Perhaps the company is finally taking a more conservative attitude toward the Max crisis after a series of overly optimistic promises left its reputation in tatters and CEO Dennis Muilenburg without a job. The Federal Aviation Administration, for its part, reiterated that there’s no time frame for the Max’s return and that safety is its first priority. Airlines and suppliers now have to recalibrate accordingly, and this latest delay will be by far the most painful for them.
With its stockpile of undeliverable jets growing and its cash burn deepening, Boeing had already made the call to halt production of the Max once it became clear it wouldn’t meet its previous deadline for a return to service by the end of 2019. The shutdown, which began in January, has already forced suppliers to idle their factories as well and, in some cases, to lay off employees. In one of the more extreme examples, Spirit AeroSystems Holdings Inc., which gets more than half its revenue from the Max, saw the rating on its debt cut to junk by Moody’s Investors Service earlier this month and is cutting about 2,800 workers. In total, economists from Barclays and JPMorgan Chase & Co. estimated the Max production shutdown could subtract half a percentage point from U.S. gross domestic product in the first quarter. Investors were expecting total compensation to affected airlines to amount to about $10 billion, according to a survey conducted by Bernstein analyst Douglas Harned. If that sounds bad, consider that the baseline case among investors and analysts before Tuesday’s update was that Max deliveries would resume by March or April.
The major U.S. airlines have all pulled the Max from their schedules through June in what they thought would be a conservative call. The logistical challenges of bringing jets out of storage and putting pilots through the simulator training that Boeing has now decided to recommend means that the airlines will likely have to go without their Max fleets for yet another peak travel season. That is likely to drive even more market share toward Delta Air Lines Inc., which doesn’t fly the Max and has been benefiting from that fact. The longer the grounding lasts, the more permanent those share gains may be. Either way, expect airlines to significantly increase their demands for compensation.
The biggest pain will be felt by Boeing’s suppliers. A three-month production shutdown is one thing; a six-month halt is something else, entirely. Getting supplier factories humming to the point where they could meet Boeing’s Max production pace required a logistical miracle and some parts-makers actually used the first few months of the grounding to play catch-up. At a minimum, suppliers run the risk of workers leaving for more secure jobs amid a buoyant labor market. Taco Bell is offering a $100,000 salary for a restaurant manager position, for heaven’s sake. For others, the damage may be more lasting. Boeing enjoys an effective duopoly with Airbus SE that has helped buoy profits over the years and arguably protected it from greater financial pain in the form of canceled Max orders. The flip side of that is that some suppliers depend heavily on Boeing for their business. The biggest producers such as General Electric Co., Honeywell International Inc. and United Technologies Corp. will be able to weather the hit from a prolonged production halt; smaller suppliers risk going bankrupt.
This will all come back to haunt Boeing once it’s finally ready to restart production. With a legitimate debate about the sustainability of air traffic growth at the levels needed to maintain demand, it’s not out of the question that the company might not ever reach its target of producing 57 Max jets per month. Air Lease Corp. Chairman Steven Udvar-Hazy said Monday that his company had urged Boeing to drop the Max name to make the plane more palatable for fliers. But the longer the grounding drags on, the likelihood increases that Boeing will need to make more than just a name change for the latest iteration of its 737 model and instead plow billions into a true successor.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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