You had to think this was going to happen. At some point, Boeing was going to run out of parking lots to store new grounded jets.
Boeing Co. will halt production of the grounded 737 Max in January, a move that will deepen the crisis engulfing the planemaker, complicate its eventual recovery and ripple through the U.S. economy.
Employees at the Seattle-area factory where the Max is built will continue 737-related work or be temporarily reassigned to other programs, the company said in a statement Monday. No layoffs are planned for now, said a person familiar with the matter.
The production pause deepens one of the worst crises in Boeing’s 103-year history, as the company waits for regulators to clear its best-selling plane to resume commercial flights. The factory shutdown will also jolt a supplier base that stretches from the Seattle area to Kansas, adding a headwind for U.S. industry ahead of the 2020 elections.
Financial pressure on Boeing is rising as almost 400 newly built aircraft languish in storage due to a global flying ban that began nine months ago. The timing of regulatory approval for the jet’s return is uncertain, with Boeing’s relationship with U.S. Federal Aviation Administration in tatters.
“We believe this decision is least disruptive to maintaining long-term production system and supply chain health,” the company said. 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 and global training approvals, and the importance of ensuring that we can prioritize the delivery of stored aircraft.”
Boeing fell less than 1% to $324.10 after the close of regular trading in New York. Spirit AeroSystems Holdings Inc., a Boeing supplier that makes about 70% of the Max’s frames, tumbled 5.4%.
While Boeing isn’t planning layoffs, the production suspension heightens the risk of job cuts at suppliers.
“If it shuts production down, it risks losing employees and having greater difficulty ramping back up in the future; and the same goes for the supply base,” Cai von Rumohr, an analyst with Cowen, said in a note to clients before the company’s announcement. “If it only trims its rate, it risks further extension in the already lengthy time required to liquidate its sizable inventory” of stored Max.
The production decision became more urgent after the FAA signaled it wouldn’t certify the revamped Max this year. Boeing executives had repeatedly warned they would have to address plans for output if the grounding extended into 2020.
The Max was grounded after an Ethiopian Airlines flight plunged into a field on March 10, the second tragedy within five months. The disasters combined killed 346 people and prompted the longest flying ban for a U.S. airliner in the jet age.
Boeing slashed 737 production by 19% 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. Boeing left its supply chain mostly running at the original pace, while the Renton plant lowered monthly output to 42 jets.
Since the company isn’t allowed to deliver the aircraft while the grounding remains in place, Boeing has already placed more than 380 new planes in storage, according to a tally by 737 production blogger Chris Edwards.
Boeing is burning through $4.4 billion in cash for each quarter that the Max remains grounded, according to Jefferies analyst Sheila Kahyaoglu. Halting production would save about half that amount, she said in a report.
However, a delay to the aircraft’s certification past the end of 2019 could force Boeing to take an additional accounting charge. Kahyaoglu said a $3.6 billion writedown was likely if program accounting costs double. That would clip profits longer term for Boeing’s biggest source of revenue.
Boeing’s board gathered after a bruising week for the aerospace giant. In a sign of growing rancor between the company and its regulator, FAA Administrator Steve Dickson chastised Boeing Chief Executive Officer Dennis Muilenburg in a Dec. 12 meeting for pursuing an unrealistic schedule for the Max’s return to service.
The FAA said it was worried that Boeing was publicly pressuring regulators to take action, even as the company failed to provide data as requested. In a message to Congress ahead of the session, the regulator exhorted the manufacturer to focus on the “quality and timeliness of data submittals for FAA review.”
The rare public admonishment came a day after Dickson was grilled for hours by the House Transportation & Infrastructure Committee over the FAA’s decision to allow the 737 Max to continue flying after the initial fatal Max crash off the coast of Indonesia on Oct. 29, 2018.
The FAA’s insistence that the Max wouldn’t be cleared to fly until next year, and Dickson’s refusal to estimate a timeline, signal that the U.S. agency is increasingly unlikely to clear the Max before regulators in other regions.
The uncertainty raises the possibility that U.S. carriers will be hamstrung for a second summer while awaiting Boeing deliveries and training pilots. American Airlines Group Inc. has delayed a return of the planes to its schedule until early April. Southwest Airlines Co., the largest operator of the single-aisle plane, said it was considering a similar move.
Risk of Unraveling
With the halt to production, the largest U.S. industrial company by market value risks a potential unraveling of manufacturing expertise across a broad swath of North America.
Boeing so far has shielded the 600 mostly U.S. companies building components for the jet from rate cuts, mindful that its own recovery would be greatly complicated if layoffs prompted engineers and mechanics at suppliers to move on to other jobs.
The company had mulled pausing Max manufacturing for a short period, Bloomberg reported in August. Executives figured that the approach would conserve cash and be less likely to trigger widespread layoffs than imposing another factory slowdown.
Boeing officials haven’t discussed the finer points of how they would manage through a shutdown, including details like worker pay. But the idea is that coveted employees would prefer the certainty of a surgical shutdown to an open-ended period of slower production that could lead to layoffs.
The 400,000 parts that go into each Max arrive in a tightly choreographed sequence timed, in some cases, down to the hour. But suppliers regularly navigate stoppages telegraphed in advance, such as for strikes and Boeing’s traditional year-end factory closing — which could be extended this year into the longer pause.
Will production suspended, Boeing will have to carefully nurse suppliers back to the current pace before contemplating an even faster production tempo it had once planned for 2020.
Further complicating matters, the FAA is insisting on inspecting planes coming out of storage before they are delivered. That raises the prospect of bottlenecks as the agency takes over certification tasks it handed over to Boeing more than a decade ago.
–With assistance from Jeff Kearns and Kyunghee Park.
©2019 Bloomberg L.P.
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Photo Credit: Boeing 737 Max jets near Boeing Field in Seattle on June 27. The manufacturer is halting production of the jets. Stephen Brashear / Getty Images
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