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Boeing Says It May Halt 737 Max Production Boeing May Halt 737 Max Production as Economic Fallout Spreads
(about 5 hours later)
Boeing said on Wednesday it could shut down production of the 737 Max if the grounding of its most popular plane persists much longer. Boeing said on Wednesday that it was considering halting production of the 737 Max if the grounding of its most popular plane persists, a move that could damage airlines, suppliers and even the United States economy.
On a conference call discussing the company’s second-quarter earnings, Boeing’s chief executive, Dennis Muilenburg, and the chief financial officer, Greg Smith, raised the prospect of halting production of the 737 Max, which has been grounded by regulators since March after two crashes. The company is struggling to contain the fallout from two deadly crashes of the Max. It has already announced more than $8 billion in costs related to the accidents, and is producing the planes at a slower rate.
Shutting down 737 Max production would have profound consequences for Boeing as well as its customers and suppliers around the world. Airlines have ordered thousands of the planes. The damage is spreading through the constellation of companies connected to Boeing, the nation’s largest aerospace manufacturer. Airlines around the world have canceled thousands of flights, costing them billions of dollars, and some carriers have reined-in expansion plans. Suppliers like General Electric, which makes engines for the Max, are expecting lower revenue in the quarter.
Boeing already slowed production of the Max to 42 planes per month in April. It is stockpiling those planes, and won’t be able to deliver any Max jets until regulators clear the plane to fly. The economic toll is also rising. Orders of durable goods in the United States, which include commercial airplanes, were down 1.3 percent in May, the third drop in four months, according to the Census Bureau.
“If Boeing has to halt production, which we do not expect but which is a possibility, it would have a big ripple effect on suppliers throughout the supply chain,” said Jim Corridore, an analyst at CFRA Research. By one estimate, a production halt would shave about six-tenths of a percent off the gross domestic product growth rate, the financial equivalent of a prolonged government shutdown or a significant natural disaster.
“The fact that they talked about it for the first time is significant,” said Scott Hamilton, managing director of the Leeham Company, an aviation consultancy. “When Boeing starts talking about a topic and repeating it, especially in the same event, they’re signaling that something is going on.”
Boeing’s chief executive, Dennis Muilenburg, and its chief financial officer, Greg Smith, both raised the prospect of halting production of the 737 Max on a conference call discussing the company’s second-quarter earnings on Wednesday.
“We might need to consider possible further rate reductions or other options including a temporary shutdown of the Max production,” Mr. Muilenburg said.
After the crashes, Boeing slowed production of the 737 family to 42 planes per month in April, down from 52. It cannot deliver any Max jets until regulators clear the plane to fly, and has stockpiled more than $30 billion worth of planes in Seattle.
Boeing has said it expected the Max to return to service late this year. But Boeing and regulators keep finding new problems with the model, leading to a cascading series of delays.Boeing has said it expected the Max to return to service late this year. But Boeing and regulators keep finding new problems with the model, leading to a cascading series of delays.
“If that timeline changes significantly, we will have to evaluate these other scenarios,” Mr. Muilenburg said. “There’s no one specific trigger.”“If that timeline changes significantly, we will have to evaluate these other scenarios,” Mr. Muilenburg said. “There’s no one specific trigger.”
As it determines whether to further reduce the Max production rate or halt it entirely, Boeing is considering the date the Max is likely to return to service, as well as its ability to store and maintain the hundreds of completed planes it has not yet delivered, Mr. Smith said. “No one item is going to drive the schedule,” he said. Mr. Muilenburg said the decision to halt production would depend on various issues, including the date the Max is likely to return to service, as well as its ability to store and maintain the hundreds of completed planes not yet delivered.
Mr. Muilenburg added that temporarily halting Max production might make more sense than reducing production levels to fewer than the current 42 planes per month, for reasons having to do with suppliers, staffing and training. He added that temporarily halting Max production might make more sense than reducing production levels. Given what it costs to operate and staff the production line, the Max program could become unprofitable if Boeing does not make enough planes each month.
Boeing reported a $2.9 billion net loss for the most recent quarter on Wednesday as costs related to its grounded 737 Max continue to rise. The company’s stock was down more than 2 percent in midday trading. “It is significant that not only Muilenburg talked about, but that Greg Smith talked about it, too,” said Mr. Hamilton. “For those of us that have followed Boeing for decades, this is them raising the caution flag.”
Boeing said it recorded $15.8 billion in sales in the quarter, down 35 percent from the same time a year earlier, in large part because it has stopped delivering the Max. The longer the Max stays grounded, the bigger the financial fallout.
Boeing also said it had taken orders for $474 billion worth of goods and services, including more than 5,500 commercial airplanes. The three United States carriers that fly the Max — Southwest Airlines, American Airlines and United Airlines — have canceled thousands of flights into November, depressing their revenue. Ryanair, the Irish budget airline, said this month that it would scale back expansion plans because the Max planes it ordered were delayed.
The figures reflected Boeing’s surprise announcement last week that it was taking a $5.6 billion charge related to the cost of compensating airlines that fly the Max, and that it was anticipating a further $1.7 billion in costs linked to production slowdowns. SpiritAerosystems, the largest supplier for the Max, has already cut hours and pay for 4,000 workers, and is especially vulnerable to a production halt. And General Electric, which makes the Max engines through a partnership with Safran of France, is also expected to record a dip in revenue as a result of the grounding when it reports earnings next week.
The economic fallout from the continued grounding of the Max is already being felt more broadly. “If Boeing has to halt production, which we do not expect but which is a possibility, it would have a big ripple effect on suppliers throughout the supply chain,” said Jim Corridore, an analyst at CFRA Research.
Airlines have canceled thousands of flights, losing billions of dollars. Companies that make parts for the Max are suffering as Boeing has slowed production. And American durable goods orders and the export of commercial aircraft are down, contributing to a small but detectable dent to the American economy. A production shutdown would be particularly painful in the Seattle area, where Boeing makes the 737 Max and most of its other commercial airplanes.
The three United States airlines that fly the Max — Southwest Airlines, American Airlines and United Airlines — have canceled thousands of flights into November, depressing their revenues. “For every direct Boeing job, there are three to four indirect Boeing jobs,” Mr. Hamilton said.
General Electric, which makes the Max engines through a partnership with Safran, is also expected to record a dip in revenues as a result of the grounding when it reports earnings next week.
And last month the Census Bureau said that orders of durable goods, which include commercial airplanes, were down 1.3 percent in May. It was the third time in four months that orders had dropped.
In a recent report, the chief United States economist for JPMorgan Chase, Michael Feroli, said the effects of the Max grounding could shave about one-tenth of a percentage point of gross domestic product in the quarter.
“The issues affecting Boeing’s 737 Max could begin impacting the economic dataflow,” he said.
Boeing’s announcement last week was the clearest indication to date of just how much the crashes and grounding will cost the company. The company had already announced an expected $1 billion in costs from production delays, and a $100 million fund for families and communities affected by those killed in the crashes.
“This is a defining moment for Boeing and we remain focused on our enduring values of safety, quality, and integrity in all that we do, as we work to safely return the 737 MAX to service,” Mr. Muilenburg said in a statement. “During these challenging times, teams across our enterprise continue to perform at a high level while delivering on commitments and capturing new opportunities driven by strong, long-term fundamentals.”
The Max was grounded after the crash of Ethiopian Airlines Flight 302 in March, which killed all 157 people aboard. In October, Lion Air Flight 610 crashed just minutes after taking off, killing 189. In both accidents, a new automated system malfunctioned, pushing the planes into nose dives.The Max was grounded after the crash of Ethiopian Airlines Flight 302 in March, which killed all 157 people aboard. In October, Lion Air Flight 610 crashed just minutes after taking off, killing 189. In both accidents, a new automated system malfunctioned, pushing the planes into nose dives.
Boeing has developed a software update for the plane, and is working with the Federal Aviation Administration and other global regulators to get the Max flying again. Boeing has developed a software update for the plane, and is working with the Federal Aviation Administration and other global regulators to get the Max flying again. The delays have persisted, and at this point it could be 2020 before the Max flies again.
“Boeing is a $100 billion revenue company who just saw a 35 percent decline in revenues, so there will be some impact on the economy,” Mr. Corridore said. “But even at its size, we don’t think Boeing’s troubles are likely to significantly hurt overall U.S. GDP.” [The Senate confirmed Stephen Dickson as the new F.A.A. administrator.]
“This is a defining moment for Boeing and we remain focused on our enduring values of safety, quality, and integrity in all that we do, as we work to safely return the 737 Max to service,” Mr. Muilenburg said in a statement.
Boeing reported a $2.9 billion loss for the most recent quarter, sending the company’s stock down more than 3 percent on Wednesday The company said it recorded $15.8 billion in sales in the quarter, down 35 percent from the same time a year earlier, in large part because it has stopped delivering the Max.
The loss included a $5.6 billion charge, which Boeing announced last week, related to the cost of compensating airlines that fly the Max. The company said that it was anticipating a further $1.7 billion in costs linked to production slowdowns. Additionally, it has set up a $100 million fund for families and communities affected by those killed in the crashes.
Boeing also said it had taken orders for $474 billion worth of goods and services, including more than 5,500 commercial airplanes. Though most airlines have stopped ordering the Max since the second crash, and some have considered canceling their orders, Boeing scored a win last month when IAG, the parent company of British Airways, said it would order 200 new Max planes.
“Boeing is so influential on the U.S. economy and the supply chain,” Mr. Hamilton said. “But at some point, it makes sense for them to stop making airplanes.”