Production Pause Adds To MAX Saga Uncertainty
Boeing’s drastic decision to suspend 737 MAX production in the face of managing a growing fleet of idle aircraft and continued uncertainty over when the model will be approved to return to service is sending shockwaves through the airline industry, posing new questions for suppliers, operators and the manufacturer itself.
The Chicago-based company on Dec. 16 said it would stop building new MAXs in January, following the planned late-December holiday break. It did not provide a specific date for the pause or speculate when production would resume. No furloughs are planned, and the P-8 Poseidon maritime patrol aircraft line will not be affected.
- Boeing will pause building MAXs in January
- Growing backlog of undelivered MAXs influenced decision
- Talks with suppliers are just beginning
- Boeing plans no layoffs, but suppliers’ plans are still unclear
“This decision is driven by a number of factors, including the extension of certification into 2020, the uncertainty about the timing and conditions of return to service and global training approvals, and the importance of ensuring that we can prioritize the delivery of stored aircraft,” Boeing said in its Dec. 16 statement.
The Society of Professional Engineering Employees in Aerospace (SPEEA), the union that represents affected workers, said, also on Dec. 16, that Boeing “expects the shutdown to be measured in weeks, not days,” and the union reiterated that “there are currently no plans for layoffs of SPEEA-represented employees.”
The move will stop the accumulation of undelivered MAXs which has grown to about 400 since the model was grounded in mid-March following its second fatal accident in five months. Boeing halted deliveries immediately after regulators grounded the 387 aircraft in service, and in April it cut monthly 737 production to 42 from 52.
Boeing says once the MAX is cleared to return, it will prioritize clearing the backlog of stored aircraft, suggesting a production resumption will not come in lockstep with regulatory approval. The reason: Boeing has no idea when its entire global customer base will be able to take MAXs again.
While most foreign regulators’ intentions remain unclear, Boeing had been confident the FAA would complete its review of changes to the MAX flight-control software and training and clear the model to return in late 2019. The company also cautioned that any significant holdups would force it to reevaluate production plans.
In the last several weeks, the FAA made clear that its review of final documentation and validation of emergency procedures and training modules will continue into 2020 (see page 12). Several other regulators are planning independent reviews that likely will keep MAXs grounded in some regions for months, even after they are cleared to return in the U.S. This, combined with having the total of about 800 idled and stored aircraft ready to join the global fleet, was enough to sway Boeing’s thinking.
“We will continue to assess our progress toward return-to-service milestones and make determinations about resuming production and deliveries accordingly,” the company says.
The uncertainty raises lots of questions for suppliers, and little information has emerged from managers in the days following the OEM’s announcement. Key factors include whether the company actually cuts orders to suppliers, whether they receive financial assistance from Boeing or others, and whether they or Boeing decide to furlough or shed employees.
Suppliers are in a wait-and-see mode until January, when Boeing should be providing more information as it actually cuts MAX production and reports 2019 financial results to Wall Street on Jan. 28, 2020.
“Boeing has not released anything about what they’re actually going to do production-wise,” says Jason Cox, president of 320-employee Cox Machine in Wichita. The majority of Cox’s work is for Boeing and on the 737 MAX.
The Wichita Eagle reports that Kansas Gov. Laura Kelly has volunteered that her state, home of leading 737 supplier Spirit AeroSystems and many of its smaller subcontractors like Cox, may have to step in and help pay workers to keep them on the assembly line. Spirit CEO Tom Gentile told her the company is not expecting layoffs but no decisions have been made.
“We continue to work closely with our Boeing customer to support it during the grounding of the 737 MAX fleet,” Spirit says. “Should Boeing make a decision to change its production rate on the MAX and expectations for suppliers, we will work with them to understand the impact to Spirit AeroSystems.” Spirit referred additional questions to Boeing.
Previously, Spirit had told its suppliers it was going to continue at its current production rate of 52 737 shipsets a month for the next two years, says Ed Ball, Metal Finishing Co. vice president of sales and marketing. Spirit reiterated that in August. “Now, that could change tomorrow,” Ball stresses. “As of right now, that’s what we’ve been told and that’s what we’re working to. As of right now, we’re going to stick with what they’ve said.”
The abrupt shutdown could have a potentially significant impact on Leap 1B engine provider CFM. The GE Aviation-Safran joint venture spent all of 2018 attempting to catch up with Boeing’s accelerating MAX production rate. It only achieved parity in 2019, several months after aircraft production was reduced to 42 per month, in the wake of the MAX grounding. Having stabilized production at just over an estimated 80 Leap 1Bs per month, including spares, the company until mid-December was readying its own supply chain for the anticipated resumption of deliveries and gradual increase in the production rate that Boeing had signaled for late 2020 and into 2021.
However, with the timing of both these milestones now uncertain, CFM appears to be pulling back. Safran CEO Philippe Petitcolin told French business magazine L’Usine Nouvelle CFM should produce at least 30 engines per month, noting it is “easier to ramp up when you already have production than to start from scratch.” He said it was “too early” to speculate if the adjustments would lead to layoffs.
Beyond saying it is “working closely with Boeing,” GE is offering little. Its work on the 1B includes all final assembly and testing in addition to building engine cores.
The consensus among analysts is that engine production rate changes will be driven by several factors beyond Boeing’s needs, including lead times and demand for spares. Given the breadth and structure of their portfolios, Safran and GE also have some flexibility.
“From a GE manufacturing perspective, depending on duration, the business could produce spare engines, buffer stock or repurpose equipment for other programs,” says Credit Suisse analyst John Walsh. “This is because GE’s manufacturing is focused around value streams (e.g., fan foils) versus engine programs. Aftermarket revenue on other programs also provide an offset.”
Canaccord Genuity analyst Ken Herbert, who has deep ties within the aerospace supply chain, expects suppliers to maintain some level of MAX-related production despite Boeing’s formal halt. “While Boeing will likely keep most suppliers running at some level, it will be supplier-by-supplier analysis, depending on a number of factors,” he says.
Bernstein analyst Doug Harned concurs: “The supply-chain plan will be tailored by suppliers, depending on operational and financial strength.”
Spirit, which derives about 50% of its annual revenue from the 737 program, is most at risk, several analysts say. Smaller publicly traded parts providers at risk include Ducommun, 15%; Hexcel, 10%; and Astronics, 7%.
“We believe Boeing will do all that is possible to ensure that its suppliers are able to maintain their 737 employees, to ensure that once Boeing is able to start deliveries of the 737 again it has the ability to ramp up production as quickly as possible,” Herbert says.
Indeed, maintaining workforce quality and quantity has been a challenge since at least 2018, when Boeing, Spirit and other suppliers struggled to hire and bring on-line enough workers to meet Boeing’s march to a 737 monthly production rate of 57, which was slated to be in place this past summer. Now, the potential loss of talent, access to funding and other incremental risk to the supply chain all point to “substantial uncertainty” about Boeing’s ability to raise rates once the production pause ends, according to Herbert.
Others agree. “We can expect a negative ripple effect across the aerospace industry in 2020,” Accenture Global Aerospace & Defense Lead John Schmidt tells Aviation Week. “This impact is likely to be more significant than prior rate reductions because of the complexities facing suppliers in restarting idled production lines back up to full production rates.”
In notes to debt investors, credit rating agency Fitch just highlighted the new spending and cash demands while Moody’s Investors Service and S&P Global Ratings notched down their overall corporate outlook for Boeing by one degree. Still, all three agencies agree Boeing’s ability meet new demands is strong.
Meanwhile, Boeing is expected to continue to take the brunt of the costs associated with the production rate decrease and pending pause—and by all accounts, it can. “Fitch believes Boeing’s credit profile can support the current MAX stresses due to substantial liquidity, financial flexibility, access to the capital markets and revenue diversification,” the agency reported Dec. 17. “Aside from the MAX, Boeing’s products and markets are healthy. Overall, Boeing had a strong credit profile for its ‘A’ rating before the MAX grounding, and Fitch’s ratings for the company incorporated the periodic stress periods that arise in the commercial aviation sector.”
Still, Boeing is expected to continue the suspension of shareholder buybacks, possibly into the second half of 2021 and likely will take out more debt. Fitch expects Boeing’s debt will nearly double in 2019, to around $27 billion, as a result of $10.5 billion of long-term issuance and several billion dollars of shorter-term commercial debt. Debt likely will continue to rise in the first quarter of 2020, potentially peaking in 2020 and 2021. Fitch expects Boeing will pay down debt, especially its higher-interest corporate loans.
Managing the financial aspects of a production interruption appears more straightforward than Boeing’s labor and logistical challenges. While the company is not providing specifics, it says the roughly 5,000 Renton, Washington-based MAX production-line employees “will continue 737-related work or be temporarily assigned to other teams in [the area of] Puget Sound.”
This indicates mechanics will be distributed to assist with everything from out-of-sequence 737 work at Renton to supplemental work on other assembly lines at Everett, Washington, as well as associated support work at Boeing Field and other facilities in the Seattle area.
Some employees are expected to be drafted for the 777/777X lines, which are assembling a mix of 777Fs, 777-300ERs and 777-9s. The newer 777-9s are being assembled in the 40-24 building at Everett, where Boeing has set up a temporary low-rate initial-production (LRIP) line to avoid disrupting the current 777-300ER/200F assembly in the adjacent 40-25 building.
Under the company’s original plan from 2018, around 30 airframes were expected to pass through the LRIP line before 777X production fully transitioned to building 40-25 in the early 2020s. However, that assumed at least two of the 30 would be the initial test versions of the shorter-fuselage 777-8, and given the delay to that derivative announced in mid-2019, it remains uncertain whether these will remain part of the pretransition LRIP tally.
Other Renton workers also may be brought in to support the 767 line, which is accelerating to an increased delivery rate of three per month as work on commercial freighters and the KC-46A military tanker variant step up.
Mechanics also may be drafted to work on readying other parts of the Renton production system for the stretched 737-10, the first of which is being prepared for the start of flight tests. The aircraft, which is the final variant of the MAX and the last derivative of the 737 family, was rolled out to employees at Renton on Nov. 22, and is expected to make its first flight early in 2020. Ground tests are focused on assessing loads on the derivative’s new “shrink-link” main landing gear leg design.
Prior to the planned January stoppage, Boeing had suspended production of the 737 twice since assembly of the first aircraft began in 1965. For the first five years of the program, the initial -100 and -200 variants were produced at Boeing Field’s Plant 2 and completed at the nearby Thompson Building, where the P-8 military derivative is now produced. Assembly was transitioned to Renton in 1970 when Boeing consolidated production of the 707, 727 and 737 narrowbody airliners at one site.
However, even with the changeover between the two lines there was little disruption with the rollout of the final Boeing Field-produced 737 (Line No. 271) on Nov. 3, 1970, and the emergence of the first Renton-produced aircraft (Line No. 272) just two weeks later.
Although the 737 experienced tough market conditions, with only 36 aircraft being delivered in 1970 and 14 in 1972, Boeing never stopped production, although occasionally it did consider shutting down the line permanently due to poor demand. The first serious interruption to the line came 25 years later in late 1997, when the transition to the first 737 Next Generation was underway in parallel with a doubling in production rate from 8.5 per month in late 1996 to a planned 17 per month by the end of 1997.
Overwhelmed by a series of engineering changes made late in the program, unexpected certification issues and supplier shortfalls, the company opted to “rebalance” the 737 line in late 1997. Although production of aircraft already in the system continued, and suppliers kept delivering their products, no new airframes were admitted to the assembly line for 25 days. Similar issues occurred on the 747 production line at the same time, and Boeing opted to pause the line for several weeks.
The second major interruption occurred in 2008 when members of the International Association of Machinists and Aerospace Workers struck for 57 days. Although the company had weathered several periods of industrial upheaval, the 2008 strike was the first of its kind to cause a full production shutdown of the line. The walkout cost the company $1.8 billion and reduced 2008 deliveries by 105 aircraft to 375.