Three days ago I noted Boeing Will Suspend 737 Max Production: Thousands of Jobs at Risk.
On the surface the story does not seem to add up.
There were only a few hundred cancellations. And the backlog is over 4,500. To top it off, Boeing insists the 737 certification is on schedule.
Boeing 737 Max Order Backlog and Deliveries
Boeing makes at most 50 planes a month. In December it was down to 42. Thus, there is over a year's worth of backlogs.
The lead times on orders at Boeing and Airbus stretch out for for years. It's not as if an airline can cancel a Max and pick up the phone and get an Airbus a month later.
What's Going On?
Several industry insiders and analysts privately emailed me in response to the article.
It a combination of new certification rules and a shortage of skilled workers on top of storage issues and foreign uncertainty.
1: Shortage of Skilled Labour
The Seattle labor market, especially for aircraft skills, is very tight. The skills needed to fix and deliver the 400 already stored aircraft is not there.
This work requires special FAA licences. Boeing just hired over 200 mechanics and has called back retirees.
What is unusual is that they did so in early December before a 2 week paid holiday. Typically Boeing hires in January. We have not seen December hiring like this this in 50 years. Thus, Boeing is locking down skilled labor.
Boeing's production worker demographics is such that there is a very high number of older workers who could retire anytime.
2: FAA Certification Delayed
Boeing expected FAA certification of the fix in December. It now looks like April.
3: Individual Certification
The FAA announced it will certify each plane individually.
This takes a huge amount of time compared to mass certification of whatever fix the FAA ultimately accepts. Prior to the crashes, Boeing self-certified and the FAA blessed the process.
4: Storage Issues
Most of the new planes are at Plaine Field, Renton airport, Boeing Field and Moses Lake, WA. All are Boeing facilities. The key is to have aircraft stored as close as possible to Boeing facilities because that is where the skilled labor is. They could store the aircraft in Arizona and elsewhere, but remote storage is already an issue.
Besides the 400 aircraft produced since the crash, there are about 380 MAX aircraft owned by various airlines and stored all over the world. Those aircraft will be fixed on location. Boeing will send mechanics to each remote location when Boeing is already short of skilled labor.
Trump is in a huge tariff dispute with the EU. The WTO ruled against Airbus, but in a separate ruling the WTO is expected to rule against Boeing.
The EU will be in no rush to certify planes if and when the FAA does. And the EU will no longer accept Boeing's or the FAA certification process. This adds to the uncertainty and the delays.
Ripple Through Impact
The Wall Street Journal reports GE’s 737 MAX Problem Just Got Bigger.
General Electric Co. will likely take a significant hit to its cash flow from Boeing Co. decision to halt production of the 737 MAX jetliner, which has already dented the conglomerate’s finances.
GE makes all of the MAX’s engines through a joint venture with France’s Safran SA . When Boeing in April cut monthly production of the plane to 42 from 52, it reduced GE’s quarterly cash flow by $400 million. The suspension of production Boeing announced Monday, if prolonged, could reduce cash flow by much more as analysts warn that GE won’t receive payments made as the planes are being built.
“It is going to create a significant cash drag for GE,” said John Inch, an analyst at Gordon Haskett. He added, though, that “one engine program cannot make or break the fortunes of this company.”
Southwest Airlines Co. earlier Tuesday said it was removing the 737 MAX from its flight schedule through April 13 as the airline sees uncertainty around the timing of the aircraft’s return to service.
The extended grounding has already strained GE finances, cutting cash flow by as much as $1.4 billion this year as factories produce fewer engines and GE can’t get fully paid for them. The LEAP engine is a major growth driver for the company’s aviation unit, which accounted for $4.8 billion of GE’s roughly $7 billion in industrial profits in the first nine months of 2019. GE has more than 17,000 orders for the engine.
That engine is also used on the Airbus . That is one heck of a lot of orders.
Industrial Production Rebounds after GM Strike Ends
On December 17, I commented Industrial Production Rebounds after GM Strike Ends
The current rebound is artificial, but so is the strike that preceded it. Looking ahead, Boeing is going to have a significant impact in the first quarter.
Thousands of jobs and possibly as much as 1/3 of a point of GDP as Boeing Will Suspend 737 Max Production in January.
Mike "Mish" Shedlock