After the FAA indicated that the Boeing 737 MAX recertification process would run into 2020, Boeing was left with little choice but to suspend production of the aircraft, starting from January. Suspending production will help Boeing to prioritise pushing out the stacked up deliveries once the aircraft is recertified and it will also help the manufacturer’s cashflow.
Boeing confirmed the halt in production in an announcement yesterday with the note that it remains committed to a robust approval process for the MAX and the timeline for that is effectively out of its hands.
“As we have previously said, the FAA and global regulatory authorities determine the timeline for certification and return to service. We remain fully committed to supporting this process. It is our duty to ensure that every requirement is fulfilled, and every question from our regulators answered.”
Boeing confirmed that it now has 400 737 MAX aircraft in storage, which need to be delivered once the aircraft is deemed safe to fly.
“We believe this decision is least disruptive to maintaining long-term production system and supply chain health. 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. We will continue to assess our progress towards return to service milestones and make determinations about resuming production and deliveries accordingly.”
Boeing has made promises that the affected employees will continue on what it called 737-related work, or be “temporarily assigned to other teams in Puget Sound”.
Restarting a production process is no easy task for any company and this will impact suppliers – the extent of that impact is as yet unknown given that there is still no firm deadline for the certification process, and after that time, the delivery backlog will take some time to reduce. Boeing said in a statement that it will “will keep our customers, employees, and supply chain top of mind as we continue to assess appropriate actions. This will include efforts to sustain the gains in production system and supply chain quality and health made over the last many months.”
The company has promised an update regarding the production suspension during its fourth quarter earnings release date in late January.
The move has not been greeted favourably on the Hill. House Aviation Subcommittee Chair Rick Larsen described the suspension in production as a “body blow to its workers and the region’s economy. The only saving grace is the Boeing leadership has promised not to lay off any workers. I am ready to work with Boeing workers to ensure they are protected and that they will have access to the necessary resources in the event of a prolonged shutdown”.
He tempered that statement with the recognition that the FAA should emphasis the safe return of the aircraft: “…the best decision for the long-term and for the workers at Boeing is ensuring the necessary changes needed to put the plane back in service are done only with safety in mind.”
The pressure is on the FAA to recertify a safe aircraft – despite the issues at Boeing affecting workers, they are unlikely to rush any decision.
This decision is not a huge surprise but it is a major blow for the manufacturer and its supply chain. Despite the news, Boeing announced a shareholder dividend on the same day. There is no indication that the company is reaching financial difficulties but it secured a new round of borrowing in October with the renewal of a $3.2bn 364-day revolving credit agreement, a new $3.2bn, five-year revolving credit agreement, and a $3.2 billion, three-year revolving credit agreement. Citi and JP Morgan were joint lead arrangers and joint bookrunners on all three transactions. Analysis by Seeking Alpha (https://seekingalpha.com/article/4311520-boeing-737-max-production-halt?li_source=LI&li_medium=liftigniter-widget) suggested that Boeing had burned through the majority of its $30bn pre-delivery payments for its 737 MAX orders and surmised that the company would run out of those funds by mid-January, hence the new debt raising activities in October. Although this wouldn’t have been a major problem for the company, it could have continued production using other funds but it would have impacted its liquidity. If this is true, halting production seems to be a measured response from Boeing to assist its cashflow and indeed divert its resources into the enormous task for delivering 400-plus MAX aircraft once it is cleared to fly.