The MAX dilemma and a lost wager……..

Boeing, the MAX and the Virus

Boeing, the world’s oldest and (until recently) largest aircraft manufacturer, has had an ‘annus horribilis’ since the second fatal crash of the best-selling Boeing 737 MAX in March 2019.

As the anniversary of the tragic crash approached, Boeing was a facing a financial crisis on top of being dethroned from its top spot by arch-rival Airbus. But there was hope that the MAX nightmare would be ending soon.

In an interview with Reuters on March 5, 2020, the chief of the Federal Aviation Administration (FAA), Stephen Dickson, stated that a re-certification test flight was “weeks away”. The FAA is headquartered in the state of Oklahoma, thousands of miles from Seattle, Washington, where Boeing’s principal manufacturing and flight testing operations are located.

Then came COVID-19

On January 21, 2020, the first COVID-19 case was diagnosed in the Seattle area. On February 29 the first Corona-virus death in the USA was recorded in Kirkland, a suburb of Seattle. By March 5, the day of the interview with Administrator Dickson, the death toll in Washington State had passed 11, with total detected cases exceeding 70. Less than a week later, the World Health Organization (WHO) declared corona-virus to be a global pandemic.

At the time of writing, Washington’s state-wide death toll has reached 765 from more than 13,600 detected cases. Boeing announced the closure of its manufacturing plant on March 23 and the sprawling facility fell eerily silent.

Future of the MAX in jeopardy

This column has maintained that the 737 MAX will certainly fly again. While the initial forecast was for the issue to be resolved by the end of 2019, now it appears that the timeline is slipping further away.

Washington, the first state to be badly hit in the USA, is slowly recovering from the pandemic but the rest of the country is still seriously affected. Cases in the entire USA have passed a million with over 60,000 deaths, making it the worst affected country in the world. The world’s largest airline industry is almost at a standstill, with the few flights operating domestically in the USA carrying an average of 10 passengers, down from over 100 only a few months ago. Awash in red ink, Boeing’s biggest customers are fighting for their lives. Even carriers such as United Airlines and American Airlines, once two of the world’s most profitable airlines, are in the ‘at risk’ category of companies that may not survive this crisis intact.

Meanwhile, the state of Oklahoma, where the FAA’s flight inspectors mainly reside, is facing a COVID-19 crisis of its own, with over 3,000 cases and 200 deaths.

Given the effect of the pandemic in the USA, we must reluctantly conclude that it is very unlikely the MAX will be certified for airline service by the end of 2020. This would mean that my good friend Martin S has won our wager and I will have to accept defeat.

What will this mean for Boeing?

By the end of December 2019, Boeing had already completed and was storing over 400 ‘orphaned’ MAX jets. Painted in airline livery, fully equipped with passenger interiors, they are in addition to the 387 already delivered to customers before the type was grounded in March 2019.

Most aircraft delivery contracts are complex documents, as would be expected given that the average price of a MAX is in the region of USD 45 to 50 million. Most of these do not have a cancellation clause as such, but there is typically an option for the customer to decline delivery, a CP or ‘condition precedent’ in legal jargon, should the agreed date be exceeded by 365 days.

With each passing day, increasing numbers of these aircraft are reaching that milestone, and customers are cancelling orders. At peak production Boeing manufactured in excess of 40 airplanes a month. Already, over 200 cancellations have been agreed to, some from airlines (such as GOL in Brazil), but many others from leasing companies, an ominous sign as these are among the biggest customers for the type.

Of the customers with orders for more than 100 aircraft of the type, eight are airlines and four are leasing companies. Of these one airline, Jet Airways of India, folded in 2019 before the pandemic. Several, including Norwegian, Lion Air (of Indonesia) with 251 orders and VietJet Air with 250, are under serious financial stress and may not survive this crisis. American Airlines, the world’s largest airline by number of aircraft, has taken delivery of 24 MAXs and has a further 76 on order – they too are in financial trouble.

Air Lease Corporation, Aviation Capital Group and AerCap, also huge lessors, have a total of 344 MAX orders between them. Already, two major lessors, Avolon (20 orders) and GE Capital (176 orders), have cancelled some of their delivery slots, although exact details are not available. SMBC of Japan, BOC and SMB of China have over 150 orders for the MAX as well. How many of these will be cancelled using the ‘delayed delivery’ CP remains to be seen.

With a total order backlog of over 4,645, the MAX will obviously fly again – but when this will occur and what the financial damage to Boeing will amount to, is difficult if not impossible to predict at this stage.

 

 

 

 

 

9 comments

  1. Alan story

    As always Suren, spot on. I’m afraid the airline industry is going to have a horrendous shakeup with thousands loosing their jobs, could no be forever!

    1. Suren Ratwatte

      Thanks Al, Yeah it keeps getting uglier. Massive job losses even in the USA looks like – after the airlines were so profitable in 2019! Traveling as we used to is going to be impossible for a long time. So glad we came out there and got to see you guys – no idea when that will be possible or affordable again.

      Some talk now of Aus & NZ creating a travel ‘bubble’ so we can go between the two countries, both with a very low incidence of the virus. But going further afield? Who knows.

      Take care, love to Rita.

    2. Suren Ratwatte

      Thanks Al. Yes it is going to be ugly. Unless demand starts recovering soon, the pain will get worse. Even American may have to go into Chapter 11. Feel bad for Doug Parker, he’s a very nice guy for being the CEO of such a huge outfit.
      We may even go back to the 1970s when almost no one flew and tickets were very expensive. What will happen to all the aircraft (and pilots) that are out there? Awful.

  2. Carl Van Der Merwe

    Hi Suren,
    Year-end is still a long way off, so a fifty fifty chance for your bet.
    The numbers you quote are bad news not only for Boeing, but for the industry as well.
    Will the X fly again? I agree – yes. When? Any one’s guess, and not worth a gamble
    Thanks for the blog. It makes good reading.
    Regards, Carl.

    1. Suren Ratwatte

      Hi Carl. Good to hear from you. Hope you and Elsa are well. Sad about SAA but there will be many more before this is over I fear.

  3. Robin Hart

    There you go again…. another well written commentary…. Totally agree!

    This is a crisis, the likes of which has never been seen in our lifetimes. There are several possible outcomes when this is all over but, I’m struggling to find any good ones! Hopefully several new opportunities/airlines will “rise from the ashes”, but I suspect that the aviation model will be forever altered…. how???? As you said in your reply to Al…. Who knows!

    1. Suren Ratwatte

      Hi Robin – yeah many ‘Unknown unknowns’ to quote Rummy. Just hope it isn’t as disastrous as the invasion of Iraq!

      I’m afraid that the days of mass tourism are over for a while – people will be too scared to travel and also not be able to afford it. Means places like the Caribbean and Sri Lanka will take a huge hit to their economies. Glad we did that great trip to NZ,USA,Canada and Europe last year. may not be able to do that for a while. Don’t even know if EK will continue to offer those ‘retirement’ tickets – hope they do.

  4. Steve Root

    Thanks again for the great articles Suren.

    Some good news for me here in country NSW is that I will resume flying the Pawnee and my glider this weekend as restrictions are easing. Let’s hope people remain vigilant so we can avoid a second lockdown.

    Regards

    Steve Root

    1. Suren Ratwatte

      That’s great to hear. we can finally have the boys over tonight – after many weeks.

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