Boeing CEO Dennis Muilenburg said Wednesday that though the company’s “best estimate” is that the 737 MAX will return to service in October, a slip in that optimistic timeline could mean the Renton 737 production line would be temporarily shut down.
“That’s not something we want to do, but something we have to prepare for,” he said on Boeing’s second-quarter earnings call with analysts and the press.
Such a drastic step would mean temporary layoffs at the plant, which employs more than 10,000 people.
“A temporary shutdown could be more efficient than a sustained lower production rate,” Muilenburg said. “That’s what we are thinking our way through.”
Wednesday’s call also included worrying news for Boeing’s Everett factory: The new 777X that rolled out of the factory in March will not fly until next year because of delays in fixing a problem with the plane’s GE-9X engine.
Though Boeing says it hopes to deliver the 777X to its first customer by the end of 2020, that’s a very tight timeline for a flight test schedule. Until then, Boeing will need to line up new orders for the freighter version of the current 777 model if it’s to maintain the current low 777 delivery rate of 3.5 jets per month.
Noah Poponak, a financial analyst with Goldman Sachs, said investors weren’t expecting the suggestion of a production halt. Last week, when Boeing announced it would take a $5.6 billion pretax writeoff over the MAX’s troubles, it laid out its expected timeline for the MAX’s return to service and a rapid ramp-up thereafter. Wednesday’s earnings call was a shift, he said, when “they toss out a possible production shutdown, which is a vastly different scenario at the other end of the spectrum.”
Ron Epstein of Bank of America was similarly caught off guard. “Is the scenario of halting production really on the table? That’s like, wow,” he said.
The International Association of Machinists (IAM) union, which has about 9,000 members working on the MAX, responded to the mention of a potential shutdown in Renton with a statement of confidence in the airplane.
“The 737 Max is and will continue to be a great airplane,” an IAM statement said. “We see the work being done and have every confidence that the company and regulatory agencies will ensure that the safety of the flying public is the first and foremost priority when the Max gains approval to fly once again.”
Rich Plunkett, a staff member with the white-collar union, the Society of Professional Engineering Employees in Aerospace (SPEEA), was more critical of Muilenburg for raising the shutdown possibility. He said that if the MAX return to service is further delayed, rather than management in Chicago making a unilateral shutdown decision, it should find a way to reassign employees in Renton and avoid layoffs.
“The question is, is Boeing going to retain its workforce for the future or are they going to scatter it to the wind to overcome a short-term capital issue?” Plunkett said.
A large financial hit
The shadow of a possible assembly-line shutdown further darkened Boeing’s release of its second-quarter financial results, which included a net loss just shy of $3 billion, the largest quarterly loss in company history.
This followed the $5.6 billion writeoff announced last week due to the MAX grounding, which was forced by two crashes of the aircraft that killed 346 people. That charge accounts for future settlement of payments to airline customers for the disruption to flight schedules, and amounts to $4.9 billion after taxes.
The payment of those penalties will affect cash flow over the next year at least, as will a separate $1.7 billion addition to the projected costs of producing the 737 because of the production slowdown, also pre-announced last week.
Boeing’s debt ballooned by $4.5 billion in the quarter, which followed an increase just short of $1 billion last quarter, as the company borrowed heavily. Chief Financial Officer Greg Smith said this is “to help shore up our liquidity position as we work through the current MAX challenges.”
Revenue for the quarter fell 35% compared to a year ago as Boeing delivered just 90 commercial airplanes, including 24 older model 737NG jets. In the same quarter of 2018, Boeing delivered 194 commercial airplanes including a mix of 137 older NGs and new MAXs.
Delivery of the 737 NGs has slowed to a trickle, and there will be few more. Boeing has just nine remaining unfilled orders for that plane.
The quarter’s net loss of $2.94 billion, or $5.21 per share, was less than expected following the MAX charge, thanks to better performance from the company’s military and services units. Still, the news of a potential Renton shutdown and the delay on the 777X sparked a sell-off in Boeing shares, which closed down for the day more than $12.45, or 3.3%, at $360.62.
Struggling to pin down a timeline
Following the grounding of the 737 MAX, Boeing cut production in Renton from 52 jets per month to 42 per month to reduce the number of parked airplanes stacking up.
Even so, it maintained the workforce level as it was, hopeful of a quick resolution to the MAX crisis so that the assembly lines could soon ramp back up again.
But clearance for the MAX to fly again from the Federal Aviation Administration (FAA) and other overseas regulators has slipped out over the past months. Approval of Boeing’s software fix for the flight control system implicated in the two crashes — the Maneuvering Characteristics Augmentation System (MCAS) — is taking much longer than anticipated.
And last month, FAA pilots flying a MAX simulator test found a new issue separate from MCAS when a microprocessor in the jet’s flight computer was shown to have a possible failure that could also lead to the airplane’s nose being pushed down uncommanded by the pilot. Boeing is working on a separate software fix for that, and because it’s flight-critical software, it cannot be rushed.
On the possibility of suspending production in Renton, Muilenburg said lowering the production rate to less than 42 jets per month “presents some challenges to our supply chain and synchronization of our workforce and how you would consider ramping back up later.”
He said top management is doing daily assessments of the timing of the MCAS and microprocessor software updates, the status of regulatory approval from the FAA and foreign aviation authorities, and the rate at which the airlines could take delivery of the planes once clearance is given, along with the stability of the 737 supply chain and of the Renton assembly lines.
Airlines won’t necessarily want to take their MAXs at the moment Boeing is ready to deliver, depending on the travel season. They will also have to manage the logistics of re-scheduling flights and bringing thousands of pilots up to speed on the changes to the MAX flight control system.
What training those pilots will be required to do remains another element of uncertainty. U.S. airlines and pilots and the FAA have signaled that they will be content to let the MAX re-enter the U.S. fleet with the package of computer-based pilot training Boeing has prepared and will require simulator sessions only when pilots are called in for their yearly recurrent training. But other countries and some airlines are demanding more than that.
Muilenburg said Wednesday that “some airlines will use simulator-based training as part of their normal recurrent training; some may want simulator training upfront before they fully return to service.”
“We have to work through all these uncertainties,” he said.
Everything else depends on the first step — approval to fly again, which the FAA will determine with other regulators.
“We have to go through a multiregulator approval process,” Muilenburg said. “It’s a complex process.”
Given the significant uncertainty in the timeline, he said, Boeing’s “best estimate” is that it will submit its final software updates and a new system safety analysis for certification purposes in September. That will be followed by an FAA flight test. Boeing then hopes for clearance from the FAA and other regulators in October.
Muilenburg conceded that the period from the FAA test flight to final confirmation of all the flight test data and analysis “is typically a process that’s measured in a number of weeks.” So achieving all that in just a month or so would clearly be the best possible outcome, and may be overly optimistic.
Boeing is counting on the fact that it’s been working for months on the MCAS fix with the FAA, and that with the detailed knowledge the agency has accumulated during that time, the evaluation of the final submission can be relatively speedy.
For Boeing, cutting a jet’s production rate — or worse, shutting down the line — is a much harder and riskier step than ramping up production.
Severely reducing production would mean layoffs not only at Boeing but at suppliers, big and small. Small suppliers who lay off workers may simply lose them as they take jobs elsewhere in the current healthy economy. That could present a serious barrier to quickly ramping up again.
Muilenburg said “there’s no one specific trigger” that would lead to the shutdown of Renton.
“We are going to continually look at this,” he said. “That includes a very close focus on our workforce.”
“We place incredible value on our teammates there, ” he said. “We are working every dimension we can to preserve that workforce and maintain that learning for future production system ramp-up.”
Muilenburg said that if the MAX can enter service in October, then Boeing plans to increase production from 42 a month to 57 a month in 2020.
That’s an ambitious plan. Typically Boeing has ramped up production in careful increments of about 5 aircraft per month, and has taken at least a year between the increases to ensure a smooth and stable transition in both the supply chain and its own assembly lines.
“To go from 42 a month to 57 in 12 months just seems fast,” said Poponak of Goldman Sachs.
Boeing thinks it can pull off an increase of 15 aircraft per month in increments over the course of just a year because it was already running well at 52 per month before the grounding, and because the reduced rate since then has allowed some suppliers who were behind schedule, notably engine supplier CFM and fuselage supplier Spirit AeroSystems, to catch up.
The 777X engine problem
Meanwhile, the 777X program has slipped out further than anticipated.
When news of the GE-9X engine delay broke at the Paris Air Show in June, it was shocking that the jet might not have its first flight until the fall. Now that’s pushed out into next year.
The problem was discovered during the final phase of engine certification testing in May, when GE found excessive wear on small stationary vanes on the perimeter of the engine core that together with the engine’s spinning turbine blades direct and compress the incoming air flow from the big fan at the front. It’s now designing, testing and certifying more robust vanes.
The impact on Boeing is, first, a potential delay in delivering the 777X. Despite the delay to first flight, Boeing is sticking to its projection of delivering the plane next year, which assumes flight test can be completed and certification approved in less than a year.
That’s a rosy projection. On the 737 MAX program, for example, the plane entered commercial service 16 months after first flight.
“The delay in 777X will put pressure on the entry into service,” Muilenburg conceded on Wednesday’s call.
A second impact is that even if the first 777X can be delivered next year, the delay in first flight certainly means there will be fewer 777X deliveries in 2020 than previously anticipated. That means Boeing will have to build more current-model 777s just to maintain the already low 777 production rate in Everett that’s delivering 3.5 jets per month.
Muilenburg said the company is hopeful of selling more 777 freighters to fill the production gap opened up by the 777X delay.
Epstein of Bank of America said that could be tough, as “the air cargo market is very challenging right now.”
Poponak said he’s not too concerned because there is still demand for the current 777 and, at the low production rate, Boeing won’t have to sell a large number of airplanes to bridge the gap again.