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Boeing Avoids Compounding Its 737 Max Crisis

Brooke Sutherland
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Boeing Avoids Compounding Its 737 Max Crisis

(Bloomberg Opinion) -- No one knows when the 737 Max will return to the skies, least of all Boeing Co.

The planemaker on Wednesday gave its first financial update since the Max was grounded by regulators across the globe in March after two fatal crashes. Boeing is suspending its guidance until a future date “due to the uncertainty of the timing and conditions surrounding return to service of the 737 Max fleet.” It has also hit the pause button on share repurchases for now to conserve cash, noting that all of its $2.3 billion in buybacks took place before mid-March, when a Max operated by Ethiopian Airlines crashed. Boeing had already moved to curtail production of the Max to 42 planes a month, down from 52. On a call to discuss Boeing’s first-quarter results, Boeing Chief Financial Officer Greg Smith said the company continued to assess its production plans and would further adjust the pace as required. Chief Executive Officer Dennis Muilenburg gave few parameters for the Max’s return, saying the timing will be paced by conversations with regulators. 

Boeing said it’s making progress on developing a fix to the anti-stall flight-control software system that was a factor in both the Ethiopian Airlines accident and an October crash of a Lion Air flight. It completed technical flight-testing of the software update last week. The planemaker shared a provisional timeline with customers that estimates it will get the Federal Aviation Administration’s blessing for the revamped software as early as the third week of May and return the Max to service by mid-July, Reuters reported Tuesday. That jibes with reports that Boeing officials have told suppliers that it will ramp up to its previously targeted production pace of 57 planes a month by September. Perhaps. But Boeing had thought it would be able to submit the software fix to regulators by late March, only to walk that back soon afterward. And the Max’s woes run deeper than software: it’s now a political and consumer issue. “We’ve taken off our watches and put the calendars in the drawer,” American Airlines Group Inc. pilot Dennis Tajer told Bloomberg News after a meeting with regulators on April 12.

In a victory for Boeing, a board of aviation experts convened by the FAA found no need for costly simulator training on the updated software. But the regulator’s own reputation is on the line after its isolated defense of the Max’s airworthiness drew scrutiny over the rigor of its review processes and the arguably too-intimate relationship it has with the companies it is meant to be overseeing. In an effort to rehabilitate its credibility, the FAA has convened a panel of international regulators to help it review the software update. Many countries will most likely also conduct separate assessments. Already cracks are emerging: Canada Transport Minister Marc Garneau has argued pilots need more than just computer-based training and that the Max should be grounded “for as long as it takes.” Interestingly, Muilenburg said Boeing is committed to continuous improvement, including anything it can do to improve its products, pilot training and education and the aircraft certification process. 

American Airlines and Southwest Airlines Co., the biggest U.S. operators of the Max, have pulled the plane from their schedules until August, leaving them reliant on other options for the bulk of the busy summer travel season. United Technologies Corp., which supplies parts for the plane, said Tuesday that it could see as much as a 10-cent hit to its 2019 earnings per share assuming Boeing’s production slowdown lasts through the end of the year. That’s a worst-case scenario, but the fact that suppliers are preparing for it to the point of putting numbers on it is troubling. With deliveries halted, Boeing is forced to shoulder more of the cost of producing the planes, not to mention the inventory pileup in its own factories as well as those of its suppliers. The cash crunch gets more dire the longer the grounding drags on.  

Analysts were prepared for much worse numbers in the first quarter: Boeing’s $2.3 billion of free cash flow in the period was closer to analysts’ estimates before the Ethiopian Airlines crash than their more recent calculations. But that may reflect the fact that the Max production slowdown happened after the quarter ended, suggesting the pain is only delayed. There are early signs of the challenges to come: the first quarter included $1 billion in increased costs, in part because the lower Max production rate will force Boeing to amortize expenses over a longer period. Revenue and earnings in Boeing’s commercial aircraft division plunged amid a slide in Max deliveries. Boeing handed over just 89 planes from the 737 aircraft family (including 57 Max jets) in the first quarter, about a third fewer than the same period a year earlier. 

The bright side of Boeing’s earnings report is that there don’t appear to be any new headaches or surprise penalties. The problem is no one knows how long it will take to fix the existing ones.  

To contact the author of this story: Brooke Sutherland at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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