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Boeing will halt 737 Max production in January as FAA reviews software fix

Following two deadly crashes, Boeing announced on Dec. 16 that it will end production of the 737 Max in January 2020. (Video: Reuters)

Boeing said Monday it will halt production on its signature 737 Max airplanes indefinitely beginning next month, a stoppage that could send ripples across the economy and put tens of thousands of manufacturing jobs in jeopardy.

The decision comes nine months after aviation authorities grounded the planes following two crashes that killed 346 people. Since then, the company has been unable to convince regulators in the United States and abroad that the airplane is safe to fly. And it acknowledged “uncertainty” Monday about when that might happen.

As one of the country’s top manufacturers and the single biggest component of the Dow Jones industrial average, Boeing plays a significant role in the U.S. economy, and the effects of its decision on employment and stock prices could be swift.

Boeing chief executive Dennis Muilenburg said Oct. 30 that he and the company he leads bear the main responsibility for two deadly crashes. (Video: Reuters)

Boeing said the decision would not immediately lead to any layoffs among its own staff, which numbers 153,000 people, saying those workers will “continue 737-related work, or be temporarily assigned to other teams.”

But Boeing’s supply chain includes hundreds of other U.S. manufacturers, from a Wichita-based firm, Spirit AeroSystems, that builds fuselages for the 737 — and relies on Boeing for nearly half its business — to engine assembly teams outside Cincinnati. Collins Aerospace, based in Cedar Rapids, Iowa, handles much of the jet’s complicated electronics.

Many of these smaller companies may not have the cash flow or breadth of work to hang onto their employees through a protracted stoppage.

FAA officials meet with Boeing CEO to discuss Max

“When you get down to the suppliers, they are not so well-heeled as Boeing, so they can’t necessarily hold on,” said George Ferguson, an analyst at Bloomberg Intelligence.

Since aviation authorities in the United States and abroad grounded the planes in March, Boeing has continued producing the jets at a cost of $1.5 billion a month in the hope that the Federal Aviation Administration would quickly approve their return to use.

That optimism now appears to have been badly misplaced, as the timeline for approval has been repeatedly pushed back. As delays mounted, Boeing and its more than 900 suppliers continued building planes at a pace of 42 per month, adding a glut of 400 new planes to the nearly 400 that were grounded.

Many of the hundreds of companies that are part of the 737 Max supply chain are likely, at a minimum, to be more circumspect with raises, capital investments and new hires for the foreseeable future, Dartmouth College economist Matthew Slaughter said, and that could have a broader effect on manufacturing as well as rail and trucking companies responsible for shipping the giant metal components.

“This is going to be something that curtails activity in the broad U.S. manufacturing sector,” he said.

Some White House officials had hoped that there would be a bump in economic growth if Boeing was able to quickly solve its problems. Commerce Secretary Wilbur Ross in August told CNBC that problems with the 737 Max had been big enough to shave 0.4 percent off the entire U.S. gross domestic product for a period this year. Ross said he expected an uptick when the problems were fixed, but it’s unclear what the impact might be if production were completely halted.

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Boeing’s stock was down more than 4 percent in after-hours trading, a move that will weigh on the Dow in regular trading Tuesday. Shares of its publicly traded suppliers similarly tumbled.

Chicago-based Boeing issued a statement saying the decision was based on the uncertainty of “timing and conditions of return to service” and that it believes “this decision is least disruptive to maintaining long-term production system and supply chain health.”

“We will continue to assess our progress towards return to service milestones and make determinations about resuming production and deliveries accordingly,” the company said.

Boeing’s acknowledgment that it does not know when the planes will receive approval marked a change. In early March, shortly after a second plane crashed, in Ethiopia, the company announced that it had been working with regulators and that the initial fix to its faulty software system was expected “no later than April.”

That timeline has been continually pushed back as regulators discovered more technical problems with the plane, and analysts said Boeing’s decision to cut production suggests that it has no idea when FAA approval will be finalized.

In October, a group of international and American aviation safety experts identified broad failures in the design and oversight of the jet’s production, including the fact that government regulators had “inadequate awareness” of an automated system that contributed to the crashes.

The report by the Joint Authorities Technical Review panel said communication breakdowns, bureaucracy and staffing disparities meant that key government safety personnel did not know enough about the power of the automated feature until after tragedy struck.

“If Boeing could see a light at the end of the tunnel, they probably wouldn’t have done this,” said Mike Boyd, an aviation analyst with Boyd Group International.

The Boeing planes have been grounded worldwide since the March 10 crash of an Ethiopian Airlines flight. It was the second crash involving a 737 Max in less than five months. In all, 346 people died in the tragedies.

The production stoppage caps a financially disastrous year for Boeing’s commercial airplanes division. Since the grounding, almost 400 737 Max jets have accumulated at the company’s Renton, Wash., facility, where the unpainted green jets loiter in a massive parking lot.

Randy Babbitt, a former FAA administrator, said maintaining a single 737 Max typically requires at least two or three “touches,” or maintenance updates, each week.

“It takes a lot of work to store them,” he said.

The costs of production, storage and maintenance added up quickly. At its recent production rate of 42 jets per month, Boeing was burning through an estimated $4.4 billion every three months, according to an estimate from Jefferies investment bank. Halting production is expected to save half that.

The decision to cut Max production was made by senior management in Boeing’s corporate office, in consultation with the board of directors. Gordon Johndroe, vice president for media relations, said the company “continues to work closely with the FAA and global regulators to answer all of their questions as they determine when the MAX is deemed safe for return to service.”

Despite the production issues, Boeing’s board of directors voted Monday to approve the company’s quarterly dividend of roughly $2 per share.

Analysts said the company was still paying for its initially unrealistic expectations for getting the planes back in service, and some worried that the stoppage would have an enduring effect on Boeing’s ability to compete globally.

“This whole experience has been one of untenable optimism,” said Richard Aboulafia, an analyst at Teal Group. He said Boeing’s heated competition with its global rival, Airbus, of France, was on hold while the company tries to rescue the 737 Max.

“There are other concepts they would like to pursue, I’m sure, but right now this is just burning a big hole in their balance sheet that they’re going to need to repair.”