By Scott Hamilton
Feb. 5, 2024, © Leeham News: The Federal Aviation Administration froze Boeing’s production rate of the 737 MAX at its current level.
But just what is this rate?
Boeing says it’s 38 airplane per month. Last year, it was common knowledge that Boeing struggled to consistently maintain a rate of 31/mo. Supply chain issues and voluntary “pauses” by Boeing during final assembly impacted the rate. LNA used the latter number to illustrate how many scheduled 737 deliveries will be affected by the FAA’s freeze. Hundreds of MAXes contracted for delivery will be delayed this year and next, and likely beyond, depending on how long the freeze remains in place.
But there was plenty of skepticism about Boeing’s announced rate cap of 38 per month expressed at last week’s Aviation Week suppliers conference in California.
“We don’t really know”
Kristine Liwag, the aerospace analyst at Morgan Stanley, said “We don’t really know” what the rate is. Is it 31 or 38, she asked during a panel at the conference.
“As of 4Q23, if you look at the deliveries, production, and performance, their one-way average is about 33, and December exited at about 35. But so far in January (this was January 25), deliveries are only seven. What does that freeze actually mean?”
That’s the question Liwag said she received all morning at the conference and also from investors.
“But I actually think the production rate may matter a little bit less, because people are looking at whatever that number is, is it 30, is it 38, is it 31, that’s the floor. And the risk that I think the market’s under-appreciating is more on the delivery front,” she said.
Liwag noted that “the FAA has been very clear that they’re going to take an aggressive look at the inspections and make sure that each airplane that gets delivered are conforming to the design. And the problem with that is the delivery rate. So, if every single airplane is going to be scrutinized, similar to how 787 was scrutinized in 2021 and 2022, that delivery cadence is what we need to be watching out for, because the floor could actually be a lot lower than what that freeze actually is.”
Delays on certification
Ron Epstein, the aerospace analyst for Bank of America, suggested Boeing could lose some orders for the 737 MAX 10 because certification will be delayed. Speaking on the same panel as Liwag, Epstein noted that the fallout from the Alaska Airlines flight 1282 MAX 9 investigation means the MAX 10 certification will shift to the right.
United Airlines removed the MAX 10 from its fleet planning for 2025, the year the MAX 10 was supposed to be delivered. Press reports—unconfirmed by United—suggested CEO Scott Kirby met with Airbus to discuss placing new orders for the A321neo to replace the delayed MAX 10.
If Airbus can find A321s in its oversold order book, Epstein said this would result in some more share shift from Boeing to Airbus.
“The repercussions of this are pretty meaningful,” Epstein said. “If you’re a supplier, probably at first, you won’t see a great investment, depending on how long this goes and how extreme the potential share shift is.
“You might see a little boost up in your Airbus business, a little decline in your Boeing business, and you’re going to have to remain at the end. The whole point of it is, who wants to build as a supply chain? Well, it’s not going to happen.”
Investors have to decide
Epstein returned to a theme he’s been writing about for months if not years: what is Boeing going to be?
“Investors have to make a decision. Do they want to invest in an aerospace company that is trying to be a lead, or an aerospace company that’s going to try to make the best airplane in the world?
“What I mean, be a lead is the goal of the Boeing company is to pay dividends and buy back shares, or make the best products in the country? And that’s the fundamental crossroads we have to make on each side. An investor will have to decide….”
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