The past year has been one of the most complex and dramatic in Boeing’s 103-year history. The 737 MAX, which Boeing brought to market to compete with the Airbus A320neo’s sales success, is entering the tenth month of its flight ban following two fatal crashes.
The timing of its return to service is still uncertain and, in any case, will likely be staggered across regions. Boeing has now been forced to pause 737 MAX production. The strain on Boeing’s relationship with the FAA seems to be increasing as 2019 draws to a close, while other regions’ authorities have made it clear that FAA approval isn’t enough for them. Even once technical fixes to the flight control system and regulatory matters are settled, many other challenges lie ahead for both Boeing and the wider commercial aerospace industry. Among them are:
- (Re)training pilots. Airlines, airworthiness authorities, and Boeing training organizations should align on the new training requirements for 737 MAX pilots as soon as possible. This could present a major challenge to the aircraft’s return to service in early 2020. The worst case would be a requirement for simulator training, as only a few 737 MAX simulators are available. Simulators could become a bottleneck, as airlines may not accept deliveries of the aircraft if their pilots are unable to fly them. Also, the simulators will have to be updated with the new flight control system modifications.
- Getting delivered aircraft back into service. Most of the 387 grounded 737 MAX aircraft around the world have been parked in expensive “active storage,” which includes regular maintenance and periodic overhauls. While this will help facilitate the return to operations, the entire Boeing Global Services division will likely be focused on this task for several quarters.
- Clearing the delivery backlog. With more than 400 aircraft ready for acceptance by the end of December (which translates into $15 billion in inventory), restarting deliveries is crucial for Boeing to stop hemorrhaging cash. However, Boeing will have to overcome airlines’ reluctance to add these many planes to their fleets over a short period of time. Airlines have adapted to operating without the 737 MAX and cannot absorb a sudden influx of new capacity overnight, especially in the current context of traffic growth slowing over previous years. We anticipate long discussions regarding new delivery schedules, which will be made even more complex by negotiations regarding airline compensation. Finding additional qualified resources to deliver this inventory to airlines will also be a challenge. Even assuming a very aggressive 70 deliveries per month target and a stable final assembly line rate, it will take more than a year to clear the backlog of grounded aircraft. And because the return to service might not happen simultaneously around the world, the whole process might take even longer.
- Extending flexible fleet solutions to carry airlines over to full return to service. Almost 900 737 MAX were expected to be in operation by the end of 2019. As these aircraft are on the tarmac or still need to be assembled, airlines will have to increasingly postpone their planned phaseouts of older aircraft, further stretch leasing contracts, and cancel additional routes. This is likely to become more complex and expensive in the next few months.
- Winning back passengers. Boeing and airline marketing departments will have to work very hard to convince passengers to fly on the 737 MAX again. The industry may be underestimating this factor right now, but it will be crucial for the future of the aircraft and its commercial success. Rebranding to drop the word “MAX” from its name might be an option but may not be enough on its own. A massive marketing campaign targeting all the stakeholders is likely to be necessary.
- Realigning company culture. It is still too early to assess the extent to which Boeing’s company culture will need to change, with investigations still ongoing. However, it seems fair to say that the company will need to deliver on new commitments around safety, transparency, and accountability, with a better balance between short-term profitability and long-term safety and sustainability.
- Protecting market share. Boeing sales teams will likely be dedicated to negotiating schedules and compensation with airlines, which is not the ideal scenario to also discuss new orders. In the meantime, Airbus will remain commercially active, and the order intake may be low for Boeing in 2020. Any further delays in returning to service or greater-than-expected difficulties with regaining customer trust may potentially even prompt airlines to cancel existing 737 MAX orders.
- Reinforcing FAA credibility. The FAA, once the undisputed leader of safety standards, has taken heavy criticism over the last few months for alleged excessive delegation to Boeing and potentially having put industry interests above those of passengers. The agency’s leadership role is being questioned and an extensive FAA overhaul could be mandated by Congress. This may make the increased involvement of other regions’ regulatory bodies inevitable, leading to longer, harder, and costlier certification processes for any new aircraft introduction. The first aircraft to be impacted by such a process could be the 777X, a program already delayed by at least six months.
- Restarting aircraft production. Boeing had originally targeted a quick return to service for the 737 MAX and therefore only reduced production from 52 to 42 planes per month. However, with continuing uncertainty around the return-to-service date and the unsustainable cash drain resulting from the current setup, Boeing has now halted production of the grounded aircraft altogether. This decision and the uncertainty on the production restart date and rate will create additional pressure on the supply chain. Suppliers with a large exposure to the MAX program – Tier 1s, but more likely Tier 2 and Tier 3 with a less solid balance sheet – need to evaluate the impact of the stoppage on their operations, on their supply chain, and on their cashflow. Without support from Boeing, most of them would be forced to put in place drastic measures to limit impact on financial results. This may have to mean headcount reduction, which comes with the risk of losing trained production resources and engineering talent or furloughing a significant part of the workforce. Boeing may also put in place a select supply chain support program to secure suppliers that are most at risk.
Ramping production back up to 52 aircraft per month is not a realistic 2020 target, as the increase will require planning ahead along the entire supply chain. Currently, even the production restart date seems unclear. With such a high level of uncertainty, how do you plan production in 2020-2021? We are anticipating a major disruption in the commercial aerospace supply chain over the next two years. Rebuilding confidence between Boeing and its supplier base will be one of the more substantial challenges.
- Revisiting product strategy. It seems increasingly unlikely that Boeing will decide to embark on a combination of turning around the 737 MAX, launching a delayed 777x aircraft, and developing a clean sheet for a new midsize airplane. Before launching a new program with a $15 billion to $20 billion investment, Boeing would likely need to have strong confidence that the moneymaker 737 is fully and sustainably back in business. This could potentially take two years and, by then, most airlines would have already decided how to replace the retiring 757s, the biggest portion of the midsize aircraft market as United Airlines’ recent order of 50 A321XLRs shows. As a result, we believe that the next clean-sheet program for Boeing could be a new single aisle to replace the MAX—either forced by issues with the 737 MAX recovery plan or as a strategic move to challenge Airbus's sales leadership in this segment. The business case for such a new airplane is not a given, as it would require new, more fuel-efficient engines. And given the breakthrough recently achieved by the engines used in the 737 MAX and the A320neo, it is difficult to imagine the next generational leap before 2030.
This list is long, yet not exhaustive, indicating that 2020 will present a new test of strength for an industry that has grown at 8% every year over the last 10 years.