With the news of Boeing’s decision to halt production of the 737 MAX from January, IBA’s Stuart Hatcher, COO – MD Aviation, shares his thoughts from an Appraisers perspective.
• Based on the temporary halt of production, when do you expect certification to occur?
Boeing expects the certification to happen in short order in 2020, but with the halting of production it will take some of the pressure off Boeing to clear the backlog in an orderly fashion. That being said, it surely won’t take the pressure off the supply chain, although they would have been party to this as they have their own supply chain and labour issues to consider. The other pressure release will relate to Boeing’s working capital which has surely taken a big hit over the past 9 months. Building 400 aircraft (without even considering the effect of compensation) would have made a serious dent in their cash flow. Moving onto certification itself, and political tensions within the US aside, there are many authorities involved that need to get on board for this process to be able to deliver to the customers of the 400 parked aircraft across the country. The FAA will be first, probably followed by EASA, but they need buy in from the rest to get the aircraft that are parked across the globe back into service and plus get the new deliveries sorted. By drawing a line in the sand on the build-up of aircraft, the questions for Boeing should simplify as they focus solely on recertification and entry into service.
• Is the halt likely to have any impact on residual values of the 737 MAX?
Values are impacted if the demand for the aircraft changes, and in particular if we see large scale cancellations. The long-term market position will define the residual value profile for the aircraft and aside from any issues with current lease rate performance we see. If the aircraft is popular and remains a true competitor to the A320neo, then the long-term performance should remain unaffected until we see transactions saying otherwise. That being said, if the market were to turn on the MAX such that it becomes an interim solution, the long-term residuals will naturally be affected if Boeing should make that kind of move. Boeing have invested heavily in this aircraft and defining it as interim shouldn’t even cross their minds, but it remains a remote risk if the market should turn against them. In reality, every design is an interim solution to the next design, but it can be classed as interim if the replacement is launched well before when the market expected it to be. The dates of launch have varied over the course of the history of the 737 so there is no hard and fast rule, but the certification process from launch to entry into service has increased substantially. Regardless, customers and investors will expect the MAX to remain in production for approximately 16-20 years to not be classed as interim. The original 737 which was launched back in 1965 entered service in 1968 and remained in production for 20 years; the Classics were launched in 1980, entered service four years later and were produced for 16 years; the NG was launched only 9 years after entry into service of the classic and entered service 4 years later in 1997 and was produced until 2019 – and finally, the MAX was launched in 2011 and entered service 6 years later in 2017. So, if a production life of 20 years was desired plus allowing time for design and certification, Boeing would be looking at a new launch around 2030 with the MAX expecting to leave production 2039 to allow for the usual 3-4 year overlap. What triggered those launches is more telling as the NG was to combat the A320 threat, whilst the MAX was launched to counter the neo; the classic, however, was to improve range and capacity to better serve the market rather than simply reacting to a changing competitor landscape. If Boeing lose ground to Airbus then they might do something earlier than expected, and similarly if Airbus launch a replacement, Boeing would have to follow suit. The danger to MAX investors would be if Boeing pre-empted the situation to launch an all-new design much earlier than expected. No-one wants that to happen but if ground is lost or the environmentalist lobby continues to gather momentum, then the whole process will need a re-think. To answer the question more directly, if Boeing’s backlog remains largely intact and plans for replacement are banished to the 2030s, then I don’t feel there will be any impact on residual values for the MAX. In fact, it will probably provide comfort that Boeing will get on top of the situation in a more sensible way.
• Can the delay allow Boeing to clear its backlog fully?
Before the delay, it was getting to the point where scenarios of how Boeing would clear the backlog and ramp-up production were getting more far-fetched. If rates were maintained, then we were already at a couple of years to do both, but if the ramp-up was triggered then it would push out further. Any mention of over-production takes our minds back to the early 1990s when production levels were less controlled and we ended up with white tails. Again, no-one wants to see that happen as it sends shock waves across the entire sector. Whether Boeing can clear their backlog or not will depend entirely on how long they plan to halt production for. If certification is triggered January-March 2020 for the major authorities, stoppage for 6 months will clear about half of the ones parked in the US and get the rest of the aircraft stationed elsewhere back in service – and that is at the highest rate that Boeing has ever achieved. They will then need to build up the production system again from a standing start and ramp up towards the end of 2020, whilst they attempt to deliver the remaining 200 currently parked – although there are a number of military NGs still to pass through Renton. The scenario they will choose will endeavour to maintain a delivery schedule that builds up, doesn’t slowdown and doesn’t stretch the system. One scenario therefore will see them focus on the grounded aircraft currently with customers and get the first few out of storage, and then ramp up the new deliveries up to 42-month. Once they have that done, then re-start production and blend in those deliveries so they can produce aircraft in an orderly fashion. In that way they can spend time handling aircraft that have been part of long-storage programs, handle any updates and training that is required, and monitor operating aircraft carefully to ascertain that the fixes they have introduced work as planned. By that point, authorities in places more affected by the problems (Indonesia and Ethiopia) can have the confidence to place the aircraft back into their schedules. Whilst this is going on, Boeing will have to remain hot on their communications, particularly social media, such that people welcome this aircraft back as opposed to avoiding it all costs.
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