The lead story tonight at the Wall Street Journal, Bloomberg, and the Financial Times is that Boeing has hit the pause button on manufacturing 737 Max planes, with its “infamous self-hijacking software MCAS,” in the words of Moe Tkacik.
Recall that Boeing had been cheerily promising that the 737 Max would be approved to fly again as of various ever-retreating dates, with the latest being a public comment in November that it expected to deliver planes again potentially in December. Major buyers American Airlines and Southwest had signaled some skeptism by not scheduling a resumption of 737 Max service until March; American had just pushed that back to April.
The FAA swiftly countered Boeing’s happy talk in November. We described at length why there was good reason to take new FAA Director Steven Dickson at his word, telling his troops in a medium guaranteed to get to the press that they should “take whatever time is needed” to assess the plane.
Apparently Boeing has been trying to strong-arm the FAA by other channels. The agency gave a more direct smack-down last week. The latest version, which came in a letter from the FAA to Congressional investigators last week, was pointed:
The administrator is concerned that Boeing continues to pursue a return-to-service schedule that is not realistic due to delays that have accumulated for a variety of reasons.
More concerning, the administrator wants to directly address the perception that some of Boeing’s public statements have been designed to force FAA into taking quicker action.
A Congressional hearing last week also exposed that the Boeing and the FAA both knew that the 737 Max was more crash-prone than typical jets, yet they didn’t consider grounding them until the second fatal MCAS-induced nose dive.
Boeing now has more 737 Max aircraft in its inventory that it sold before the troubled jet was grounded worldwide. The Seattle Times points out that many of Boeing’s 400 mothballed planes will need “extensive maintenance” to be able to fly. The Wall Street Journal cited analyst estimates that the freeze would cut Boeing’s $4.4 billion a quarter 737 Max cash burn by about 50%. As Bloomberg points out:
The factory pause heightens the risk that financial damage will linger for years after regulators clear Boeing’s best-selling plane to resume commercial flight. The cash pressure is rising as almost 400 new aircraft languish in storage due to a global flying ban imposed nine months ago. The timing of regulatory approval for the Max’s return has slipped repeatedly and remains uncertain with Boeing’s relationship with the Federal Aviation Administration in tatters.
And the cost of storing planes isn’t the only source of damage. Later in the same story:
But the company still faces eye-watering costs to compensate airlines for lost flying that will only grow with the disruption to production. Customer concessions could double to $11 billion from the previously announced $5.6 billion, [Jefferies analyst Sheila] Kahyaoglu said.
One bit of good news is at least for now, the 737 Max workforce has been spared; they are being shifted to other planes. But as we’ll discuss, employees at major parts-makers for the 737 Max may not be so fortunate.
On the one hand, I have to confess to schadenfreude in seeing Boeing suffering the consequences of its reckless, self-serving behavior and its success in capturing the FAA. It was disturbing, even with no stake what happened to the 737 Max, to see CEO Dennis Muilenburg’s scapegoating of pilots, misrepresentations about Boeing’s awareness of problems with the plane, and repeatedly unrealistic timetables about when the 737 Max would be greenlighted to fly again.
Boeing also seemed to be remarkably obtuse about the significance of the damage it had done to the FAA and how having the US regulator discredited was not in its commercial interest. Even while it is in the doghouse, Boeing has repeatedly tried to pressure the FAA by presenting timetables when it expected the agency to grant its blessing. It isn’t merely that the FAA has found new problems with the plane as it has looked harder, such as physical difficulties in operating the manual trim wheel, leading to delays in the certification process. It is also that the agency has twice found it necessary to slap down Boeing’s ham-handed efforts to muscle the FAA by disputing Boeing’s assertions.
But even so, seeing Boeing suffer more, and more tangible damage from the 737 Max fiasco hasn’t yet dislodged Muilenburg, who is in his own way, as arrogant and tone deaf as departed Wells Fargo CEO John Stumpf. Some try to defend Muilenburg by arguing that the 737 Max project was well along before he became CEO. That does not cut it. He made no discernible effort to alter its risky course. He’s done a terrible job of crisis management and now of the relationship with the FAA. Yet the Boeing board seems so convinced of the company’s too big to fail status that it’s unwilling to engage in the overdue ritual defenestration.
The knock-on impact of the production freeze will be significant. From the Journal:
“It would be hard to have any other single company stop the production of a single product and have it hit the economy as hard as this would,” said Luke Tilley, chief economist at investment-management firm Wilmington Trust. He estimated that stopping MAX production for one quarter would shave 0.3 of a percentage point from quarterly annualized GDP growth.
Boeing’s suppliers will take a blow,. With the propensity of major firms to concentrate production among fewer suppliers (to gain more pricing leverage, natch), the damage to some could be large. And they also be less likely to shield their workers even in the near term. From Bloomberg:
The 400,000 parts that go into each Max arrive in a tightly choreographed sequence timed, in some cases, down to the hour.
“If it shuts production down, it risks losing employees and having greater difficulty ramping back up in the future; and the same goes for the supply base,” Cai von Rumohr, an analyst with Cowen, said in a note to clients before Boeing’s announcement.
The pace of work will be determined supplier by supplier, rather than halted across the board, said the Boeing official, who asked not to be named because discussions are confidential. The company doesn’t want to lose capacity at casting and forging companies that struggled with delays last year.
The Journal provided examples:
GE has said it expects the grounding to drain as much as $1.4 billion from its cash flow this year as its factories produce fewer engines for the aircraft and can’t get paid for them in full.
Many suppliers had said they favored Boeing maintaining some production, citing the risk of losing workers in a tight labor market during a halt. They said furloughing staff and stopping machinery would be harder than lowering production, and that restarting assembly lines would be costly.
The spectacle of company of Boeing’s heft floundering is focusing some minds. The normally reflexively-big-company-backing Wall Street Journal readership has a lot of new-found religion. The first comment below got a remarkable 32 likes:
Boeing is a classic tale of why reasonable regulations help the market. Cutting every last corner, taking over the regulatory process to further cut costs, and ultimately loosening safety standards all helped Boeing’s short-term shareholder value.
But the loosened regulations allowed two crashes. Apart from the tragic loss of life, it is having ripple effects across the economy. And following proper protocols would have avoided this whole mess. In the end, the myopic shareholders lose too.
We are witnessing the slow motion crash of a hollowed out version of the great Boeing.
And the continued delays and bad press are not soothing passenger nerves either:
I consider myself a person with reasonable and well grounded judgement. I don't think I could ever walk onto a #737MAX. My wife feels similarly.
How can #Boeing convince people like us to fly on these planes? https://t.co/uh8DKcysvh
— Michael Taslitz (@michaelathh) December 17, 2019
It doesn’t look like Boeing’s pain, and that of customers and suppliers, will end any time soon. Too bad there isn’t a prediction market on when the plane is likely to fly again. It would be instructive to see how it would price dates beyond 2020.