Boeing‘s (NYSE: BA) The troubled 737 MAX jet is one step closer to being cleared for commercial flights again. This week, Boeing and FAA personnel completed three days of test flights, a key part of the process to determine if recent design changes have made the plane safe to fly.
Six months ago, reaching this milestone would have been seen as a major turning point for Boeing. While the recertification process has not yet been completed, Boeing is now well positioned to resume deliveries of 737 MAX later this year. Unfortunately, the COVID-19 pandemic has decimated demand for aircraft in recent months, making the steps to recertify the 737 MAX much less significant.
There are still some recertification steps
In the coming weeks, FAA officials will analyze data collected during the recent series of test flights. This will help them verify the effectiveness of Boeing’s design changes. Other next steps in the recertification process include reviewing the proposed procedures for pilot training and documentation provided by Boeing. After a period of public comment, the FAA can finally take the long-awaited steps to recertify the 737 MAX and outline the procedures airlines must follow to reactivate their 737 MAX fleets.
Based on the current timeline, which could still change, the FAA may recertify the 737 MAX in mid-September, according to Reuters. That would allow a return to service in the United States before the end of the year.
However, recertification will not mark the end of the 737 MAX grounding saga. International regulators, particularly in Europe, are set to demand additional modifications to the 737 MAX’s safety systems by the end of next year. These changes (and modifications for aircraft that have already occurred) will add costs to Boeing and affect future earnings. Pilots will also need additional simulator training to fly the 737 MAX in the future, which could trigger payments by Boeing to airline customers to cover the related cost.
Image source: Boeing.
A plane without a market
Despite initial 737 MAX design flaws and resulting accidents, the plane was in high demand before the COVID-19 pandemic. Between the strength of global air travel demand and production constraints in AirbusCanceling orders for 737 MAX was not a realistic option for most Boeing customers.
Today, the situation is very different. Air travel remains well below 2019 levels, and industry experts believe that it will take several years for demand to fully recover. As a result, airlines are trying to defer or cancel as many aircraft deliveries as possible. Due to extensive delivery delays for 737 MAX aircraft originally scheduled to be delivered in 2019 and 2020, customers in many cases have the right to cancel some of their orders.
In the first five months of 2020, more than 600 737 MAX orders evaporated from Boeing’s order book. Meanwhile, the company secured just a handful of net orders for its widebody models.
The rush of order cancellations is not over yet. Last week, the leasing company BOC Aviation announced that it had canceled 30,737 MAX orders. More significantly, Norwegian Air canceled 92,737 MAX orders and five 787 Dreamliner orders. Adding insult to injury, the staggering European budget airline filed a lawsuit demanding compensation for losses due to the 737 MAX’s grounding and engine problems for its current 787 fleet. It also wants Boeing to return its pre-deposit deposits. delivery. Considering that Norwegian was a major customer and that Boeing has more than $ 50 billion in customer advances and progress invoices, these deposits are likely to amount to hundreds of millions of dollars.
There are still a handful of airlines eager for new planes. As demand for air travel picks up, other airlines will also need to buy new planes to replace old planes and allow growth. However, demand could remain well below previous levels for the foreseeable future, assuming that global air travel grows at a slower rate over the next decade than in the past five years.
Gloomy times ahead
In the first 12 months after the 737 MAX was grounded last March, Boeing was able to partially offset the cash burn of that part of its business with the proceeds from its widebody jet programs and services business. But in today’s environment, those sources of cash are also running low. Airlines are retiring old planes instead of spending money on Boeing service offerings that could extend the life of those planes. Simultaneously, demand for the entire body has plummeted, as international travel is likely to be one of the slowest parts of the aviation market to recover.
For example, Boeing is halving production of 787s (from 14 per month to seven per month). However, even that production rate can be too ambitious. While Boeing delivered 29,787 Dreamliners in the first quarter, it appears to have delivered only seven in the second quarter. Additionally, key customers such as Qatar Airways, which represents 9% of Boeing’s order book, are demanding multi-year order deferrals.
Aircraft demand will eventually recover. That said, “eventually” it could be many years away. Meanwhile, Boeing has borrowed tens of billions of dollars and is spending cash at a terrifying rate. Investors would be wise to avoid action.
