A Boeing 737 Max 8 taking off from Renton Municipal Airport, adjacent to the company's 737 factory in Washington State. Photo / Lindsey Wasson, The New York Times
Airlines have cancelled orders for hundreds of the troubled jet because of its safety problems and the pandemic, but others are still eager to buy them.
The first half of the year was not kind to the 737 Max. Boeing froze production of its beleaguered plane from January through much of May as customers cancelled hundreds of orders, and deals for hundreds more were put at risk by delays in the plane's return to the skies 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 has already wrecked Boeing's bottom line. In January, the company said it expected the grounding to cost more than US$18 billion ($27 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 cancelled 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 is 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 the September 11 attacks 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 United States, 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. And more than one-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 defence 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 is 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 walk away from orders they have 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 per cent 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. "There's still a pretty strong business case for the Max."
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 US$230 million ($348 million) in fuel costs, according to Guzhva's math. Boeing said the plane offers fuel savings of more than US$10 million ($15 million) over its 25- to 30-year life span.
Airlines can also point to fuel savings as an indication of their environmental stewardship to customers who are increasingly cognisant 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 are typically needed a few years after those end, said Robert Spingarn, an aerospace and defence 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.
"When you have a brand-new airplane, you don't have to think about that kind of expense," Spingarn said. "There's going to be some that say, 'I'm sticking with the Max because the math works better for me than not taking it.'"
Strapped airlines could also see an opportunity in buying the Max, selling it to a third party for cash and then immediately leasing it back. "They get an upfront 10, 15, maybe even 20 million dollars, which helps with liquidity," Guzhva said.
Delta Air Lines did just that after passenger traffic bottomed out this year. Between April and June, the airline raised US$2.8 billion by selling and leasing back planes, it said this week. Delta is the only major US airline not to use the 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. And airlines over the past few months have retired older aircraft, sometimes years ahead of schedule.
Rather than back away from Boeing, airlines might also try to negotiate compensation for the plane's grounding and delays in securing the jets. Customers could demand that Boeing defer deliveries or offer them deep discounts. After the September 11 terrorist attacks, the low-cost Irish carrier Ryanair reportedly snapped up 737s at a substantial discount, for example. When asked the price he paid, the airline's chief executive, Michael O'Leary, demurred: "I wouldn't even tell my priest what discount I got off Boeing," he said.
Industry trends are also on Boeing's side. For years, airlines have been shifting away from wide-bodied planes toward narrow-bodied ones like the Max, which are easier to fill. And the pandemic only seems to be accelerating the shift. The rebound in air travel, pitiful as it is, is also being driven by domestic flights, exactly the kind of short trips for which the Max was designed.
Walking away from the Max may prove difficult for airlines, too.
Contracts are drawn up years in advance of delivery and can be difficult to break, experts said. Still, terms vary substantially by order, so some airlines may be better positioned than others, and contracts for the Max typically provide for some renegotiation rights if deliveries are delayed by more than a year. Some airlines may also have signed contracts that require them to forfeit money they've already paid if they cancel.
The Max has a list price of as much as US$135 million for the latest model but can sell for far less — as little as 50 per cent of that figure for a large enough order, according to experts. An airline might pay 1 per cent upfront when it signs a letter of intent and another 5 per cent when it signs a contract, said Eddy Pieniazek, an airline consultant at Ishka, a consulting firm. The rest is typically 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."
Written by: Niraj Chokshi
Photographs by: Lindey Wasson
© 2020 THE NEW YORK TIMES
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