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.