Turbulence intensifies for Boeing as 737 MAX remains grounded
Sky's Ian King explains the multiple pressures on Boeing as the biggest exporter in the US considers slashing 737 MAX production.
Wednesday 18 December 2019 13:18, UK
It is impossible to overstate the impact of a freeze in production of Boeing's 737 MAX aircraft.
Firstly, there are 12,000 people employed building the planes at Boeing's plant at Renton, Washington State, who would need to be redeployed on other work.
Boeing has other sites in the state, in the cities of Auburn and Everett, which could take on some of the affected employees but by no means all of them.
Then there are the implications for the supply chain.
According to the Wall Street Journal, which first reported that production of the 737 MAX could be cut back or frozen, there are about 600 firms involved in the supply chain and hundreds more smaller subcontractors.
The expectation of some is that they will be asked to continue producing, in order to prevent some of them from suffering from disruption, with Boeing already apparently having provided some with financial support already.
The Seattle Times has reported that one of the most affected suppliers is Spirit AeroSystems, in Wichita, Kansas, which makes the fuselages for the 737 MAX and transports them to Washington State by train.
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It has continued to produce the same volumes as it did before the planes were grounded, even though Boeing has reduced the number of planes being produced, on the basis that it is difficult to resume production at the previous level once it has been reduced.
The disruption to suppliers also extends beyond the United States. Another major supplier to the 737 MAX is CFM International, a joint venture between the US industrial giant GE and Safran, a French company.
Also hugely affected, of course, are the airlines that have ordered the 737 MAX.
In terms of orders placed, the most important of these by far is Southwest Airlines, which has ordered some 259 of the aircraft worth a total of $25bn.
It was also flying more of the planes than any other airline, some 34 in total, when they were grounded in March. Boeing agreed over the weekend to make a confidential compensation payment to Southwest over the weekend which has been put at some $600m.
Other airlines which placed significant orders for the 737 MAX include Flydubai, whose order for 237 planes is worth $23bn and Lion Air, the Indonesian carrier that was operating one of the aircraft that crashed in October last year with the loss of 189 lives. It has ordered 235 planes at a cost of $22bn.
Other significant orders have come from VietJet Air, SpiceJet, United Airlines and Ryanair, which has ordered 135 of the aircraft at a cost of $13bn.
Michael O'Leary, Ryanair's chief executive, last week put the cost of the aircraft's grounding to be "more than" €100m a year and reiterated a warning on the disruption being caused to the airline's expansion plans.
He said Ryanair might not yet be flying any of the planes by next summer, even if US authorities had allowed them to take to the skies once again, due to European regulators taking longer to sign off on a return for them.
There is also an impact on the wider US economy because, as the biggest single US exporter, Boeing's failure to deliver as many aircraft to overseas airlines has also resulted in a widening of America's trade deficit for 2019.
That is something that Donald Trump will not want to see extended into a presidential election year and especially if a halt to production leads to job losses.
The latter, however, looks likely - firstly, because there is not sufficient work available for all of those workers to be switched and secondly, because Boeing needs to preserve cash.
So Mr Trump himself will be worried and there is a historic precedent, on this side of the Atlantic, that he may just have in mind.
In May 1970, shortly before that year's general election, the delivery of two 747 jumbo jets by Boeing to British Airways suddenly led the UK's trade deficit, after a run of good figures, to balloon to a then-shocking £31m.
Labour's Harold Wilson subsequently blamed this for his shock defeat to the Conservative Edward Heath.
The implications of a production freeze will, therefore, be felt far and wide. Ironically, due to Mr Trump's tariffs on Chinese goods, the US trade deficit had started to head in the right direction in recent months.
In the meantime, during the nine months since the 737 MAX was grounded, Boeing has continued to knock out the new aircraft, albeit at a rate of 42 per month since April, down from the 52 it was producing previously.
So inventory is stacking up. Including those aircraft completed since the 737 MAX was grounded, there are now an estimated 500 planes being stored around the world, including around 100 in Renton itself.
It is this factor that is likely to have convinced Boeing that it needs to freeze production of the 737 MAX.
Wall Street, meanwhile, is starting to have fresh doubts about Boeing's management.
A view is forming among investors and analysts that management is losing credibility because of the number of times the company has stated that the planes would be back in the air within a couple of months only for that not to happen. It is gaining a reputation for creating unrealistic expectations as a result.
That is why communication of any production freeze will be absolutely critical.
Boeing has, rightly or wrongly, convinced investors that it is cheaper to carry on producing new aircraft and storing them than it would be for production to be frozen with all the accompanying knock-on effects to its suppliers.
So any suspension to production is going to come as a shock and, accordingly, shares of Boeing, which had fallen by just over 22% since the beginning of March, fell by another 3% on Monday.
The longer this process drags on, the greater will be the concern over the dividend, which costs Boeing $1.2bn to pay to shareholders each quarter.
Payments to service its debts costs another $1.8bn each quarter.
Boeing set aside $5.6bn in July this year to compensate airlines for the late delivery of aircraft and the grounding of existing ones.
These kind of numbers are not trivial even for a company, like Boeing, with a stock market valuation of $192bn.
It feels as if a bad picture for Boeing is getting worse.