Going by a recent string of modestly good news about new orders and plane deliveries, the much-troubled 737 MAX aircraft and its maker, Boeing, are both in recovery mode now.
But such a declaration creates a definitional challenge: Just what qualifies as a recovery for such a huge company and its biggest-selling product ever after an unprecedented fall from grace? Yes, things are looking up for Boeing and its high-profile 737 MAX series of intermediate size and range passenger jets. But when you’ve been knocked as far down as Boeing and the MAX, the only way you can look is up.
With India last week lifting its ban on 737 MAX operations there, the aircraft type now can be operated in every nation but one. And that one, China, currently is putting the MAX through recertification flight tests with the expectation of allowing it back into serve there soon. SpiceJet, the only Indian airline with MAXes already in its fleet will have them back in the air within days. Plus a new ultra-low cost Indian domestic carrier being set up by billionaire Rakesh Jhunjhunwala called Akasa Air is expected to place a relative large order for MAX planes soon, too. If that order comes through for Boeing, it would be a big win for the MAX over its arch-competitor, the Airbus A321.
Earlier this month, Alaska Airlines delivered another strong vote of confidence in the MAX by ordering a dozen more of them. That follows the decision by Southwest – which is an all-737 carrier and has ordered far more 737s than any other airlines during the carrier’s 50 years of operation – to add 140 more 737 models of various types to its order book. Irish discounter Ryanair, Aeromexico and Brazil’s GOL all also have placed big MAX orders since the spring. And earlier this summer United ordered 200 737s, 50 of them the smallest MAX 8 model and 150 of them the largest MAX 10 model. Combined with the 30 MAX planes already in United’s fleet plus ones already on order, the new order eventually will push United’s 737 MAX fleet to 410.
And that sure seems to constitute a recovery for a plane type and a maker that were hammered by the stock market and in the global court of public opinion following the two deadly crashes that caused nation after nation to withdraw certification of the MAX design more than two years ago. And it certainly means billions of dollars in new revenue for Boeing, which went nearly two years without selling or delivering a single new 737 MAX. And it didn’t help that two other big sources of revenue – the much ballyhooed 787 Dreamliner and the very large 777 — ran into their own manufacturing and quality control problems that saw short suspensions of manufacturing and delivery of both planes in the last couple of years.
But as welcomed as all that recent news is around Boeing Commercial Airplane’s operations in Washington state and South Carolina may be, the view from Boeing headquarters in Chicago isn’t rosy. The financial pain caused by the MAX’s long, embarrassing grounding continues, and will continue for years.
“Boeing Commercial lost $472 million in the second quarter, but the Boeing Company, the parent was profitable,” said Scott Hamilton, an aircraft manufacturing industry consultant who blogs about the commercial jet maker at Leehamnews.com. “Yes, Boeing Commercial is recovering from where it had fallen, but they still lost nearly half a billion in the second quarter.” (The parent reported its first quarter profit in two years in this year’s second quarter: $567 million, or $1 a share.)
To be fair, Hamilton said, no aircraft manufacturer currently can be accurately said to be in recovery, if for no other reason than the huge drag on sales and airplane deliveries caused by the Covid-19 pandemic. The relatively strong return of leisure travel in the late spring and early summer this year has been a bright spot for the industry. But that rebound in leisure travel, he noted, is mostly limited to the huge domestic U.S. air travel market. And that means outside the U.S., demand for mid-range, mid-size aircraft like the workhorse 737 line remains weaker than historical norms.
Plus, a lot of the MAX sales that Boeing has negotiated and announced this year fall into the “Make Good” or “Re-sale” or “Deeply Discounted” categories, meaning those sales are worth far less than meets the eye.
While the various 737 MAX versions all have “list” prices of $100 million or more plane, top customers like Southwest, Ryanair, United and Alaska never pay anything close to the list price. And in the case of Southwest and Ryanair – and likely a number of other carriers – the airlines holding large number of orders of MAX planes when the groundings began entered huge claims against Boeing for the losses they attributed to the failure of Boeing to deliver dozens of MAXes by the dates at which it was contractually obligated to do so. There also were big claims against Boeing for the MAX planes it had delivered before the grounding but which could not be flown because they lost their certification. And while some of those claims were actually filed through courts in this nation and others, most were made directly to Boeing with the hopes of working out deals that would result in the airlines eventually getting those planes at very low prices.
“A lot of these recent sales were “Make Goods” to resolve the claims these airlines had against Boeing,” Hamilton said. “So Boeing wasn’t making money, per se, on the sale of those planes, just reducing the size of the losses they otherwise would have made.”
Boeing also entered the spring with nearly 400 built-but-unsold – or white tail – MAXes. In some cases, those planes had been ordered by airlines that went out of business thanks to the pandemic. In other cases, some of those planes were just cancelled by airlines that no longer needed or could afford them. And still others were 737s MAXes built during the long grounding period.
Hamilton thinks that it won’t be until the first or second quarter of next year before Boeing finally delivers the last of those White Tails in its inventory.
“Long term, I have no doubt that Boeing and the Max will be making a comeback,” he said. “There’s nothing fundamentally wrong with the airplane. But it’s clear now that the MAX, which previously seen as the primary long term driver of profits for Boeing Commercial Airplane, will never become that. It’s still debatable whether it’ll ever actually be a profitable program.”
Because of the complex and unusual accounting practices used by aircraft makers – which focus on the profitability of a “program” over the many years the company spends developing, certifying, making, modifying, and supporting a plane type and its derivatives – such programs can appear on paper to be either profitable or unprofitable even though they drove huge amounts of revenue over those very long periods of time.
“But over a projected 3,500 planes sold,” down from more than 4,500 projected to be sold prior to the grounding, “it is pretty clear that Boeing won’t make an actual profit on the MAX,” Hamilton said.
Had the program’s costs been spread out over that larger 4,500 or 5,000 planes originally expected to be sold, it likely would have been handsomely profitable. Already Boeing officials already have said that the MAX’s long grounding and all the costs associated with it probably shaved $9 billion or $10 billion. But some analysts have suggested that when all the legal, manufacturing and sales damage eventually is totaled up, the 737 MAX program’s loss could push $20 billion.
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August 30, 2021 at 04:30PM
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Boeing And The 737 MAX Are Beginning To Recover, But The Damage Won’t Be Quickly Erased - Forbes
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