Boeing said Wednesday it could shut down production of the 737 Max if the grounding of its most popular plane persists much longer.
On a conference call discussing the company's second-quarter earnings, Boeing's chief executive, Dennis Muilenburg, and the chief financial officer, Greg Smith, raised the prospect of halting production of the 737 Max, which has been grounded by regulators since March after two crashes.
Shutting down 737 Max production would have profound consequences for Boeing as well as its customers and suppliers around the world. Airlines have ordered thousands of the planes.
Boeing already slowed production of the Max to 42 planes per month in April. It is stockpiling those planes and will not be able to deliver any Max jets until regulators clear the plane to fly.
"If Boeing has to halt production, which we do not expect but which is a possibility, it would have a big ripple effect on suppliers throughout the supply chain," said Jim Corridore, an analyst at CFRA Research.
Boeing has said it expected the Max to return to service late this year. But Boeing and regulators keep finding new problems with the model, leading to a cascading series of delays.
"If that timeline changes significantly, we will have to evaluate these other scenarios," Muilenburg said. "There's no one specific trigger."
As it determines whether to further reduce the Max production rate or halt it entirely, Boeing is considering the date the Max is likely to return to service, as well as its ability to store and maintain the hundreds of completed planes it has not yet delivered, Smith said. "No one item is going to drive the schedule," he said.
Muilenburg added that temporarily halting Max production might make more sense than reducing production levels to fewer than the current 42 planes per month, for reasons having to do with suppliers, staffing and training.
Boeing reported a US$2.9 billion net loss for the most recent quarter Wednesday as costs related to its grounded 737 Max continue to rise. The company's stock was down more than 2 per cent in midday trading.
Boeing said it recorded US$15.8 billion in sales in the quarter, down 35 per cent from the same time a year earlier, in large part because it has stopped delivering the Max.
Boeing also said it had taken orders for US$474 billion worth of goods and services, including more than 5,500 commercial airplanes.
The figures reflected Boeing's surprise announcement last week that it was taking a US$5.6 billion charge related to the cost of compensating airlines that fly the Max, and that it was anticipating a further US$1.7 billion in costs linked to production slowdowns.
The economic fallout from the continued grounding of the Max is already being felt more broadly.
Airlines have canceled thousands of flights, losing billions of dollars. Companies that make parts for the Max are suffering as Boeing has slowed production. And American durable goods orders and the export of commercial aircraft are down, contributing to a small but detectable dent to the American economy.
The three US airlines that fly the Max — Southwest Airlines, American Airlines and United Airlines — have canceled thousands of flights into November, depressing their revenues.
General Electric, which makes the Max engines through a partnership with Safran, is also expected to record a dip in revenues as a result of the grounding when it reports earnings next week.
And last month the Census Bureau said that orders of durable goods, which include commercial airplanes, were down 1.3 per cent in May. It was the third time in four months that orders had dropped.
In a recent report, the chief US economist for JPMorgan Chase, Michael Feroli, said the effects of the Max grounding could shave about 1/10th of a percentage point of gross domestic product in the quarter.
"The issues affecting Boeing's 737 Max could begin impacting the economic dataflow," he said.
Boeing's announcement last week was the clearest indication to date of just how much the crashes and grounding will cost the company. The company had already announced an expected US$1 billion in costs from production delays, and a US$100 million fund for families and communities affected by those killed in the crashes.
"This is a defining moment for Boeing and we remain focused on our enduring values of safety, quality, and integrity in all that we do, as we work to safely return the 737 MAX to service," Muilenburg said in a statement. "During these challenging times, teams across our enterprise continue to perform at a high level while delivering on commitments and capturing new opportunities driven by strong, long-term fundamentals."
The Max was grounded after the crash of Ethiopian Airlines Flight 302 in March, which killed all 157 people aboard. In October, Lion Air Flight 610 crashed just minutes after taking off, killing 189. In both accidents, a new automated system malfunctioned, pushing the planes into nose dives.
Boeing has developed a software update for the plane, and is working with the Federal Aviation Administration and other global regulators to get the Max flying again.
"Boeing is a US$100 billion revenue company who just saw a 35 per cent decline in revenues, so there will be some impact on the economy," Corridore said. "But even at its size, we don't think Boeing's troubles are likely to significantly hurt overall US GDP."
Written by: David Gelles
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