Boeing 737 Max Should Return In 2020 But The Crisis Won’t Be Over

The Boeing 737 Max will likely return to service sometime in 2020, but that won’t close the books on one of the aerospace giant’s worst crises in its 103-year history.

Boeing (BA) will have to address key questions, such as how quickly production can ramp back up and how much compensation airlines will get for the grounding.

Lawsuits from families of crash victims and investigations are also pending. The Securities and Exchange Commission is reportedly probing Boeing’s financial disclosures related to the grounding. Congress, the Justice Department, FBI and the Transportation Department inspector general’s office also have been looking to see if the company provided misleading information about the Boeing 737 Max to regulators and customers. And the FAA is investigating 737 Max production practices.

For now, top Boeing 737 Max customers expect the plane to fly again in early to late spring. Southwest Airlines (LUV) and American Airlines (AAL) removed the jet from their schedules until April, while United Airlines (UAL) has removed it until June.

But those are just the U.S. carriers with the Boeing 737 Max in their fleets. Depending on when regulators around the world OK the plane, the return to service elsewhere may take longer. Chairman and incoming CEO Dave Calhoun suggested in an interview with CNBC in November that the return of the Boeing 737 Max may take until 2021 to complete “in its entirety.”

Then there is the flying public. Airlines will have to deal with passengers who find out if their flight is on a Boeing 737 Max and want to change to a different plane. Some airlines will let skittish passengers switch, but European budget carrier Ryanair (RYAAY) reportedly won’t and won’t offer refunds either.

Boeing 737 Max Production Outlook
To stop the flow of grounded jets spilling out into employee parking lots at the Seattle-area factory, Boeing will halt production of the narrow-body jet starting in January and told its suppliers to stop deliveries starting in mid-January.

Boeing previously slowed 737 Max production to 41 a month in April as the global grounding took hold, but planned to ramp up to 46 by the end of 2019, then to 52 by February 2020, and to 57 by the end of 2020.

The failure of the Boeing 737 Max to obtain clearance this month to fly again has thrown that timeline out the window. But a whistleblower warning also threatens the ability to ramp up, even when the plane is recertified.

Former Boeing employee Edward Pierson told Congress earlier in December that he witnessed a factory in chaos and reported serious concerns about production quality to senior Boeing leadership months before the Lion Air crash in 2018.

FAA chief Stephen Dickson revealed at a Capitol Hill hearing that the regulator has opened a probe into Boeing 737 Max production processes after the whistleblower warning surfaced. He also suggested more enforcement action may be on the way.

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Charges To Weigh On Boeing Earnings, Cash Flow
Boeing has booked $9.2 billion in charges relating to the 737 Max grounding, and the production halt won’t stop the bleeding.

The company will still burn through $1 billion a month during the halt, though that’s down from $2 billion a month before the halt, according to a JPMorgan analyst.

Moody’s recently cut Boeing’s debt rating one notch to A3, saying the production halt will mean additional financial support to many suppliers, elevated risk in the production system, and higher customer compensation, which will lower 737 margins and cash generation “for years to come.”

The company hasn’t detailed the financial impact to suspending output, but Spirit AeroSystems (SPR), which gets about 50% of its revenue from the Boeing 737 Max, has suspended production of fuselages.

Meanwhile, engine supplier General Electric will boost production of its Leap 1A for Airbus (EADSY) to help offset lost sales to Boeing during the 737 Max production halt, according to the Wall Street Journal.

Spillover From Boeing 737 Max Crisis
Before the crashes, the FAA often delegated key tasks to Boeing, and global regulators had often followed the FAA’s lead. Not anymore. And that new relationship will have long-term effects on the 737 Max as well as other planes.

The FAA will have to approve every Boeing 737 Max before delivery to airlines, the regulator said in late November. Boeing previously had authorization to perform routine predelivery safety checks by itself. In addition, European, Brazilian and Chinese aviation regulators have their own requirements, separate from the FAA’s, to be fulfilled before the jet can return to service.

Other Boeing planes will likely face extra scrutiny too. The European Union Aviation Safety Agency has said it will conduct its own “concurrent validation” of the FAA’s certification of the next-generation Boeing 777.

The UAE’s aviation regulator will review the certification process of the 777X as well, sources told the Wall Street Journal. The UAE’s move is key as it affects the Emirates airline, which is a major 777X customer.

And that’s for an update to an existing aircraft. How will regulators treat a totally new plane? Boeing has said it’s still considering a midmarket aircraft with a clean-sheet design.

Boeing CEO Turnover
Former CEO Dennis Muilenburg had reportedly antagonized the FAA with his predictions on when the Boeing 737 Max would return to service. That prompted the FAA to push back as it sought to counter the image of the regulator having a cozy relationship with Boeing.

After being removed as chairman in October, Muilenburg was fired from his CEO role on Dec. 23. Calhoun will take over on Jan. 13, and a top priority will be to repair ties with the FAA.

Analysts were bullish on his appointment as CEO. Bernstein analyst Douglas Harned called him the right choice “given his managerial skills and knowledge,” according to a recent note.

Calhoun has a long history of working in aviation and helping turn companies around during a crisis. He was appointed to run General Electric’s (GE) jet engine business after 9/11. He’s also served on Boeing’s board since 2009.

But Boeing’s CEO turnover won’t stop with Muilenburg’s ouster. The company has a mandatory retirement age of 65, meaning 62-year-old Calhoun can only serve a few years. That leaves enormous pressure on Calhoun and the company to quickly find a replacement and prepare him or her for the role.

“He is likely to have a relatively short tour of duty at Boeing,” Robert Stallard, an analyst at Vertical Research Partners, said in a research note. Calhoun’s focus will be “getting the 737 Max back into service without further aggravation, and starting the process of finding a new CEO and senior management team that can potentially get Boeing back on track.”

https://www.investors.com/news/boeing-737-max-service-return-2020-crisis-not-over/