Boeing May Need To Pause 737 MAX Production

Boeing has warned it could need to reduce or even pause production of its 737 MAX aircraft if additional holdups on its return to service and further regulatory requirements arise. Boeing was responding to correspondence from the U.S. Securities and Exchange Commission (SEC) when it made the statement. The SEC has since released the letter as per its disclosure regime.

boeing-737-max-production
Boeing has warned the SEC it may further reduce or even pause production of the 737 MAXs. Photo: Boeing.

A report by Eric Johnson in Reuters draws on a lengthy letter by Robert Verbeck, a Senior Vice President and Boeing’s Finance and Corporate Controller. The letter is available on the SEC’s Edgar filing system and can be accessed here.

The letter, dated October 18, 2019, responds to SEC comments on Boeing’s 10-K form filing for the fiscal quarter ending June 30, 2019.

Advertisement

The 737 MAX is having a very material financial impact at Boeing

It is no secret that the 737 MAX grounding is having a drastic impact on Boeing’s bottom line. Orders in the 737 MAX, a potential cash cow for Boeing, have dried up, impacting on revenue. Then, on the other side of the ledger, there was the USD$5.6 charge that covered potential concessions and compensation to MAX customers. 

Advertisement

Despite not moving the 737 MAXs, Boeing has continued to manufacture them, albeit at a reduced rate. As of June 30, 2019, its inventory holdings had increased by USD$5.9 billion. As Mr Verbock put it in his letter to the SEC, the 737 MAX grounding was having “very material financial impacts on our revenues, operating earnings and cash flows.

boeing-737-max-production
The 737 MAX is having a big financial impact at Boeing. Photo: Boeing.

Whilst Boeing has been publicly optimistic about the 737 MAX’s return to service, it notes the grounding will have ongoing financial impacts across future reporting periods. But unless the grounding is lifted and Boeing can “resume deliveries consistent with our expectations,” the impact on Boeing’s bottom line would continue to be substantial and the manufacturer may decide to further reduce production or temporarily cease production altogether.

Advertisement

“We expect that in the event that we are unable to resume aircraft deliveries consistent with our assumptions, the continued absence of revenue, earnings, and cash flows associated with the 737 MAX deliveries would continue to have the most significant impact on our operating results.

In the event that we decide to further reduce the 737 production rate or temporarily cease production, we expect that the growth in inventory and other cash flow impacts associated with production would decrease. However, while any such reduction or cessation of production could mitigate the impact of continued production on our liquidity, it could significantly increase the overall expected costs to produce aircraft included in the accounting quantity, which would reduce the 737 MAX program margins in the future.” 

A veiled warning against further regulation and delays

The letter from Boeing to the SEC could also be perceived as a veiled warning to Government regulators contemplating further layers of red tape and regulation when it comes to the 737 MAX. Mr Verbock specifically references additional regulatory requirements beyond what is currently anticipated as another reason to reduce or temporarily halt production.

“ … Significant additional regulatory requirements and / or delays in return to service beyond our current assumptions could customers to cancel or defer orders, which could also cause us to reduce or temporarily cease 737 MAX production.”

boeing-737-max-production
Boeing warns additional regulations and red tape could also cause problems with production. Photo: Boeing.

Publicly, Boeing has been cautiously bullish about the future of the 737 MAX and its return to service. Recently, there was an expectation that the 737 MAX would be back in service next month. However, there are no signs that this is going to happen. US airlines are pushing the MAX out of their schedules until the 2020 Spring, at which point we will be contemplating the one year anniversary of the grounding. 

Are the 737 MAX’s days numbered?

Is Boeing’s letter to the SEC the first sign that the manufacturer’s confidence in its 737 MAX program is wavering? Ceasing production of the 737 MAX, even temporarily, hasn’t publicly being floated by Boeing before. By opening the door a crack here, by voicing the possibility, is Boeing starting to prep us for the end of the 737 MAX program?

What do you think? Post a comment and let us know. 

Advertisement

36
Leave a Reply

14 Comment threads
22 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
19 Comment authors
newest oldest most voted
High Mile Club

Didn’t they already pause production due to them running out of places to put the unfinished planes?

Passerby

Im pretty sure they just reduce the amount of plane produced, not pausing the line entirely.

Andrew Curran

According to Boeing they still have ample storage space at various sites around the USA

Bryce

@High Mile Club
No, they reduced production to 42 frames per month, but they didn’t stop it.

High Mile Club

Okay, But how exactly are they going to get them there? Sure, there are special permission flights, but I’m not buying the ample space lingo if they have to park planes in their employee Lots.

Bryce

I’m also not buying the “ample space” assertion…sounds like wishful thinking to me…

TonytTDK

They can always get permission to fly them to one of the ‘boneyards’ in the US.?
They’ll preserve a brand new airframe, every bit as well as an old one.!!!

Antz

I don’t see how the MAX is going to be viable with the FAA stating that it can’t fly without MCAS and the EASA saying it must be able to fly without it. Hopefully their replacement for the 737 is far enough along in development that they can bring that to market in the next couple of years, prematurely end MAX production and convert existing orders to a modern airframe.

Ron

Someone in Canada’s authority talked about removing MCAS from the airplane altogether. If MCAS was removed that likely amounts to the engines being changed and potentially the efficiency savings they hoped this model would bring come to a wishful thinking end.

Bryce

It was a manager at Transport Canada…and he more-or-less demanded that MCAS be removed…

Farhan Nazar

Should've done that months ago

Armand2REP

Boeing trying to use economic impact to bypass safety regulations only shows the greed of this corporation. Passenger safety means nothing to Boeing.

Shapes

Yup you only have to look at the wording boing uses to see the real reason why they have continued production of these hulks, “boing warns of production cuts if delays continue)” Boing are trying to use the US economy and job losses as leverage to get these cans back in the air.

WordsMatter

Man, I feel like the rest of us recently woke up after a 30 year sleep. When did the business ethics rules change to the extreme? I marvel at people who do extreme sport, but it seems in extreme business you have to peak with traits such as spin, deceipt, no scruples, opportunism, political black mail. So now I see, that’s how you get to earn $20 million a year.

JFP

Boeing did a poor job at explaining the 737 Max situation, the root cause of the accidents, and the impact of any grounding to various branches of the U.S. Government. Were Boeing -I mean Washington State- still represented in Congress by a U.S. Senator like the late Henry Jackson, Boeing would be likely still delivering the 737 Max to airlines around the world. And, airlines would be flying them. WIth most of them flying them safely. Problem is, neither the U.S. Government nor the U.S. President been advocates for Boeing in this. Yes, Boeing holds blame for not properly developing… Read more »

TonytTDK

JFP,
With respect, the FAA was the LAST regulatory body to ground the MAX.
No matter who was advocating for Boeing, it wasn’t going to be flying a good 75-80% of it’s MAX’s around the world anyway.???
Boeing have screwed-up royally over this.!
They’ve stuck a ‘quick-fix’ for a significant problem, in order to both mitigate the engines being in the ‘wrong’ position AND to avoid full conversion-training for existing 737 flight crew.
Boeing has stopped being an aviation engineering company & has become a financial institution which makes planes.!

Bryce

This is hardly surprising.
It seems that the Boeing management had a wildly optimistic view of how quickly the plane would be re-certified for flight. An illustrative proof of just how out-of-touch with reality they are.

Remember those days back in the Spring/Summer when we were told that it would be a quick and simple fix?
Remember the constant stream of “it will be certified next month” BS that we were subjected to?
All hot air.

Ron

I am not so sure as “wildly optimistic” but damage control to their stock value and investors. To me it becomes suspicious when the return to the skies date was treated as a carrot on a stick. I question if something this serious could happen and management not have a realistic grasp of when it would likely return to service after a few weeks passed and the international regulators begin standing up for the flying public.

Bryce

With regard to the question at the end of the article:
It’s possible that Boeing are secretly hoping that customers will cancel their orders, so that the program will just snuff out due to lack of demand. Boeing can then say: “It was a great plane, but it was killed by indecision and unnecessary delay by regulators”. Much less embarrassing than having to admit that the wreck isn’t fit to fly again.

Luke Vader

Boeing now has a huge (737 MAX) albatross of a program on their hands, but there’s no way they want customers to cancel existing orders, which they (and Wall Street) are counting on for billions (of dollars) in future revenues. Despite their pride, can’t see Boeing execs willing to sacrifice significant profits (and bonuses) for the sake of a moral victory to be able to blame the FAA for excessive regulatory scrutiny.

Bryce

The suggestion is that, whether or not they want to cancel the program, they may have no other choice if it isn’t re-certified. Better in that case to make it look like a failure due to hesitant regulators rather a failure due to a failed design.
Got it now?

Remy

Would it be an option to just cancel this plane, give the money back to the customers, get rid of the current management and go back to the drawing table and design a whole new aircraft?

Niklas Andersson

Smart and exactly what Boeing need to do to reframe their business

Neil W

That would be tantamount to economic suicide.
A new narrow body replacement would require 7 to 8 years of development. Boeing will not cede the narrow body market during that time.
Boeing would also need to convince the engine OEM’s to take the plunge and develop a new engine – not something they have the time or resources for given the trauma of recent engine developments – they have other priorities at the moment.

Bryce

Your comments suggest that you think that Boeing is in control of the situation…which simply may not be the case…

TonytTDK

Bryce, I agree. Boeing PR guys are out there with their MoM/NMA & FSA…. and some wild talk about a new SST & a spaceplane. But realistically, their ‘cash cow’ is currently dead in the water & their ‘next big thing’ the 777X, is in bits strewn across a hanger in Seattle.! Boeing are in a LOT of trouble & it won’t take much for them to fail. I’ve been saying for about 3 years now, that I can easily see Boeing going under & Airbus taking the B777 over as the Airbus A370.? The existing B777 is absolutely the… Read more »

Armand2REP

The answer is to kill 737 MAX and roll out 797. What is Boeing waiting for?

TonytTDK

Armand2REP
Simple……
An actual design…..!
not just 10 years of talk…..?

Bryce

For those interested, here’s a list of global aircraft groundings from the start of aviation:

https://news.aviation-safety.net/2019/03/14/list-of-global-aircraft-groundings-in-history/

HereWeGo

Ok, got it. All that optimism to bring ‘that thing’ back into the air was never based on the trust they had in that aircraft, it was based on the belief that their influence on regulators, government, press and public was strong enough.
Guess they are heavily at work with the design of a 737-successor, hoping their customers are willing to wait and take the new one instead. Financially possible? With those heavy subsidies (aka tax-cuts) they recive, it should work…

Ron

The text quoted from Boeing seems there is a dollar value to human life 🙁 Shouldn’t Boeing be driving sales by their safety and not putting safety up for sale?

Andy

The crazy thing is that if Boeing just added an extra fuselage frame to the forward fuselage, the problem would likely be resolved, as the pitchup would be countered by the extra weight forward of the engines.
Either that, or they’ve reached the limit of what you can do by using controls and electronics to overcome the laws of physics.

Bryce

*** NEWSFLASH ***
Look at what I just found: the wheels are starting to roll on re-certification of the MAX 8 and 9:

https://leehamnews.com/2019/12/06/faa-takes-first-steps-for-re-certification-of-the-max/

Shapes

If you’re not familiar with the Ford pinto story, I would recommend checking it out. Ford worked out that they would make more profit by letting a certain amount of people burn to death than it would cost to fix a problem they already knew about. (SOUND FAMILIAR?),
Apparently this is just a normal equation in business.

Dave

Boeing is no stranger to reductions in head count. If the company is warning you then it’s either a scare tactic or it’s a real danger. I worked for Boeing once before. People are expendible to them.

JFP

There isn’t a business nor government which considers people as anything other than expendable. That’s why it’s called “Human Resources” and not “Personnel” any longer