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17 December 2019
INVESTMENT

Boeing halts 737 Max production to slow cash burn

The timing of regulatory approval for the Max’s return has slipped repeatedly and remains uncertain with Boeing’s relationship with the Federal Aviation Administration in tatters.

Boeing 737 Max/Bloomberg


Boeing plans to halt production of its grounded 737 Max in January 2020, a move that will deepen the crisis engulfing the planemaker, complicate its eventual recovery and ripple through the US economy, reported Bloomberg.

The indefinite shutdown will help conserve cash but jolt a supplier base that stretches from Seattle to Kansas, adding a headwind for the American industry ahead of the 2020 elections. In a statement, Boeing said that employees will continue 737-related work or be temporarily reassigned to other teams, no layoffs or furloughs are planned for now.

The factory pause heightens the risk that financial damage will linger for years after regulators clear Boeing’s best-selling plane to resume commercial flight. The cash pressure is rising as almost 400 new aircraft languish in storage due to a global flying ban imposed nine months ago.

 “We believe this decision is least disruptive to the health of the production system and supply chain,” said Boeing.

Boing said that the decision is based on such considerations as the extension of certification into 2020, the uncertainty about the timing and conditions of return to service as well as global training approvals and the importance of ensuring that the company can prioritise the delivery of stored aircraft.

The 12,000 employees now building the Max at Boeing’s plant in Renton, Washington, will start filtering back to their regular roles once the timing of the Max’s return comes into sharper focus, said a senior Boeing executive.

The uncertainty over when Boeing will restart production adds to the strain at suppliers and job cuts at those companies may later impede the planemaker’s own recovery. The 400,000 parts that go into each Max arrive in a tightly choreographed sequence timed, in some cases, down to the hour.

The production decision became more urgent after the FAA signalled it would not certify the revamped Max this year as Boeing had anticipated. The company repeatedly warned earlier this year that it would have to reconsider its Max output plans if the grounding extended into 2020.

Regulators halted Max flights worldwide after an Ethiopian Airlines jet plunged into a field on 10 March 2019, the second tragedy within five months. The disasters combined killed 346 people and prompted the longest flying ban for a US airliner in the jet age.

Boeing slashed 737 production by 19 per cent in the weeks following the Ethiopia crash. But inventory costs have ballooned to record levels as the company plotted a quick rebound once the narrow-body jet was cleared to resume flights.

Since the company is not allowed to deliver the aircraft while the grounding remains in place, Boeing is said to have already put more than 380 new planes in storage.

Sheila Kahyaoglu, Jefferies Analyst, said that Boeing is burning through $4.4 billion in cash for each quarter that the Max remains grounded, adding that halting production would save about half that amount in the near term.

The company still faces eye-watering costs to compensate airlines for lost flying that will only grow with the disruption to production. Customer concessions could double to $11 billion from the previously announced $5.6 billion, said Kahyaoglu.

 


RELATED STORIES: Boeing 737 Max


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