Boeing 737 Max Fallout Continues

Boeing is considering the possibility of lowering 737 Max production rates below the already decelerated pace of 42 per month if the airplane doesn’t return to service early in the fourth quarter and temporarily shutting down the production line in Renton, Washington, in the event of a more prolonged grounding. That's according to company CEO Dennis Muilenburg, who spoke during the company’s recent second-quarter earnings call. Boeing projects that it will submit a final package of software upgrades, including those needed to satisfy new Federal Aviation Administration requirements not related to the maneuvering characteristics augmentation system (MCAS), some time in September, he noted.

The company expects that—if it manages to submit the required documentation in September and the FAA validates and approves the fixes in time for an October re-entry into service—it will raise production to 57 per month by the end of next year. Of course, either scenario raises implications for companies in the supply chain, some of which have actually benefitted from the extra time the grounding gave them to address their own production problems. Muilenburg specifically mentioned Pratt & Whitney and Spirit Aerosystems, both of which had fallen behind in their supply of engines and fuselage barrels, respectively.  

Muilenburg also acknowledged that a scenario in which a return to service occurs in October presents its own set of challenges for Boeing, given that the post-certification approval process normally takes several weeks. Still, he insisted the company’s estimate is not overly optimistic.

“Every day we are doing scenario planning, working through every dimension of this program,” said Muilenburg. “We’re looking at the ongoing software update development, regulatory approvals, the certification process, the return-to-service process, working hand-in-hand with our customers, supply chain health, production system health...every dimension of the program.”

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Muilenburg added that Boeing continues to meet with the various regulatory authorities every day and that the company understands clearly the work needed to return the airplane to service. “But there still is uncertainty in the timeline,” he noted. “We have to go through a multi-regulator approval process, and it’s a complex process and one that will take time to get done...If any of the timeline assumptions change significantly, then we’ll have to evaluate alternatives, and those alternatives could include different production rates and they could include a temporary shutdown of the line.”

Muilenburg’s disclosure came as Boeing reported that the Max grounding resulted in a $2.94 billion net loss during the quarter and a negative cash flow of $600 million. Last Friday, the company announced it would take a $4.9 billion charge associated with customer concessions, resulting in a $5.6 billion reduction of revenue and pretax earnings in the quarter. Boeing estimates that costs to produce the 737 in the second quarter increased by $1.7 billion due to a longer-than- expected reduction in the production rate. The company cut rates from 52 to 47 per month in April.