Boeing May Need To Pause 737 MAX Production

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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.

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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.

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. 

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.

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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.

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“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.

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“ … 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.”

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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. 

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