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    Why Boeing’s 737 Max might not fly anytime soon

    Why Boeing’s 737 Max might not fly anytime soon

    Why Boeing’s 737 Max might not fly anytime soon
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    By Satyendra Pandey   IST (Updated)

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    The Boeing 737 Max aircraft has now been grounded for eight months. While the American plane maker is optimistic that the plane will return to service towards the end of this year, several — mostly unflattering — new reports have emerged that makes this possibility bleak.

    The Boeing 737 Max aircraft has now been grounded for eight months. While the American plane maker is optimistic that the plane will return to service towards the end of this year, several — mostly unflattering — new reports have emerged that makes this possibility bleak.
    These include an inordinate focus on “making the numbers”, relaxation of norms and a whistleblower complaint. The seriousness is highlighted by that fact that the Boeing CEO, chief engineer and chief pilot are scheduled to testify before a US Congressional Committee at the end of the month. Which is why the return to service date targeted by Boeing looks overly optimistic.
    The financial impact to the company is clearly visible. For the second quarter, Boeing took a charge of $4.9 billion and reported on loss of $2.9 billion – its worst quarterly loss in its history. Majority of this was attributed to the 737 Max.
    There is a vital Indian connection — low-cost airline SpiceJet was a user of the 737 Max until the planes were grounded. That brings us to the question on everyone’s mind:  how soon will this aircraft fly again?
    Multiple regulatory reviews likely
    The grounding was an outcome of two fatal crashes which claimed 346 lives. Given the severity of the crashes and details that emerged, and details that continue to emerge, the entire certification process has thrown up several questions. Regulators around the world have taken notice and will no doubt hold the recertification to extremely exacting standards.
    With the paramount goal of safety in mind, several industry watchers have indicated that when this aircraft flies again, it will be subject to extensive reviews — perhaps more than any other aircraft in recent history. Consequently, from an aircraft that is currently grounded, this may end up being the safest aircraft due to the regulatory reviews.
    The American regulator the Federal Aviation Administration (FAA) has been clear in its stance stating, “The FAA continues to follow a thorough process, not a prescribed timeline, for returning the aircraft to passenger service.”
    It is widely assumed that this will be one of the few times where the FAA approval will be itself reviewed and the European regulator (EASA) and Canadian regulators will have their own set of standards. Regulators in India, Ethiopia and China are likely to have their own concerns that will have to be alleviated.
    While Boeing continues to engage with regulators, it is widely believed that there will be a phased re-entry into service with the first approval being from FAA and followed by approvals by other countries.
    Liquidity on the aircraft type has been impacted
    Liquidity on the aircraft type refers to the ability to trade the aircraft and what value the aircraft holds for placement in a secondary market. This in turn is tied to the aircraft life cycles, operating economics and supply demand dynamics.
    The liquidity is important for the entire ecosystem that supports an aircraft. Namely, airlines, lessors, insurance providers, banks, maintenance repair and overhaul shops (MROs) and parts providers. If not managed, this can have significant impact.
    Due to the grounding of the 737 Max, the lease rents are under pressure. Overall, compared to the latest technology aircraft (namely the Airbus320 NEO) the lease rents are down by 7-10 percent. The near-term market value of the aircraft has also been impacted largely due to supply and demand dynamics.
    With leasing companies holding on to more than 100 aircraft that are not placed, additional downward pressure is likely. Yet, the long-term value outlook for the aircraft remains strong.
    Ironically while it may seem that airlines will want to shy away from this aircraft type during the current period, given the attractive rates on the aircraft, this may actually have an opposite effect. Indeed, some airlines have been engaging with Boeing towards examining orders for the aircraft.
    Orders and cancellations
    The Boeing 737Max had been one of the fastest selling aircraft of all times. Prior to the grounding, as of January 2019 the order backlog was in excess of 5000 aircraft. Even now the order backlog stands in excess of 4,400 aircraft.
    Additionally, significant portion of the orders are towards replacement of older aircraft flying with airlines and set to retire and there is just no other alternative on the market (the only competitor being the Airbus320 NEO, an aircraft for which production slots are completely booked).
    Since the grounding Boeing has seen some cancellations.  Saudi Arabian low-cost carrier Flyadeal cancelled its commitment for up to 50 Boeing B737 Max 8 aircraft and went with the A320 NEOs instead. Jet Airways’ remaining order of 111 aircraft has been written off but that is due to the failure of the airline as opposed to a cancellation. Garuda Indonesia indicated that it has informed Boeing of the intent to cancel and rumors abound about China Southern’s position on the aircraft.
    SpiceJet has also indicated that they are speaking to Airbus with regards to an aircraft order. Yet only going by the numbers, the net cancellations since the grounding have are estimated to be less than 100 (Boeing does not disclose this information).
    Post the grounding, Boeing actually won a commitment from the International Airlines Group (IAG) – the parent of British Airways — to purchase 200 737Max aircraft. This commitment is quite telling because the chairman of IAG is an extremely tough negotiator and also a former pilot who has flown the 737 and is intimately aware of the aircraft’s safety, operations and economics.
    Airline expectations vary and are reflected in capacity adjustments
    For airlines, schedules determine success and to fly the published schedules, they must plan for the right capacity at the right cost. On costs, the Boeing 737 Max’s seat mile advantage is evident. This is due to a higher number of seats and a lower fuel burn. And in many cases, the aircraft is replacement capacity for older aircraft that were due to be retired.
    The largest operators of this type of aircraft have adjusted and planned for capacity in different ways. Actions include driving up fleet utilisation, reassignment of aircraft (upgauging) and also short-term capacity via extending the life of current aircraft or sourcing older 737 variants from the market. According to a recent report by analytics firm Cirium, 160 older generation aircraft have been added by 26 operators of the 737Max since the grounding.
    Airlines have also indicated different times for reintroduction. American Airlines indicated that they removed the 737MAX flying from their schedules through November 2, 2019; United Airlines previously adjusted schedules to remove 737Max flying till December 19; Southwest Airlines reported in its investor update, that it had adjusted flight schedules to remove all MAX flights through January 5, 2020; Ryanair has adjusted capacity and news reports indicate that it does not foresee the reintroduction of the 737Max prior to March 2020; Flydubai which adjusted capacity downwards by 14% due to the grounding has no clear timeline for when it will be reintroduced into schedules; SpiceJet is planning around a Feb/March 2020 timeframe; and other operators such as China Southern and AirChina have not given any guidance.
    So when will with the 737 Max return to service?
    The return to service is an outcome Boeing is working towards very diligently. Yet there are many variables and a multitude of factors ranging from the political to social to economic to judicial.
    On a broader level, aerospace is a sector that has a net positive trade balance for the United States and Boeing continues to be a key player in that. Indeed, the impact of the 737Max has been felt in the US GDP itself and the 737 Max is critical to Boeing. All efforts are underway to ensure that the aircraft flies again while meeting the highest standards of safety.
    Yet, at the same time there is a congressional committee hearing that is pending. And if this was not enough there is the whistleblower complaint that has emerged. And challenges with its other aircraft programs.
    That’s not all:
    • There is an ongoing US China trade dispute.
    • There are potential supply chain shocks due to the WTO tariff order.
    • And a production line that is producing 42 aircraft a month that head straight to the parking lot.
    • Make no mistake, the 737 Max’s return to service has a challenging flight path ahead.
       
      Satyendra Pandey has held a variety of assignments in aviation. He is the former head of strategy at a fast growing airline. Previously he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds. 
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