Boeing’s 737 Max will return to rough sector
The first half of the year wasn’t kind to the 737 Max.
Boeing froze production of its beleaguered plane from January through much of May as customers canceled hundreds of orders, and deals for hundreds more were put at risk by delays in the plane’s return to the sky and the coronavirus pandemic.
But Boeing is back to work on the Max and, if it passes regulatory scrutiny, the plane could fly again as soon as the end of the year.
When it does, it will return to an industry that was hammered by the coronavirus and faces a yearslong recovery.
The Max crisis already has wrecked Boeing’s bottom line. In January, the company said it expected the grounding to cost more than $18 billion, which didn’t account for the ruinous effect the pandemic would have on airlines.
In April, it announced plans to cut about 16,000 jobs, or one-tenth of its workforce, because of the pandemic’s impact.
The aerospace manufacturer said this week that its customers had canceled 373 Max orders in the first six months of the year. Another 439 are considered at risk, including nearly 100 that Norwegian Air, a struggling low-cost carrier, recently said it no longer planned to buy.
Boeing still has several thousand pending orders for the Max, but analysts expect that to shrink somewhat as more customers back out of deals.
And even though the company plans to increase production of the jet and other 737 variants to 31 planes per month sometime next year, that’s about half the rate Boeing had targeted before the Max was grounded.
Globally, airlines are losing hundreds of millions of dollars by the day, and most experts predict it will be two to five years before the industry sees as many passengers as it did in 2019.
After 9/11 and the financial crisis a decade ago, airlines recovered before the overall economy, according to Boeing, which expects the opposite this time around.
In the U.S., a limited recovery in domestic travel has stalled in recent weeks as virus infections soared and states and cities reimposed restrictions on travel and business activity. More than a third of the world’s passenger planes — more than 8,000 aircraft — remain parked and unused, according to Cirium, an airline data firm.
Yet experts said the 737 Max would survive because many airlines still saw value in it as they fought for what few passengers remained.
“It’s not phenomenal, but I don’t think it’s all that dire for the Max, despite COVID and everything else,” said Sheila Kahyaoglu, an aerospace and defense analyst with Jefferies, an investment bank.
It may seem misguided for an airline in the midst of a major crisis to buy a tarnished jet that costs tens of millions of dollars, but experts say there’s good reason many companies like Southwest Airlines and American Airlines will stick with the Max. The plane can offer substantial savings on fuel and maintenance that are even more valuable in lean times.
Other airlines might find it difficult to drop orders they’ve already placed and will reluctantly go through with purchases.
A new plane can last a generation, and the Max’s efficiency matters a lot because fuel can account for about one-fifth of an airline’s operating costs. Boeing said the plane uses at least 14 percent less jet fuel than its predecessors. That could yield double-digit increases in profits for airlines, said Vitaly Guzhva, a professor of aviation finance at Embry Riddle Aeronautical University.
Southwest Airlines, for example, has nearly 750 planes in its fleet, each some version of the 737.
If it had been able to replace part of its fleet last year with the more than 275 Max jets it hopes to own, Southwest could have saved more than $230 million in fuel costs, according to Guzhva’s math.
Boeing said the plane offers fuel savings of more than $10 million over its 25- to 30-year life span.
Airlines also can point to fuel savings as an indication of their environmental stewardship to customers who are increasingly cognizant of air travel’s contribution to climate change. Others might just want to apply the money saved to lowering the price of tickets to lure business.
The jet could yield big savings on maintenance, too. New planes often come with warranties, and expensive engine overhauls typically are needed a few years after those end, said Robert Spingarn, an aerospace and defense analyst at Credit Suisse. If the timing is right, an airline might choose to replace a plane in need of major repairs with a Max.
By Boeing’s count, thousands of airplanes worldwide are at least 20 years old and may be due for expensive maintenance or replacement soon.
Rather than back away from Boeing, airlines also might try to negotiate compensation for the plane’s grounding and delays in securing the jets. Customers could demand Boeing defer deliveries or offer them deep discounts.
The Max has a list price of as much as $135 million for the latest model but can sell for far less — as little as 50 percent of that figure for a large enough order, experts say. An airline might pay 1 percent upfront when it signs a letter of intent and another 5 percent when it signs a contract, said Eddy Pieniazek, an airline consultant at Ishka, a consulting firm. The rest typically is paid in the year or two before a plane is delivered.
Relationships with manufacturers can run deep, with long-term plans built around an all-Boeing or all-Airbus fleet; the two companies have a roughly equal share of the commercial plane market. At Southwest, for example, introducing a new plane would increase maintenance and training costs.
“There are companies that stick with Boeing, and there are companies that stick with Airbus; you don’t often get people jumping and changing,” Pieniazek said. “There are people who have bought into the Max story and will want to fly their airplanes.”