UPDATE: Cowen & Co issued a revised note today, with new language concerning simulations of the MCAS flying characteristics. Boeing is not urging sim training. Rather, it is urging regulators and pilots to go to sites where MAX MCAS flying characteristics may be witnessed and understood. Cowen tells LNA it misunderstood what Boeing said.
May 10, 2019, © Leeham News: In a sign that Boeing is confident it’s on track with the fix of the MCAS for its 737 MAX, the chief financial officer of the company Wednesday and Thursday made the rounds in New York and Boston with aerospace analysts and key institutional investors.
Coming out of these meetings is news that Boeing will support simulator training for pilots to fully understand MAX handling characteristics, one analyst reports.
Greg Smith gave the financial analysts Boeing’s latest thinking about progress in returning the MAX to the skies across the globe. He also said Boeing is using the production slowdown (from 52/mo to 42/mo) to allow suppliers, notably engine maker CFM, to catch up from their own delays and strains. The suppliers maintained the 52/mo rate.
Spirit Aerosystems said it hopes that CFM, which has been running two-three weeks late with engines–will return to rate 52 in June. This is faster than suppliers were told by Boeing when the rate was cut in April. At that time, June’s rate ramp up was goal was 47/mo, with 52 in August and 57/mo in September. Boeing last year planned rate 57 in June this year.
Analysts issued notes following their meetings with Smith. Here are summaries of some of them, directly quoting the notes:
BA’s first potential milestone in trying to get MAX grounding lifted is its FAA certification test flight and meeting of the FAA with international regulators scheduled for Dallas on May 23. Boeing will not be in attendance to assure that it isn’t influencing discussions; and while the meeting could lead to lift of the U.S. grounding, the FAA also could require additional testing and documentation. Furthermore, European regulator EASA and China are expected to move separately to evaluate allowing the resumption of MAX service; and it’s unclear what their lag vs. the FAA will be.
Deliveries also may be impacted by need to reshuffle delivery positions, with possible required configuration changes if customers where grounding is extended, i.e. China, won’t be able to accept them.
BA hasn’t focused on the NMA since the Ethiopian crash, and given NMA’s business case hasn’t closed, it likely won’t be launched at the Paris Air Show in mid-June. Moreover, BA views NMA as an effort to derisk its next small aircraft. BA also is considering that 777x EIS could be delayed from 2020 if the FAA decides to adopt more stringent certification procedures. Hence, it’s considering trying to sell more 777-300 ER’s to avoid a production dip if the 777x is delayed.
Boeing stated it is holding daily calls internally regarding the 737 MAX situation, which includes a lane for outreach to each existing and planned customers. There is a lot of focus on delivery profile in those conversations, in terms of which airlines are capable of taking which deliveries and when. Boeing stated there has been a lot of movement in the skyline, though nearly entirely related to ability to accept deliveries vs. anything else. The company also suggested that MAX deferrals that have occurred since the grounding were by airlines that were likely to have made those changes anyway. Customer liability discussions will start once the aircraft has returned to service; and can include a variety of items outside of cash, including PDPs or delivery positions.
Boeing will stay at 42/month until the aircraft returns to service. It suggested it could start to increase the rate again at that point, but also pointed to a desire to clear the ramp of currently parked planes before quickly growing rate. It also stated it wants to increase rate in increments while maintaining stability; and not go back to where it was previously when at 52 but with a disrupted supply chain. The company is not committing at this point to how the production rate plan looks on a multi-year basis compared to what it was prior to the MAX grounding, given the many moving pieces in that equation, though it did have to submit a production plan to auditors to generate the estimated $1.0bn of incremental cost it added to the block in 1Q.
We get the sense Boeing may have ended up waiting till fairly late into 2019 or even very early 2020 to make the previously planned break to 57/month on account of supply chain disruption. The company stated the condition of its own facility is already significantly better today than at the time of the grounding as a result of these efforts.
We are looking at May 23 for indications on the path forward. This FAA meeting should include representatives from over 50 regulatory bodies and—as previously reported—the FAA intends to share more about the methodology it will use to determine when the 737 MAX can re-enter service. This does not guarantee that the FAA will have approved Boeing’s flight control software modifications by then, though we cannot rule that out either. The FAA certification flight for the new software has not yet occurred though comments on the Q4 call suggested to us that it would be soon and we have no reason to change that view. This process is separate from the Joint Technical Authorities Review, in which nine non-US entities are reviewing the FAA’s approval process for MAX flight controls. That review began last week and is expected to last 90 days but regulators need not wait for its conclusions to lift the grounding.
There are still several re-entry into service scenarios. . . . We believe one purpose of the May 23 meeting is to set forth a global roadmap for bringing the MAX back to service since we think the FAA, most other regulatory agencies, aircraft manufacturers, and airlines all see value in the existing certification regime. Despite that shared goal, global regulators will need to be satisfied that they have done everything required—and show the public in their countries that they have done everything required—to ensure the aircraft is safe, and so we do not take for granted that everyone will re-certify the aircraft simultaneously. Boeing management believes, however, that its engagement with global regulators thus far has been constructive.
Boeing will work to restore its brand. Management is quite aware that it has to shore up confidence in the company and the 737 MAX among the public, regulators, and other players in Aviation. With regard to the MAX, airlines seem likely to take the lead since they are the direct link between the product and travelers, though Boeing intends to play a key role in supporting them. We do not yet know what form this will take and the situation is unusual. On the earnings call, however, CEO Dennis Muilenburg highlighted the critical role that research shows pilots playing in inspiring trust among travelers and it does not sound to us like that view has changed. Meanwhile, the company continues to engage with US lawmakers and global airlines and regulators, including bringing them to simulators to demonstrate and discuss the software upgrade.
We found our meeting with Boeing management to be more encouraging than not. To start, there remain a host of unknowns that the company faces including the MAX’s return to service, government inquiries, and knock-on effects from the accident. Having said that, we found a degree of optimism on the part of management as dialogue with regulators and customers is progressing, specifically around getting the 737 upgraded and back in the air, which could potentially occur over the coming months. Of particular importance to them is the upcoming May 23 meeting between the FAA and other aviation authorities, since it may lay out a path towards certifying fixes and removing the grounding.
The MAX certification is progressing with the May 23 FAA event being a key watch item. Following the most recent earnings call on April 24, there was a view that an effective FAA handover was imminent of the software fixes on the MAX via a certification flight, which has yet to occur. However, management pointed out that there was no delay in the process and that the FAA has been engaged with Boeing on a consistent basis. Moreover, it was even noted that such a certification flight is not a prerequisite to returning the aircraft to service. Nonetheless, that process does seem like it will move forward over the coming weeks, with the most important milestone now being the May 23 meeting between the FAA and global aviation officials. Following this meeting, there is the potential for a clearer path forward relating to a removal of the grounding, certifying of fixes, and necessary training, all through a more consensual path. We find this encouraging given the opportunity for clarity and a return to service consistent with our late 2Q19 / early 3Q19 assumption.
Boeing would slowly clear inventory levels, which we estimate will be in the ~150 aircraft range by mid-year, as it along with the airlines would not be able to process the large volume given logistical constraints (e.g. pilot availability). And while there was no number provided by management on maximum monthly 737 deliveries, we believe the 70-100 range is appropriate based on Boeing’s / Airbus’ history with the 737/A320.
Will passengers fly the MAX again? Management obviously believes so, and we think so too. Management acknowledged a tough path ahead on regaining trust of the aviation community and are finding ways to tackle it through customer outreach, public campaigns, and so on. In addition, they are bracing for a level of demand pressure at the outset when the MAX returns to service. They even drew parallels to the 787, where there were a degree of headwinds initially, albeit noting different conditions with the MAX. In our opinion, and utilizing our knowledge of covering airlines, most passengers are unaware of aircraft types when flying, making an effective ban of the MAX difficult to give credence to.