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The Boeing 737 MAX completes its flight tests: so what?

 


Boeingthis is (NYSE: BA) a struggling 737 MAX aircraft is even closer to being allowed to resume commercial flights. Boeing and FAA personnel conducted three days of test flights this week – a key part of the process to determine whether recent design changes have made the aircraft safe to fly.

Six months ago, reaching this milestone would have been considered a big turning point for Boeing. Although the recertification process has not yet been completed, Boeing is now well positioned to resume deliveries of the 737 MAX later this year. Unfortunately, the COVID-19 pandemic has decimated the demand for aircraft in recent months, making the steps towards recertification of the 737 MAX much less significant.

There are still a few recertification steps

In the coming weeks, FAA officials will analyze the data collected during the recent round of test flights. This will help them verify the effectiveness of Boeing design changes. Other future steps in the recertification process include an analysis of the proposed pilot training procedures and documentation provided by Boeing. After a period of public consultation, the FAA could finally take the long overdue measures to recertify the 737 MAX and describe the procedures that airlines must follow to reactivate their fleets of 737 MAX.

Based on the current schedule – which may change further – the FAA could recertify the 737 MAX as early as mid-September, according to Reuters. This would allow US service to return to service before the end of the year.

However, the recertification will not mark the end of the 737 MAX saga. International regulators – particularly in Europe – are on the verge of demanding further modifications to the 737 MAX’s security systems by the end of next year. These changes (and modifications to aircraft that have already been produced) will increase costs for Boeing, which will reduce future profits. Pilots will also need additional simulator training to fly the 737 MAX in the future, which could trigger payments by Boeing to airline customers to cover associated costs.

A Boeing 737 MAX 9 flying over the clouds

Image source: Boeing.

A plane without a market

Despite the initial design flaws in the 737 MAX and the resulting accidents, the aircraft was in high demand before the COVID-19 pandemic. Between the strength of global demand for air travel and production constraints Airbus, canceling orders for the 737 MAX was not a realistic option for most Boeing customers.

Today the situation is very different. Air travel remains well below 2019 levels, and industry insiders believe it will take several years for demand to fully recover. As a result, the airlines are trying to delay or cancel as many aircraft deliveries as possible. Due to the significant delivery delays for the 737 MAX aircraft which were originally scheduled to be delivered in 2019 and 2020, customers are in many cases entitled to cancel some of their orders.

In the first five months of 2020, more than 600,737 MAX orders evaporated from Boeing’s order book. Meanwhile, the company only got a handful of clean orders for its widebody models.

The flood of order cancellations is not yet over either. Last week, leasing company BOC Aviation announced the cancellation of 30,737 MAX orders. Most importantly, Norwegian Air canceled 92,737 MAX orders and five 787 Dreamliner orders. Adding insult to injury, the routed European budget carrier has filed a lawsuit seeking compensation for losses due to the grounding of the 737 MAX and engine problems in its current fleet of 787. He wishes also that Boeing reimburse its deposits before delivery. Given that Norwegian was a major customer and that Boeing has over $ 50 billion in advances and progress billings, these deposits are likely to amount to hundreds of millions of dollars.

There are still a handful of airlines eager for new planes. As demand for air travel picks up, other airlines will also have to buy new planes to replace old planes and allow growth. However, demand could remain well below previous levels for the foreseeable future, assuming that global air travel grows at a slower pace in the next decade than in the past five years.

Dark times ahead

During the first 12 months after the grounding of the 737 MAX last March, Boeing was able to partially offset the cash consumption of this part of its activities thanks to the benefits of its wide-body aircraft programs and its service activities . But in the current environment, these sources of liquidity are also drying up. Airlines are retiring their old planes rather than spending money on Boeing service offerings that could extend the useful life of these planes. At the same time, demand for jumbo jets has dropped, as international travel is expected to be one of the slowest parts of the aviation market to recover.

For example, Boeing is halving its 787 production (from 14 per month to seven per month). However, even this production rate can be too ambitious. While Boeing delivered 29,787 Dreamliners in the first quarter, it appears to have delivered only seven in the second quarter. In addition, key customers like Qatar Airways – which accounts for 9% of Boeing’s order book – require multi-year order carryovers.

The demand for aircraft will eventually recover. That said, “possibly” could be in many years. Meanwhile, Boeing has incurred tens of billions of dollars in debt and is consuming money at a frightening rate. Investors would be advised to avoid the stock.



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