AUSTIN, Texas — The extended grounding of Boeing’s 737 Max, which this week passes the one-year mark, has made the jetmaker’s future tough and uncertain. Now the global spread of the coronavirus — which has rapidly slashed demand for air travel and for jets — will complicate its efforts to recover.
At an aviation conference in Austin early last week, industry veterans struggled to analyze the impact of these two “Black Swan” events — unpredicted developments that each delivered an existential shock.
Like most attendees, Adam Pilarski, veteran aviation analyst at consulting firm Avitas, was optimistic that Boeing will get the Max back in scheduled service this year and that a few thousand will be delivered eventually. That should secure the jobs of Boeing’s 12,000-strong workforce in Renton for the coming years.
But strategically, the grounding has left Boeing far behind Airbus in the bread-and-butter single-aisle airplane market that in normal times should provide about half its revenue.
The crisis has allowed Airbus’ large A321neo to run away with sales and forced Boeing to shelve the 797 “New Midmarket Airplane” concept it planned on putting up against the Airbus jet. It’s unclear what Boeing can do, what new plane it might come up with, to regain market share.
Pilarski believes that even as Boeing battles this immediate crisis, if it fails to make the kind of multibillion-dollar investment in an all-new airplane that former CEO Jim McNerney refused to make in 2014, Airbus could eclipse Boeing through 2030.
“There could be a lost decade,” said Pilarski. “Boeing needs exactly what McNerney said they don’t need. Boeing needs a moonshot.”
The missing Max
The Max’s grounding has left airlines that planned to grow instead scrambling to cut flights and fill in gaps in their reduced fleets by holding onto older jets.
At the Austin conference, Amos Kazzaz, senior vice president for finance planning at Air Canada, said the airline was operating 24 Maxes before the grounding and was reaping the economic benefit of the jet’s fuel efficiency. “And customers loved it,” he added.
Air Canada was supposed to have 50 Maxes by July. Both Kazzaz and United Airlines Chief Financial Officer Gerry Laderman said they want the Max back in their fleets as soon as possible.
On Thursday, Gary Kelly, CEO of top 737 customer Southwest Airlines, told an audience at the U.S. Chamber of Commerce summit in Washington, D.C., that the grounding of the Max has left his airline fleet smaller today than it was three years ago.
Southwest’s plans to grow in markets across the U.S. have been put on hold. And though it has arranged to have nine Max simulators in Dallas by next month, ready for pilot training, it’s unlikely to be back at its previously planned fleet size until the end of next year.
“We’re anxious to get back on track,” said Kelly.
This is despite what Kelly called the “gut punch” from the precipitous drop in air travel because of the COVID-19 scare. Kelly said so many companies have curtailed corporate travel that this profitable part of the business for now is “dropping off a cliff.”
Compared to these North American carriers, European airlines are generally in worse financial shape and Asian airlines much more affected by the coronavirus. Many carriers in those parts of the world may be relieved to not get any Maxes delivered for a while.
Even in the U.S, the contraction in traffic will quickly dissolve the airplane capacity shortage caused by the Max grounding. In Austin, Jude Bricker, CEO of Minneapolis-based Sun Country Airlines, said that as carriers park older 737s, in the immediate future “there’ll be lots of planes available.”
Still, John Plueger, CEO of Los Angeles-based airplane lessor Air Lease Corp. (ALC), said that’s unlikely to be a major problem for Boeing unless the spread of the virus extends beyond the summer. Like many in the industry, he’s hopeful that the virus is a short-term problem for airlines that may be largely over by the time the Max returns to scheduled service.
That return will be slow — Kelly said that after the Federal Aviation Administration (FAA) approves the Max to fly, Southwest will take 90 days to get the first Maxes into service — and Boeing’s production ramp-up very measured and extended.
Plueger said it could take up to two years to get into service the nearly 800 grounded Maxes already built.
Boeing last month committed to taking 216 Max fuselages this year from supplier Spirit AeroSystems in Wichita, Kansas, which implies a production rate averaging about 30 new jets per month once the assembly lines resume. But ALC founder and chairman Steve Udvar-Hazy said he expects a much slower rate of about 21 Maxes per month.
Udvar-Hazy notes that foreign regulators still have reservations about the Max that could cause delay.
Transport Canada has told him that it wants Boeing to develop a way for the pilots to disengage the “stick-shaker,” the shaking of the control column that erroneously activated and continued throughout both Max crash flights, creating a powerful distraction in the midst of the emergency.
And he said the European Union Aviation Safety Agency (EASA) has told Boeing it wants to develop a third measure of the Angle of Attack, the sensor that failed on both Max flights. Boeing’s redesign of the Max flight control system takes data from only two such sensors.
EASA, he said, is not likely to insist on that feature before the Max’s return to service, but wants Boeing to commit to developing it for the Max later.
As Boeing negotiates these details, it still hopes for FAA approval of the redesigned Max in midsummer with foreign regulators following not too long after.
In that case, it had anticipated plenty of airlines clamoring to take its slowed-down Max deliveries. The uncertainty around the coronavirus outbreak creates one more element of anxiety around that near-term future.
Can Boeing recover?
In the longer term, Boeing faces even more uncertainty.
Udvar-Hazy, who has met with new Boeing Commercial Airplanes boss Stan Deal, his sales chief Ihssane Mounir, and new Boeing CEO Dave Calhoun, said they all recognize that Boeing’s biggest challenge lies with the larger models of the Max single-aisle jet family.
The 737-9 and 737-10 models fail to match the range and passenger capacity of the rival Airbus A321neo and the long-range (LR) and extra-long-range (XLR) versions of that jet.
“The Max 10 has limited range and runway performance,” Udvar-Hazy said. “Boeing doesn’t have an airplane with the capability of the A321LR or XLR.”
The problem for Boeing is that because the A321neo can fly international long-haul routes, many airlines have chosen it over the traditional and expensive big widebody jets that normally fly trans-ocean.
As a result, the A321neo in its various versions has racked up an astonishing 3,375 firm orders, more than four times the sales of the Max 9 and 10. Airbus head of investor marketing Mark Pearman Wright said in Austin that the European jetmaker expects this large model to be 50% of its single-aisle jet production.
This dramatic loss of share in a market that once was split evenly between Airbus and Boeing is worrying because it could trigger a downward spiral of lost sales.
But what can Boeing come up with to match the A321neo? An expensive all-new Boeing jet would need dramatically improved engine efficiency to make sense, and there’s no prospect of such technology before 2030.
“It’s like running a marathon, where Airbus is at the 10-kilometer mark and Boeing is back at the starting line,” said Udvar-Hazy, who is renowned in the aviation industry as a judge of the market.
Pilarksi of Avitas said the only option for Boeing is to forgo incremental change and shoot for the moon: to develop a new clean-sheet airplane design of very new aerodynamic shape that will be both much faster and produce dramatically lower carbon emissions than current jets.
Of course, that would require the Boeing board to commit to a huge investment at a time of immense challenge and uncertainty. And such an innovation couldn’t be ready to enter service before 2030, effectively ceding substantial market share to Airbus until then.
In addition, while getting the Max back in the air and coming up with a contender against the A321 are Boeing’s biggest problems, they aren’t the only ones.
The Max crashes revealed engineering design shortcomings, but the recent discovery of debris in the fuel tanks of many of the Maxes — following similar quality control issues on the Everett-built KC-46 Air Force refueling tanker — raised questions about Boeing’s manufacturing culture, too.
In January, Boeing began flight tests of its new giant 777X widebody jet. But that plane is running late and over budget and its order book is far from solid.
“There’s not a big line of airlines wanting the 777X,” said Udvar-Hazy. “It may be profitable in three or four years but it’s not a profitable program now.”
Boeing has borrowed more than $25 billion in debt to get it through the cash crunch of the Max crisis. With the Max production rate at zero now and low for the foreseeable future after it returns, that leaves only the 787 Dreamliner program as Boeing’s main cash lifeline.
In this precarious cash position, how likely is it that Boeing’s leadership could go for Pilarski’s moonshot?
“Is the board going to approve another $15 billion for a new airplane?” said Udvar-Hazy. “In 2020, I don’t think so. I don’t think they’ll bet the company.”
One former senior Boeing executive, who asked not to be identified as he now works elsewhere in the business, said there’s no obvious answer as to what Boeing can do.
Early in 2018, Boeing was considered well positioned against Airbus. But the Max crisis, the worst in the company’s history, which Boeing has estimated will cost it more than $18 billion, has exposed extreme vulnerabilities.
“We were on top of the world. Now we’ve got issues across the board,” the former executive said. “It’s tough.”
On Tuesday, the one-year anniversary of the Ethiopian Airlines Flight 302 crash that triggered the grounding of the Max worldwide, Boeing’s leadership — CEO Calhoun, Commercial Airplanes boss Deal and board chairman Larry Kellner — plan to mark the occasion with a video address to all employees.
The three plan to reflect on the lives lost, Boeing said. They’ll also need to steady the nerves of the workforce as the company faces enormous challenges.