Boeing’s 737 Max crisis will stretch into next year

Posted at 11:43 AM, Jun 29, 2019

Boeing’s very bad year just got worse. It is now facing the very real possibility that the 737 Max crisis will stretch into next year.

Even after it gets the planes back in the air, it will have to make deliveries of new planes to its customers. Until that backlog is cleared up, its earnings will suffer.

The company, had its best-selling 737 Max grounded in March following two fatal crashes, said this week that it will have to delay its efforts to get the plane back in the air because a new potential problem with the jet has been discovered during testing.

Experts have been expecting that the planes could be back in the air by August. The three US airlines that own the 737 Max — Southwest, United and American airlines – had canceled flights using that plane only throughearly September.

But now a Boeing official confirmed to CNN Business that the company does not expect to submit a new software fix to the US Federal Aviation Administration for testing until September. “We believe this can be updated through a software fix,” said the official. The new time frame was first reported by the Wall Street Journal.

But it is not certain that a software fix will be the final solution.

Sources familiar with the testing process told CNN Business this week that the new problem is a failure of a microprocessor that could push the nose of the plane toward the ground. It is not known whether the microprocessor played a role in either crash. But it is too great of a risk to not be addressed, the sources said.

If the FAA determines that there needs to be a hardware fix in addition to a software fix, that could further delay the return to service.

Boeing said it agreed with the FAA’s decision to make additional changes.

“Boeing will not offer the 737 MAX for certification by the FAA until…it’s safe return to service,” said the company’s statement.

But even if only a software fix is needed, it will likely be months after that fix is submitted in September before the plane is granted approval to fly again by the FAA.

That means the earliest Boeing and airlines can hope to have the plane flying again will be sometime close to the end of the year.

“I don’t know if I’d say it’s best case scenario, but that’s what’s likely,” said Jeffrey Guzzetti, a former director of the FAA’s accident investigation division.

The delay, at least in part, will likely stem from the fact that the FAA and Boeing will need to get near simultaneous approval from authorities around the world for the plane to fly again, Guzzetti said. More than 30 authorities from other countries have been meeting in the United States to discuss the certification process.

Getting FAA approval alone would be of limited benefit to Boeing since more than 80% of the nearly 400 grounded jets are owned by foreign carriers.

But even once the plane is flying again, Boeing’s problems aren’t over. It has continued to build the 737 Max during the grounding, but it hasn’t been able to deliver them to customers.

By the end of this year, Boeing will likely have about 400 built but undelivered Max jets in its inventory according to Cai von Rumohr, aerospace analyst with Cowen. But it won’t be able to deliver those jets until after it fixes the planes already in the hands of airlines.

“Boeing’s first priority will be to prepare the 381 planes in customers’ fleets for service,” he said in a note this week.

And it even once the deliveries start, it will take time to fix, test and deliver all those planes, said Jim Corridore, director of industrial equity research for CFRA Research. That means the delivery delay will likely stretch well into 2020. And Boeing doesn’t get most of the cash from the sale of the plane until it’s handed over to the customer.

“They’re not going to clear out the supply in a month or two,” he said.

That will only add to the compensation that Boeing will owe to airlines for the grounding and the delays in deliveries, as well as the cost of the repair and the certification process and any legal settlements with the families of victims of the crashes.

“We’re definitely looking at figures in the billions,” he said. “It’s impossible to quantify it completely at this point.”

Boeing also faces the prospect of an expanded probe, with the Seattle Times reporting Friday that federal prosecutors are looking into claims of subpar work at a South Carolina factory that makes Boeing 787 Dreamliners. A Boeing spokesperson told CNN: “We don’t comment on legal matters.”

Still, Boeing is in a far better position than most companies to ride out the crisis. It had $7.7 billion in cash on hand at the end of March. To preserve cash, the company has stopped repurchasing its shares.

Even with all the problems for the company, shares of Boeing are up 13% for the year.

While firm orders for new commercial jets has virtually stopped, it has continued to deliver other types of jets and it has a huge backlog of past orders that will take years to work through.

“They’re going to have to take on debt, eat into cash reserves,” said Corridore. “As long as the plane comes back into service, the company will eventually be fine. And everyone expects that will happen. But whether it returns to normal in 2020 or not until 2021 is tough to say.”