Podcast: Suddenly, The MAX Is Boeing’s Good News
As Europe clears the MAX's return, 777X and 787 woes cap a horrible year and record loss for Boeing. Listen in as Aviation Week editors discuss.
Below is a rush transcript of Aviation Week’s January 29, 2021, Check 6 podcast.
Welcome to this week's Check Six Podcast. I'm Joe Anselmo, editorial director for the Aviation Week Network. Early on January the 27th, Europe's EASA became the latest regulator to lift its flight ban on the Boeing 737 MAX.
If only the day had ended there.
But Boeing still had to report its full year earnings for 2020, and they weren't pretty. The company reported its largest annual loss ever, nearly $12 billion. It took a $6.5 billion pre-tax charge on the 777X program and pushed that aircraft's first deliveries back another year, to late 2023, because of the need for a late modification to the aircraft's flight control system.
Meanwhile, quality issues have forced Boeing to pause deliveries of the 787 -- and the cash they bring in. Ironically, the company's brightest news may be the return to service of the MAX and a ramp up of production and deliveries.
Joining me to unpack all of this are three Aviation Week editors: Guy Norris, who recently visited Boeing's 777X flight test program in Seattle, Sean Broderick, who has written extensively about the MAX and the 787 and Jens Flottau, the leader of our commercial aviation team.
Guy, let's start with you. Is it safe to say that you were fairly stunned by this news about the 777X after hearing from program leaders just a month ago that the certification effort was on track?
Thanks, Joe. ‘Stunned’ is probably a pretty accurate word, I would say. Having been there, I was face to face with the team there. I was sitting in the flight deck -- and this is just over a month ago, really, six weeks maybe -- and through it not the faintest hint that this was coming down the track. And I certainly got the feeling that it wasn't just us that were stunned by this. I got a feeling that even [For] Boeing… this has really come out of left field a little bit.
So just to put people in perspective, as we're recording this podcast, we don't yet know some of the specifics involved. And we don't also know whether the ramifications of whatever's happening with this modification, how it will impact the timing of the proposed beginning of the certification flight test program. Now, just to remind our listeners, this was due to happen virtually any day now under the schedule that we were talking about in December, where the FAA would grant a type inspection authorization to Boeing to begin building credit towards certification with flight testing. Remember, the aircraft has been flying for a year now with four in the flight test program. So, they're on the verge now of getting to that point.
That would mark the final [point] towards certification and entry into service. So, just now 24 hours ago, all of that changed. We don't know yet whether the TIA start of it has been stopped or delayed. We're presuming it probably will. But at this moment we don't know.
So anyway, what's going on? Well, we know that Boeing is basically saying... What Dave Calhoun, Boeing CEO said yesterday was essentially that there's going to be some modifications to the actuation system on the flight control system. Particularly, he said firmware and hardware changes to the actuator control electronics. And he said that reflected our current judgment of global regulators’ compliance expectations.
So what does that actually mean? Well, digging a little bit deeper, we understand that somebody raised concerns about the potential for single points of failure in the flight control system. We're not sure if it means changes to the flight control electronics unit, which actually manages the surface actuators through a series of remote electronic units, or whether it actually applies to the physical actuators themselves. As far as we know, they're all commonly provided by the same company in Japan.
Anyway, that's in a nutshell where we are with what we know so far.
And I think it's pretty fair to say Guy that they wouldn't have had you out there for all those extensive briefings, if they knew things were going to turn south, so this obviously was a big surprise to Boeing as well.
Absolutely Joe. Let's not be fooled here. Companies like to sometimes keep things to themselves when it suits them, of course. But I think in this era, they're trying to be more transparent and I don't think anybody at the time of our meeting saw this one coming down the track. So, very disturbing of course, for them.
The only thing is, and I know Jens is going to speak to this a little bit more in a second, but, they've also indicated obviously the impact of COVID continues. This is built into their new expectation of deliveries now by the end of '23. And, quite frankly, they've been talking to the customers as well about this and we should say that... So they know that the market itself is not really ready to take this aircraft anyway. And, as part of this adjustment, but they've also reduced the accounting block for the program to 350 aircraft. That was announced yesterday by CFO Greg Smith.
Just very briefly on that, that's not actually an indicator of a break even point. It's just simply a production accounting book over which they can reasonably, credibly estimate costs and revenues. And so really what it says is they were acknowledging that this plane is going to be a long program, they're going to be spending a lot more time on it and it's going to take a lot more time for it to start building and earning cash for the company.
Sean Broderick, the 777X is in development. It's not generally surprising that they might have some hiccups there, but the 787 has been in service for more than nine years. What the heck is going on with that program?
Well, what's not going on at the moment is deliveries. We haven't had a delivery since the middle of October and Boeing acknowledged on the earnings call on the 27th that inspections needed to find and then set up rework on several quality issues are the main driver in that delivery haul.
As we've reported for the last almost six months, Boeing's had quality issues -- this latest batch of quality issues with the 787 date back at least a couple of years. They revealed them first late last summer, there were several issues in the batch, but the main two that seemed to be cropping up the most are some issues with the composite fuselage skin flatness, in layman's terms. Interior mold lines where large pieces of subassemblies like fuselage barrels fit together. That's one issue and that seems to be the more prevalent issue that's popping up in different areas, besides that the fuselage barrels.
Another issue is shimming used to put together large pieces of, of again, fuselage and other parts of the airplane. Shims that aren't the right spec, the right size.
Take it individually, none of these cause a major safety of flight issue, but there have been a couple of them, the shimming and the smoothness issues that caused immediate concerns for eight airplanes that were produced in 2019. The airplanes were pulled from service, inspected, cleared. They are cleared to reserve service, because of COVID, I don't think all of them are back in service, but it's not a due to the quality issues.
Boeing didn't signal that they were not going to deliver any airplanes in November or December very early on. The last delivery was October and they delivered what, 53 last year, it's a big come down from their top end in 2019. The problem seemed to be, I don't know if ‘worse’ is the right word, but they are more extensive. They're finding more issues on more airplanes coming off the line and they want to make sure before these airplanes do go into service, when they do go into service, that they're not going to require any rework down the road. So Boeing has built up a backlog of about 80 airplanes than under normal circumstances would have been delivered by now. That's more than a year's worth of production they have sitting in Charleston and Puget Sound in Victorville.
And, it's adding problems at a time when demand is already down for these airplanes. I guess the silver lining here is that most airlines don't really need the airplane. So if you're going to have a time to hold up deliveries, now would be the time. But longer term, I think it's concerning because this isn't the first set of quality issues we've had on the '78, this isn't the first set of shimming issues we've had on the '78. And Boeing flagship program and the program that was supposed to be the one that would help set up all its future production programs in terms of how airplanes are put together, how they are designed, it continues to struggle as you said, almost a decade after entry into service.
And Sean, it should be noted that Boeing was assembling 787s in both the Seattle area and North Charleston, South Carolina. They're in the midst of shifting all of that to North Charleston. Are these problems unique to just North Charleston or are they just all across the program?
No, they're not. North Charleston is where all the fuselage barrels are made and where, of course, the -10s are assembled exclusively... Well, now they're all going to be assembled exclusively, but it was just the -10s coming out of North Charleston or has been up until now.
And this problem went well beyond the -10s and well beyond airplanes assembled in Charleston. And also, the inspections should be noted. Greg Smith noted specifically that these inspections are going into the supply chain. So we know of a Boeing facility in Salt Lake City where the shimming problems have cropped up on vertical fin assemblies. So the problem is widespread and it's not a quality issue with one batch of either in one part of Boeing or in one part of the supply chain. This I think can be best described as a Boeing program problem, if not a Boeing problem writ large.
The last question on this issue, did Boeing leaders give any sense during the earnings call of when they expect this problem to be solved and production to return to normal?
Dave Calhoun was very careful to say that they are applying very little pressure I believe, were his words, on the engineers to identify the problems and get them fixed. That I think is a reflection of the [heat] Boeing has taken during the 737 MAX saga in which pressure was applied, and that went down a very dark path.
They hope to begin deliveries in late February, maybe March. They think they're going to deliver some this quarter. They hope to deliver the 80 they have on hand, the bulk of them by the end of 2021. Again, keep in mind, they're going to be producing five a month at their new rate starting in March. So that 80 is a year and a third worth of production they already have sitting and they're still going to be making them. And even if they fix these problems, as I wrote about in a story filed today, that Jens helped report on, even if you take away the quality problems, you still have the demand issue. Few carriers really want... Nobody needs 787 right now. Few of them want them the only benefits being, you're getting a more efficient airplane maybe for the new world mission.
Jens, thanks for being so patient. Speaking of not wanting airplanes, I mean the widebody market in general is just in the dumps, isn't it? It was already not in a good place before COVID-19 hit.
Exactly. We all have to keep in mind that even in the boom years leading up to the pandemic in '17, '18, '19, there were hardly any widebody orders and that's when airlines did really well. Now we're in the pandemic, international and long haul in particular is going to be slowest to return. So we can all expect that segment to return in several years at best. I don't expect any significant orders for now. That's the market situation.
Now, Boeing has specific problems as well beyond the quality issues that Sean just talked about on the 787, specific market issues, Norwegian just decided to exit long haul low cost flying. That's 37 787s right there that need to be remarketed, 26 of them are owned by the lessors. So they're facing this huge challenge of finding new homes for these aircraft in times where nobody wants these aircraft. LATAM, Avianca, both in the equivalent of Chapter 11, have 787 fleets that they can now dispose of more easily if they want to.
Switching to the triple 777X program, the fundamental problem I think that we will see even in the long-term is that the -9 is too large for most operators. It's sad and ironic at the same time. I just talked to someone who's evaluating these aircraft regularly for his clients and he said, "The -9 is actually, in terms of unit costs, probably a little better than the A350-1000, the largest Airbus aircraft long-haul aircraft if you don't count the A-380. But it buys that advantage through size and that's the problem. It's a good aircraft if you can fill it. The problem is, most airlines won't be able to fill it.
And now comes the irony, Boeing shelved the -8, which is significantly smaller than the -9, but now would actually be better in terms of size because of the lower demand. Also in the long run, problem with that aircraft, it's much less economic. So there you go, it competes more directly with the A350-1000 and has a disadvantage.
So, whichever way you turn it, the 777X is in a really, really difficult spot from a market perspective. Yes, there's Asia. Yes, there's the Gulf carriers, which will probably take a number of them. But if I look at Europe, if I look at the U.S., I just think it's going to be a very hard sell.
Jens what are people on the other side of the argument saying? Not everyone, I guess, is as pessimistic as you that the 777X is too big for the market. What do proponents say? Do they think Asia-Pacific will maybe rebound stronger and there'll be more of a need for those aircraft?
Yeah. The big argument in favor of the 777X is always, don't look at it from this Eurocentric or U.S.-centric perspective. Yes, United, Delta probably won't for a long time want to order them, but, forget about that. Forget about Europe, forget BA, Iberia or whatever, look at Asia. There, you've got these big, big, thick markets, long-haul markets that need to be served, which will come back much faster, where you've got the economic growth supporting that. And yes, that's a possibility. The question is, and I'm not saying they will kill the program or they won't sell any aircraft, whatever. No, absolutely not. But the question is, will they sell enough to make this program profitable in a reasonable period of time.
From some perspectives, the phrase shelve the 777-8, as Jens was just mentioning, it's important to remember the Boeing's family plan still does include bringing that model on board. However, as we've obviously pointed out, the whole plan has shifted to the right, it's probably extended beyond what we even thought this time yesterday, for example. So yeah, I think they still do see that as part of the family, but it will be coming even later than the market probably a thought right now.
Sean, I wanted to go back to you for a second to talk about the one piece of good news this week for Boeing, the ungrounding of the MAX in Europe.
Big step. Not a surprise because Europe EASA put out their draft AD in late 2020. And, as they said it would, it was finalized this week. Clearly a good significant. There are still many regulators around the world that need to follow suit. The big one still outstanding, I think everybody would agree is China. The Chinese say they'll clear it when they're ready. And there's no indication when that's going to be.
Dave Calhoun did say he expects the other global regulators to sign off sometime in the first half of 2021. He didn't offer any specifics and he didn't mention China by name so it's unclear whether that's more wishful thinking out of Boeing or whether that's actually going to happen. But definitely good news for European operators there, good news for the MAX there.
A lot of nuanced differences though, came out between EASA and the FAA, which is the subject for more articles and future podcasts in the documentation EASA put out. Very interesting to see how that is evolving. And that may be now spilling over under the 777X, as Guy alluded to earlier in this show.
Guy, let's let you have the final word. Dave Calhoun, the CEO, his job is looking beyond the current crisis to the long term. What's he saying about where Boeing is going to go next as it looks to tackle the market?
Well, as we've talked about it a lot on this podcast in the past several months anyway, at least what is Boeing going to do next? In a way there's nothing kind of new about what he said, but it's interesting that he did drill down again to sort of say, look, February of 2019, the same story that Jens and I talked about in Singapore... Sorry, 2020, I should say, seems I'm losing track of my years now, but we seem to have bided this sort of Bevin Evelyn for such a while. But yeah, essentially NMA was shelved and they moved on retargeting, perhaps something much more along the lines of the A321XLR market, where they see a clear and present danger to their market, future markets of penetration and what to do beyond the MAX.
What he didn't really say or indicate was when this would happen. And he said, the timing just isn't right. But a clear point that was made was that, generally, historically, all of these developments have been led by new engine technologies and the need to produce 20% lower fuel burn generation upon generation. He's saying that this isn't really the case right now. Again, the focus is just really building into new production and manufacturing technology, and basically putting on an engine which is probably available or would be available within the next few years for many of the manufacturers that we can round up the usual suspects.
The last point I'll make is that he absolutely did not see hydrogen being a key part of this. And of course, Boeing only last week made this commitment to certify its entire commercial product line to run 100% sustainable aviation fuel by 2030. So it's very much in line with that overall strategy of keeping it not cheap and cheerful, but something that's achievable with basically almost today's technology.
Okay. Unfortunately, we'll have to end it on that note, but much to talk about in the weeks and months ahead and more podcasts to come for our audience with you guys. Guy Norris, Sean Broderick, Jens Flottau, thanks so much for sharing your insights.
That is a wrap for this week's Check 6, now available for download on iTunes, Stitcher, Google Play, and Spotify. Special thanks to our editor in London, Guy Ferneyhough. Join us again next week for another Check Six and stay safe.