Financial pain from the grounding of Boeing’s 737 MAX program continues spreading to key industry stakeholders, but new CEO David Calhoun said Wednesday the company plans to slowly restart production a few months before aviation authorities certify the plane to fly again.
Earlier, Canadian carriers WestJet and Air Canada said they are removing the 737 MAX from their flight schedules through June 24 and June 30, respectively, following Boeing’s Tuesday estimate that aviation authorities won’t recertify the plane for commercial service until midyear. The extensions give airlines scheduling predictability while reducing chances customers will experience last-minute cancellations.
Based on the new guidance, Southwest Airlines (NYSE: LUV) will likely extend MAX-related changes to its flight schedule beyond June 6, Chairman and CEO Gary Kelly said in the company’s fourth-quarter financial report. The Dallas-based airline has 34 MAX aircraft in its fleet and was scheduled to have 75 by the end of 2019, with another 38 deliveries in 2020.
Kelly said the MAX grounding contributed to a 7.7% in unit costs for the fiscal year and impacted a planned network expansion.
American Airlines (NYSE: AAL), United Airlines (NASDAQ: UAL) and Southwest Airlines had previously canceled MAX flights through early June after Boeing (NYSE: BA) announced last month that it would temporarily shut down the MAX production line in Renton, Washington. The manufacturer recently confirmed work has stopped and some employees have been transferred to other programs, but Calhoun suggested production could resume in the spring, according to news accounts. Boeing will not cut its dividend either, he added.
Boeing’s stock has fallen 28% since last March to $309 a share.
The six-month notice was a departure for Boeing, which teased customers and investors last year that the U.S. Federal Aviation Administration would quickly lift the March grounding once the airframer submitted software adjustments for its automated flight control system implicated in two deadly crashes. Airlines felt misled when the clearance timetable repeatedly slipped through the end of year, while FAA officials said they felt undue pressure to rush their review. The frayed relations with partners and mounting financial costs led to the firing of CEO Dennis Muilenburg.
“We continue to assume there will be a safe return of the MAX. We’re actually encouraged at what we hope is a more realistic timeline and target,” United President Scott Kirby said Wednesday during a quarterly conference call with analysts. “We will be announcing soon our own pushback of service . . . from what Boeing is now saying about the MAX return to service to give us time to get the airplane back up and running and give us time for classroom training and simulator training for our pilots before they fly.”
COO Gary Hart added the airline doesn’t expect to start flying the MAX this summer.
United’s fleet plan shows the number of MAX aircraft remaining static this year. The airline has 14 MAX planes in storage and was supposed to receive 44 more in 2019-20.
The lost MAX capacity has increased costs for airlines, which have had to rely on older, less fuel-efficient planes, lease extra aircraft, reschedule passengers on other planes and cancel thousands of flights.
Southwest, for example, is removing about 300 flights from its daily total of more than 4,000 flights. It based last week’s decision to extend the MAX blackout past April 13 on uncertainty over when the aircraft will be cleared to fly again and Boeing’s recommendation that pilots now get training in a simulator, something the FAA didn’t require for the initial certification.
United officials had counted on swapping the MAX for regional aircraft on several domestic routes to gain operating efficiencies as part of a long-term program to manage costs. The wider planes would add about 3% to passenger capacity. Cargo capacity would also increase, although narrow-body aircraft are used for mail and compact, low-weight consignments that can be manually loaded through the narrow door.
United’s nonfuel costs increased about 1% in 2019 due to the lengthy grounding of the 737 MAX. Otherwise, United said its costs would have stayed flat or decreased. It expects the grounding to add 1%-2% to unit costs this year, after which it will return to a flat cost structure.
WestJet has 13 MAX jets that are idle and was scheduled to receive four more through this year. Air Canada, which previously pushed back reintroduction of the MAX until Feb. 14, has 18 MAX aircraft in its fleet, with six more scheduled for delivery.
Papua New Guinea’s Air Niugini recently postponed delivery of four 737 MAX aircraft until at least 2024 while it reassesses its fleet needs, Reuters reported. Three other buyers have also postponed orders, but most customers don’t have many options because rival Airbus faces a huge backlog of orders for its popular A320 family of fuel-efficient jets. On Tuesday, Airbus said it will expand production capability for the A321 at its facility in Toulouse, France, by converting its assembly line for the massive A380, which Airbus is discontinuing.
Currently, the only European final assembly line for the A321 is in Hamburg, Germany. Airbus also assembles the plane at a plant in Mobile, Alabama, and recently said it plans to boost production rates there.
Earlier this week, the chairman of Air Lease, which has 150 MAX jets on order, said Boeing should rebrand the plane because of its damaged reputation, according to Reuters. Calhoun rejected that idea or that Boeing would give up on the MAX.
The news agency and CNBC reported that Boeing is seeking to borrow between $6 billion and $10 billion to cover near-term losses associated with the production stoppage, compensation to airlines and financial support for struggling suppliers.
Analysts estimate Boeing has lost nearly $10 billion since the MAX grounding in March. The company said it had $3 billion in negative cash flow during the third quarter and took a $5.6 billion pretax charge in the third quarter to cover compensation claims. In 2019, commercial deliveries reached an 11-year low. The manufacturer reports fourth-quarter earnings next Wednesday. Boeing is also looking into new software and wiring issues with the plane, which potentially could add to certification delays.
Fuselage maker Spirit Aerosystems this month announced layoffs of 2,800 workers to reduce costs after Boeing said it would no longer receive components. Previously, Boeing had continued making the 737 MAX at a reduced rate of 42 planes per month.
Parker-Hannifin Corp., a highly diversified manufacturer of flight control and engine systems, has more exposure to the 737 MAX after its September acquisition of Exotic Metals. Given the long lead time for some of its products, Boeing was ordering components at a 52-per-month build rate, but order rates are expected to fall significantly, Cowen equity analyst Joseph Giordano said in a client note. A 50% cut in orders would trim 10 cents off earnings per share in the second half of the year, he estimated.
Boeing’s about-face on simulator training over just computer-based training increases the likelihood that the FAA will require pilots to learn in the machines first. That will add to the time and expense to preparations for flying the MAX again. The problem for airlines is that there are only 34 certified MAX simulators around the world, Helane Becker, head of airline equity research at Cowen, estimates.
Finding time for all the pilots at dozens of airlines operating the 737 MAX is a looming challenge and the shortage could delay introduction of the aircraft into fleets, Reuters said.
United is better off than most airlines, according to Becker’s latest analysis. “United has one fixed simulator and expects to have one full motion simulator up and running over the next six to eight weeks. In addition, two more simulators are expected to be delivered in the coming months. While more training simulators would obviously be helpful in ensuring the fastest return to service, we believe United is in a solid position to cover training their pilots,” she wrote.
In related news, Calhoun has also sent planners back to the drawing board for a midsize plane that would slot between the narrowbody 737 line and long-range widebodies like the 787 and compete with the Airbus A321.
Frank Jackman contributed to this story.
