Boeing to Slash 737 Production by Nearly 20 Percent – Skift

Boeing Co. will cut output of its 737 jetliners by mid-April and is creating a special board panel to review safety and design after two fatal crashes prompted regulators worldwide to ground the newest and best-selling member of the aircraft family.

The planemaker will temporarily cut its production rate to 42 airplanes a month, down from the current 52-a-month pace. Boeing plans to coordinate with customers and suppliers to blunt the financial impact of the slowdown, and for now it doesn’t plan to lay off workers from the 737 program, Boeing Chief Executive Officer Dennis Muilenburg said.

“When the Max returns to the skies, we’ve promised our airline customers and their passengers and crews that it will be as safe as any airplane ever to fly,” Muilenburg said in a statement Friday after the market close.

Boeing had planned to hike output of the 737, a workhorse for budget carriers, about 10 percent by midyear. Suppliers who provide the 600,000 parts needed for each plane had already started moving toward a 57-jet monthly pace under a carefully orchestrated schedule set in place long before the Lion Air and Ethiopian Airlines disasters.

Shares fell 1.2 percent to $387.14 in after-market trading, following the statement.

Preserving Cash

With the 737 Max now grounded indefinitely, the production slowdown will help Boeing preserve cash. The Chicago-based manufacturer faces losses ranging from $1.5 billion to $2.7 billion a month as customers halt advance payments for jets whose deliveries are suspended, said Seth Seifman, analyst with J.P. Morgan.

Boeing’s announcement comes a day after Ethiopian officials released a preliminary report on the latest Max accident, concluding it experienced the same equipment failure as a Lion Air 737 that crashed off Indonesia in October. The two incidents killed a combined 346 people.

If regulators take their time in certifying the Max’s return to the skies, Boeing would be forced to stash hundreds of factory-fresh jets in airports across the Western U.S. until commercial flights resume. As of Friday, there were 21 of the jets stored at Paine Field north of Seattle, according to 737 production blogger Chris Edwards, and eight at Boeing Field to the city’s south.

The reversal squeezes suppliers who’d hired workers and invested to expand capacity. With order books oversold through 2023, Boeing and Airbus SE had been mulling hiking production to as high as a 70-jet monthly pace next decade.

“They’re all waiting with some level of angst,” Stephen Perry, co-founder of Janes Capital Partners, a boutique investment bank that specializes in aerospace deals, said of Boeing’s suppliers in a recent interview.

Software Update

Boeing’s 737 final assembly in Renton, south of Seattle, borrows from the lean manufacturing techniques honed by automaker Toyota Motor Corp. to churn out more than two planes a day. About 90 percent of the jetliners made there this year are expected to be Max aircraft, according to Boeing.

A swift return to normal looks increasingly unlikely for the Max and Boeing. Engineers are still finishing work on a software update for a stall-prevention system linked to a Lion Air crash into the Java Sea off the coast of Indonesia in October, and the fatal dive of an Ethiopian Airlines plane near Addis Ababa last month. The disasters killed a combined 346 people.

Ethiopian Transport Minister Dagmawit Moges recommended Thursday that Boeing review its flight-control system after releasing a report that found pilots had followed proper procedures to counter the flawed anti-stall system in the plane.

Muilenburg, meanwhile, said he asked Boeing directors to establish a committee to review “company-wide policies and processes for the design and development of the airplanes we build.” The group, chaired by Retired Admiral Edmund Giambastiani Jr., will study the safety of the 737 Max and other programs and recommend improvements.

Rigorous Review

Boeing said April 1 that it would be several weeks before the software patch for the Max is submitted to regulators. The U.S. Federal Aviation Administration vowed a rigorous review, while authorities in Europe, Canada and China plan to do their own analysis.

By establishing a common cause behind the two crashes, the Ethiopia report eliminates the worst-case scenario for Boeing — a new technical issue that would’ve made it far more complex for Boeing engineers to find a solution.

“There now appears to be a sound technical fix,” Douglas Harned, analyst with Bernstein, said in a note to clients Friday morning. “Timing is still uncertain, however, with multiple investigations underway. Still, we are now looking at scenarios we believe can keep 2020-21 free cash flow roughly the same, even though 2019 will likely see large swings in inventory.”

©2019 Bloomberg L.P.

This article was written by Julie Johnsson from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

See full article