Remember the 737 Max? Hard to believe that this time last year fixing the plane and getting it into the hands of customers clamoring for more capacity was Boeing Co.’s biggest worry. But 15 long months after the second fatal crash of the jet, the Max remains parked in deserts and employee car lots across the country.
The worst-case scenario of the Max simply never flying again looks likely to be averted, but the jet’s unique situation — in particular, the relative ease with which customers can cancel their orders after such a lengthy grounding — makes it one of the best benchmarks for measuring the post-pandemic recovery in aviation.
Bloomberg News this week reported tangible signs of progress on the plane’s return to commercial service. These include: a fix for both the flight-control software system blamed for the two crashes and wiring bundles that had the potential to short-circuit; the distribution of draft materials for new pilot training; and a goal to schedule the milestone recertification flight with U.S. regulators later this month. The aerospace publication Air Current, however, concludes that the earliest the plane will fly is September, as certain other steps in the regulatory process that were initially scheduled for May haven’t yet occurred.
There remain serious challenges, for instance, with coordinating a review of the Max among key international regulators, particularly the European Union, which is conducting its own independent safety analysis and has repeatedly indicated it may require additional fixes. These regulatory hurdles are nothing, though, compared to the thornier question of who actually still wants or needs the Max after the coronavirus pandemic forced an unprecedented decline in air travel.
“It’s really all about the Max,” Southwest Airlines Co. CEO Gary Kelly said on an earnings call last July. “Everything else within the company is rock solid.” So much so, that at the time he was willing to entertain the possibility of buying more Max jets. But now, nothing within the company or any other airline is rock solid. Even as a modest uptick in demand gives airlines the confidence to slowly start bringing back flights, Kelly warned last month of a “brutal low-fare environment” as carriers compete over a still historically low number of customers. Southwest, the largest Max operator, will take no more than 48 Max deliveries through 2021, compared with an initial plan for 123 new jets. At least it’s just delaying deliveries at this point.
Boeing said this week that other customers scrapped 14 orders for the Max in May, bringing the year-to-date total of cancellations to 313. Those who have trimmed orders include General Electric Co.’s leasing arm, Air Canada, and Brazilian carrier Gol Linhas Aereas Inteligentes SA
Suppliers are also feeling the pinch. Spirit AeroSystems Holdings Inc. said this week that it was unlikely to meet its target of producing 125 Max fuselages this year after Boeing asked it to halt work. Production is likely to be trimmed by at least 20 planes and probably more, Spirit said, forcing the company to make adjustments to its already slimmed-down workforce. Bear in mind that the 125-plane production goal was set in early May and is itself a reduction from a previous agreement for 216 shipments. Jefferies analyst Sheila Kahyaoglu estimates Spirit ultimately will deliver just 75 parts packages for the Max this year. With 450 yet-to-be-delivered Max jets sitting in storage, Boeing is likely to keep production at a reduced rate through 2023, Kahyaoglu writes.
Further complicating things for the planemaker is the fact that no one seems too keen to take deliveries of its 787 Dreamliner right now either, with demand for the kind of international flights it’s made for still staggeringly anemic. Boeing didn’t sell or deliver a single 787 in the month of May, the first time that’s happened since that plane was grounded in 2013 following battery fires, according to Bloomberg Intelligence. While rival Airbus SE declined this week to make deeper cuts to its own production plans, Boeing’s latest Max rejiggering may indicate further reductions are inevitable. The company recorded no new cancellations in May, but also no orders. It delivered a mere 24 planes that month and CEO Guillaume Faury has acknowledged that discussions with airlines have turned contentious, telling Politico that the planemaker is prepared to go to court if carriers aren’t willing to engage in some compromise over purchasing contracts.
It all adds up to a much-needed dose of reality for an aerospace sector that’s been caught up in the irrational exuberance around a potential “V-shaped” recovery from the coronavirus pandemic. While there are green shoots in other parts of the economy, such a turnaround remains remote for the makers of planes.
And yet, after a wipeout in aerospace stocks on Thursday, it only took American Airlines Group Inc. reiterating a modest improvement in booking trends for the sector to be off to the races once again on Friday. “WE GET IT — you buy aero stocks in the downcycle to be there for the next upcycle, and you can’t get worse than traffic down 94%!” Vertical Research partners analyst Rob Stallard wrote in a report this week (capitalization his). But similar to the market reaction in the wake of a post-9/11 downturn in air travel that was way less severe than what the world is currently experiencing, “we are wary that this aero rally is going to meet aero reality, and the outcome isn’t going to be pretty,” Stallard wrote.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies.
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