another angle this morning. Boeing wants to pressure Trump to pressure the FAA. Production will be back on as soon as the FAA says OK.

Whisper2018
Whisper2018

Boeing CEO Dennis Muilenburg must be investigated for his role in this mess. I wonder why no one is pressuring him to step down. is he that powerful ?

Sleemo
Sleemo

Boeing effed up so bad with the 737MAX. This is the rotten fruit of the poison tree. They deserve everything they get for making this catastrophic of a mistake. As a frequent flyer, I will never set foot on that aircraft -- and there are thousands of others who feel the same way.

Sologretto
Sologretto

If those orders are firm, this sounds like a political gamble to me. By threatening all these jobs they're pressuring congress into directing the FAA to re-certify the plane. Considering the companies recent decisions, Boeing Leadership likely believes that their proposed solutions are acceptable and the FAA's resistance to them are political in nature...

Anda
Anda

"Every month at 42/month production equates to $1.5 billion of inventory, carrying costs per month or $4.4 billion per quarter, assuming essentially no advances. The dividend consumes $4.7 billion of cash per year. “I think you have to halt production to keep the dividend,” Kahyaoglu said."

Aviationweek.

OTOH if deliveries resume the company will be further behind schedule hence higher compensation to customers.

Webej
Webej

Whether the production stop has anything to do with a possible criminal investigation I do not know. But there should be an investigation, because this is a case of simple fraud. The plane was certified even though material changes were made to the blue prints without resubmitting the required paper work. Changing the max authority for MCAS to 4× the original design and concept should have led to resubmissions and new re-evaluations. Whether the FAA also committed fraud is hard to judge, but certainly the certification process was fradulent and should be prosecuted. Everybody keeps making "mistakes", but they always seem to be going in a certain direction

Rvrider
Rvrider

I inquired with a friend, who flies for a major airline, as to what he thinks about the 737 Max: “ I flew the airplane many times and found it to react as expected in all of the flight regimes we encountered. I do think that the MCAS system was there to compensate for CG shift due to the aircraft having to accommodate larger engines than previous 737's. I also feel that Boeing committed a major foul by not notifying airlines and pilots about the software change because they saw it as "action behind the scenes" and that "pilots did not need to know about it" - simply ludicrous. Also downright criminal that the AOA system had no redundancy for signal input when there is redundancy after redundancy in most every critical system on the airplane.”

Pater_Tenebrarum
Pater_Tenebrarum

The long delay in getting the plane ready for re-certification may be due to the fact that the process is necessarily a slow one, since it seems to involve an entire gaggle of bureaucracies, committees and sub-committees. However, it is also possible that fixing the problem is turning out to be far more difficult than anyone expected - and if that is the case, then there is a certain danger that it may not be fixable at all. The company would presumably be kept afloat through its defense business in that case, but the stock would definitely be in for what is euphemistically referred to as a "re-rating". As it were, it actually looks like a giant distribution top has formed on the weekly chart.


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