Analysts align in reaction to MAX production suspension

Dec. 17, 2019, © Leeham News: Wall Street analysts were fairly aligned in their reaction to Boeing’s decision to suspend production.

Below are excerpt of some of the research notes received by LNA:

Bernstein Research

FAA officials testified to Congress that Boeing’s software fix and proposed training approach should resolve MAX issues, but milestones remain to be done. Despite positive messages, certification now appears to be dragging well into January. With more than 400 parked airplanes in inventory, it has become impractical for Boeing to keep adding planes to storage.

It is unclear how long the production halt will last. We have no clarity from the FAA on timing. Boeing, after being admonished, will not speculate on timing. The halt, we believe, could continue through January – or longer if the certification and JOEB approval go more slowly than recent statements suggest. Rate 57 in 2020 appears impractical at this stage and likely shifts to 2021. Boeing plans to redeploy employees to other programs and keep the supply chain ready to restart. The supply chain plan will be tailored by supplier, depending on operational and financial strength. There should be added costs related to operations and customer compensation, but an impact well below yesterday’s $7bn fall in Boeing market cap.

Canaccord Genuity

Considering the anticipated two-week December shutdown at the Boeing Renton 737 factory, the MAX production suspension is effectively starting the end of this week. With almost 400 MAX in inventory (basically 9 months at 42/month) and continued uncertainty on the exact timing of the MAX return to service (RTS), it is not surprising Boeing has taken the steps to suspend its production. However, negotiations with suppliers are ongoing, and it is not yet determined at which level key suppliers, such as Spirit AeroSystems, will continue to produce 737 MAX aircraft (note that SPR had been maintaining its production at 52/month). The expected impact on Boeing and its suppliers is significant, but the exact financial details are still to be worked out, and we expect the supply chain to maintain some MAX production, but likely at a lower level than the current production rates.

Boeing indicated that it views a temporary pause as the least disruptive to its supply chain. Boeing in fact indicated that it is not expecting any layoffs or furloughs as a result of the production pause. We believe Boeing will do all possible to ensure that its suppliers are able to maintain their 737 employees to ensure that once Boeing is able to start deliveries of the 737 again, it has the ability to ramp production as quickly as possible. We estimate that the MAX, at 42/month, is a $1.4B monthly cash burn for Boeing. Boeing did maintain its current dividend, and we believe Boeing has sufficient financing capacity to weather an extended pause. However, we also believe part of the decision by Boeing to pause its MAX production is to lessen the perceived pressure on the FAA and other regulators.

We now view an RTS for the MAX in February as a best-case scenario. It is clear that the FAA has been frustrated with Boeing’s pressure and public statements regarding the MAX. Boeing is still looking to complete several of its key milestones soon, but this has taken longer than expected. While Boeing has not indicated that the pause will be in place until the successful RTS, at a minimum Boeing will want better visibility on the key milestones, including the JOEB training requirements. Moreover, it is likely Boeing will gradually “wake-up” the factory after the pause, and it could take several months to get rate back to the 42/month level.

Credit Suisse
  • Suspend production, maintain dividend: Following the conclusion of the December board meeting, Boeing decided to suspend MAX production beginning in January, but did not specify the duration. A suspension was one of three options we and the market have been contemplating ahead of this board meeting (see Pick Your Poison). The others included a decrease in production rate and a suspension or cut to the dividend, neither of which occurred.
  • Logistics over liquidity: While we were most concerned that continued cash burn and its impact on liquidity would drive this decision, we also recognized that the complex logistics from continued production could also be a factor. Boeing’s statement explains that its basis for suspension is the latter, as it wants to “prioritize the delivery of [~400] stored aircraft.”
  • Labor and supply chain: Boeing said that no layoffs or furloughs will result from this action at this time, and that “affected employees will continue 737-related work, or be temporarily assigned to other teams in Puget Sound.” It is not clear whether Boeing intends to pay suppliers to continue production or if they will be expected to suspend activity as well. However, Boeing did say that suppliers, along with customers and employees, will be top of mind as it assesses further actions. This may suggest that Boeing will continue to pay its suppliers to produce. This would be a negative from a near-term cash flow standpoint, but a positive from a long-term health of the supply chain standpoint. However, we note that if suppliers continue to produce while Boeing does not, a component inventory mismatch may arise, requiring supplier rates below Boeing in the future.

With uncertain duration and uncertain supply chain treatment, an uncertain impact: In sum, we think Boeing had to take at least one of the options noted above as continuing apace seemed untenable given the unknowable timing of recertification. However, without more detail on the duration of the suspension and the supplier terms, it is difficult to gauge the economic impact of this decision to Boeing and its suppliers. Regarding liquidity, it is also unclear how much cash this decision will actually save given the unclear treatment of the supply chain as well as the fact that Boeing is undertaking no actions to produce labor cost savings. Boeing stated that it would provide financial information regarding the production suspension in connection with its Q4’19 earnings release in late January. We reiterate our Neutral rating and $324 TP. Risks: regulatory and execution.

 JP Morgan

Boeing’s MAX announcement leaves many questions unanswered but that was probably inevitable, given the difficulty of forecasting how the aircraft will return. Some of these questions include 1) the duration of the halt, 2) the production pace post-halt, 3) the timing of re-certification, 4) the delivery pace after reaching that milestone, and 5) how Boeing will support the supply chain during the halt, with uncertainty on these topics leaving a broad range of outcomes for modeling. We sense that investors are still looking to a “clean year” in 2022-23 for a sense of how to think about the stock and on this basis, our estimates are little changed today at ~$16bn of FCF, though this is based on several important unknowns. In addition, the path between today and a “clean year” contains risks, such as we saw with today’s production halt, which had seemed far less likely several weeks ago. The focus of the halt appears to be inventory management and while the duration is TBD, the release states that it is the least bad option for preserving supply chain health, suggesting to us that it should be fairly short term—perhaps a few months. We cut our PT to $370.

  • Managing MAX inventory is a priority. Boeing will end 2019 with ~400 MAXs on the balance sheet and with increased uncertainty about re-certification timing and the pace of subsequent deliveries, we believe that management—with good reason—is increasingly concerned about managing this. For example, had Boeing continued producing at ~40/month through 2020, it would build ~500 jets; if deliveries began April 1 at 50/month through year-end, probably an aggressive assumption for the early months, Boeing would still have ended 2020 with 450 jets, 50 more than on Jan 1. What if there is a recession? What if the elements degrade some jets? Clearly, there is risk around the value of this inventory that management seeks to limit. The FAA controls when Boeing can start taking planes out of inventory and customers will play a role in determining the pace at which they are delivered, with the FAA’s decision to end delegation of final certification authority adding uncertainty. But Boeing controls the pace at which jets go into inventory, resulting in today’s decision. No one knows the future production and delivery cadence but in our model for now, we assume Boeing restarts production at 30/month after Q1 and ramps gradually to 52 during 2021 and 57 during 2022. We assume ~400 deliveries in 2020 and ~800 in 2021. This would leave ~70 aircraft in inventory at YE21.
  • We see only some cash savings. We estimate that Boeing is burning nearly $2bn per month on the MAX but this will not drop to zero during the halt. For one, Boeing’s internal overhead and labor expense will remain in place. Second, we expect Boeing to support suppliers, which comprise ~65% of the 737 cost base, in order to preserve labor and production capabilities. For now, we assume ~50% of supply chain costs hang around, resulting in monthly cash burn that is still solidly > $1bn.

Suspension creates execution challenges. The short-term disruption from the halt will be a challenge for suppliers and we have concerns about the subsequent ramp for both Boeing and suppliers as well. Prior rate changes (i.e. from 47 to 52/mo last year) caused disruptions for suppliers and so we think that going from zero to 30-40/mo and then eventually to > 50/mo will be very challenging. A mitigating factor might be that all these aircraft will be MAXs vs a combination of NGs and MAXs previously; in addition, Boeing and suppliers should be staffed for higher rates, even if this is inefficient near term. However, if some suppliers do not follow Boeing all the way to zero, they will end up with more inventory that will take time to unwind. Note that key supplier SPR has been producing at 52/mo, vs Boeing’s 42/mo, and will need to spend a meaningful amount of time below Boeing’s production rate on the other side of the suspension/grounding to work through this balance. We expect some impact on all 737 suppliers.



38 Comments on “Analysts align in reaction to MAX production suspension

  1. Every senior manager holdover from McD needs to be retired asap. Work on NSA and NMA can’t begin until a new CEO is in place, and presumably a commercial president to approve the plans/timeline. When is the new leadership supposed to be in place?

  2. None of those analysts have a clue! Not a single clue.

    If RTS was any time in Q1 or Q2 of 2020, Boeing would either swallow the financial pill and live with the inventory build up or reduce the build rate by a manageable amount.

    The ripple effect of effectively yanking the handbrake up while travelling at 80mph to the wider supply chain is **massive**. It is hard to state how vast it is. You can expect suppliers to be facing the financial wall very shortly.

    How smoothly will Boeing restart production if a number of suppliers are gone? If their workers are gone? If their suppliers’ suppliers are gone?

    Bernstein think “Rate 57 in 2020 appears impractical” – WHAT?!? If this FAL shutdown drags beyond 6 weeks, then rate 30 at any time in 2020 appears impractical at this point.

    It is hard to emphasis the utter ignorance of the analysts in their blatherings on this. You’d be safer talking to a tree.

    • Yes, rate 57 in 2020 appears not only impractical at this stage and will likely shift to 2022, at the earliest. These “analysts” seem to be ignoring that Boeing says that once the MAX is cleared to return, it will prioritise clearing the backlog of stored aircraft, which means that a production resumption would commence only at a later date — i.e. 3-6+ months after the re-certification date.

    • The force is absent in this one.

      See it as crass arm twisting leveraged on Trump and the US administration.

      It turns things from
      “cortical approach to fixing FAA and Boeing’s
      certification (mis)practices”
      “emotional high pressure down fall of the US”.

      Lets see if this Adrenaline injection holds its promise for Boeing.
      Groundwork has been done already like
      “EASA is dragging its feet just for the Euros getting back at the US and Boeing.”
      “all hinges on lack of training in non US domains”
      and similarly inane stuff

      • Expect a massive increase in US military spending that should see Boeing through. President Trump just signed a historically massive arms appropriation Bill both the Democrats and Republicans wanted and voted for. He didn’t want to sign of on that huge amount for economic reasons thinking it bad for the economy (plus all that crumbling infrastructure). However with an impeachment (on party lines) from congress likely there was a danger that neo-liberal Hawk Republicans would combine with neo-liberal Democrat Hawks in the senate to unseat the president if he didn’t sign off. Impeachment isn’t about impeachment sometimes, its about pressure. Eisenhauer’s warning about the Military Industrial Complex comes to mind but there is more to it than that. Without getting to political Lots of money in the pipeline. Of course you have to ask what that military is going to be used for or against? Building weapons is expensive but the real economic hit happens when the fighting starts.

    • Absolutely correct but there is more strategy that BA is playing here. Hamiltons’s previous post, “Boeing Halts 737 Production”, the first comment…

      Dec 16, 2019
      “This puts more pressure on the FAA.”

      … hits the nail on the head. The last several months of comments from FAA chief; Steve Dickson, maintain that he will not commit to any timing at all which is just plain crazy. Even brand new airplane certification has schedules and ETAs. Validation & testing can be defined finitely and scheduled. The fact that there is no published schedule or even rough ETAs may mean that he has no clue as to what he’s doing… hiding behind the false virtue of ‘so-called perfection.’ I’m not buying it anymore. It’s unprofessional for him to keep saying “whenever”. Dickson will soon get many calls to “get off your ass”. His statement to “fly it myself” was about as arrogant as it gets. I’m just a tad more impressed with BA’s message on their website: 900 test flights, 1700 hours with the new MCAS system. What the hell is he gonna accomplish by himself with one flight!? Amazing!

      • “The last several months of comments from FAA chief; Steve Dickson, maintain that he will not commit to any timing at all which is just plain crazy. ”

        Really? I mean considering the fact that there isn’t even a consensus on what the MCAS System is supposed to do other than “enhance the pitch stability of the airplane – so that it feels and flies like other 737s.” Pure weasel words.

        Read it for yourself.

        So…there’s this 737 Max System (MCAS) of dubious purpose that’s installed on the plane and which has demonstrated that it will KILL. It’s agreed by everyone that this MCAS System situation needs fixing. But if ya’ don’t even know the purpose of MCAS, then how can you know it’s been fixed? Much less put a timeline on that fix?

        • Ok fair enough but can someone please clarify “pitch stability”. If a 737 were to be dropped in a pancake fashion (zero airspeed) at 40k feet, would the nacelles create more mechanical moment about the CG than the horizontal stabilizer? Would the plane mush forward nose-down or flip back nose-up. Have we heard any test results of taking the plane through a full stall without MCAS being turned on?

          • mikewaco,

            I haven’t, and I haven’t see anything published other than Boeing has logged lots of hours flight-testing the system. In other words, I haven’t heard anything of importance regarding testing and I don’t think anyone else has either.

            And as far as “pitch stability” – let Boeing define the term for they built the Killer system that supposedly “enhances” the pitch stability. And yet, through all their testing and talking and testifying before congress, I’ve never once heard Boeing – or anyone else – make the definitive case as to why the MCAS system is essential.

            This 737 Max situation reminds me of Gas Lighting – but on a grand scale.

          • Pitch stability means that the aircraft can be trimmed for a given speed, meaning it will fly along on its own at that speed and attitude without pitch input. A corollary is that after a perturbation in pitch, be that due to a gust or a transient pilot input, the aircraft will return to stable flight at the trimmed speed.

            I.E. if the pilot pulls or pushes on the pitch control and then releases the control the aircraft will return to stable flight at the trimmed speed.

            The MAX is stable in pitch at all attitudes up to stall.

        • I don’t think there is much argument about what MCAS is supposed to do. The Max has bigger engine nacelles installed farther forward. This causes a pitch up if AOA gets above a certain level. MCAS keeps the aircraft from getting into that situation by trimming nose down.

          Read Bjorn’s description of how it works. It’s not that complicated. It was poorly designed, but taking a year to make a fix and still not knowing schedule is ridiculous. Regulatory agencies are all in CYA mode, pulling in any vaguely related concern just to show they are doing something. The complexity is regulatory, which may be at least partly justified by Boeing’s behavior.

          Crashes are tragedies and these should not have happened, but this world wide outrage over 600 people is unwarranted when a million people just as good as these die and twenty million are injured in automobile accidents every year. Fix the problem, hold the outrage.

          • “I don’t think there is much argument about what MCAS is supposed to do. The Max has bigger engine nacelles installed farther forward. This causes a pitch up if AOA gets above a certain level. MCAS keeps the aircraft from getting into that situation by trimming nose down. ”

            So What? That doesn’t mean the MCAS System is essential. I mean why can’t the pilot push the yoke forward and use electric trim themselves? Basic flying.

      • Sorry Mike – but as someone who works on DAL A software – you don’t constrain safety to deadlines. If its not right, its not ready, end of.

        Besides – the FAA may only be halfway down the rabbit-hole. No one is sure quite how deep it is at this point.

        It would be utterly irresponsible to commit to a timescale at this point.

        • Utterly irresponsible!?
          Wait a minute, I get that it would be reckless to put dates on this deal if we were back in March but that’s not the case today. We’re almost 1000 flight tests into this. I guess a better question would be, how many flight tests or flight hours have occurred since the last tweak to the software/hardware (system). I also do a fair amount of app development work, and each tweak must be properly regression-tested and evaluated for the creation of new bugs… but there has to be a defined list of conditions or ‘rules’ in place where they can declare ‘ready’, and yes, tweaks can cause a reset. Not all tweaks are cause for a reset – such as correction of a misspelling on a screen, but anything that touches or affects logic IS cause for slippage. I hold that by now they should be able to publish a test completion schedule with caveats, “barring any new discoveries, or failed tests, we believe the AD could be lifted by ____ date.”

          • Where does this flight test number come from?

            Are Boeing counting their ferry flights to storage as test flights? Wouldn’t surprise me given the underhand way they’ve been operating.

            Given they have only committed the final code to FAA review a couple of weeks back, to accumulate 1000 test flights on said final proposed solution is a big stretch.

      • Do you know how many years Boeing delayed the 787?

        Boeing couldn’t even provide an software audit for the MAX. The need of an audit must be written in regulations, otherwise how could EASA ask for it. Turns out the Boeing clowns never provided an audit before!!!
        Good morning …

        Boeing self-certified 96% of its work. Turns out Boeing made mistakes, because, you know … clowns. So Dickson told Muilenburg on December 11 or 12 to provide the complete certification documents. Few days later Boeing stopped production LOL

        Boeing might need a long time to provide all documents because now they might need to change them. Example, 2+2=4 but in Boeing’s calculation it might be 2+2=5, you know why … clowns.

        The clowns will be trending on social media when the Ethiopean Crash Report annouce Boeing’s clown calculation 2+2=5.

  3. These comments are reminiscent of the nonsense spouted about Enron, not that I am suggesting corporate malfeasance. In simple terms the funds cannot put sell on Boeing given they have consistently said buy and Boeing is such a major stock that a sell damages the indices too much. Further if they encourage sell then their bank risks being blacklisted by Boeing Corporate. Reading the comments is an exercise in reading the Boeing press release with a couple of comments to make the brokers appear clever.

  4. If suppliers are still going to build components I see a bottleneck forming that will become a mess. Question is, do the suppliers have contracts in place that would result in Boeing paying its suppliers penalties for not accepting components, etc. On top of this, add airline compensation payments (not everyone is going to need Boeing widebody discounts on future orders), and then Boeing go out and declare a dividend which surprised me more than anything else from all the reporting. How does a Company get away with halting production of a cash cow for 9+ months and still pay a dividend. I guess the dividend was a way to keep the Financial community onboard so they don’t savage Boeing stock price.

    Either way, you have Airlines delaying introducing MAX aircraft again to April (5 months away), this is evident that it ain’t going to be available in Q1 and Q2 is now questionable.

  5. Well, in another topic host Scott Hamilton quoted a pilot that by May 2020 they will have a simulator for Max. I think this gives and indication on when things might start looking better if no bad surprises.

  6. Many of the effected suppliers are not financially solid, and may not survive a long production suspension. Will there be any risk to Airbus, as many suppliers supply both Boeing and Airbus?

    None of the analysts mention possible long term effects of the grounding and production suspension. I’m thinking of the value of an MAX aircraft, both the value of the 800 grounded aircraft, but also the price Boeing will be able to get for coming MAX orders and the impact on overall orders for the MAX program.

    Is there any risk the MAX wouldn’t return to service (ever)? Maybe Boeing could build Cseries aircraft (A220) on license from C Series Aircraft Limited Partnership (“CSALP”), and rename Boeing build aircraft 797 or something? Maybe the LEAP 1b engine could be used. That could be a way out of the mess if the MAX won’t return to service. It takes a too long time for Boeing design themselves a new clean-sheet narrowbody.

    • “”Maybe Boeing could build Cseries aircraft (A220) on license from C Series Aircraft Limited Partnership (“CSALP”), and rename Boeing build aircraft 797 or something?””

      Boeing could re-engine the 717.
      It would need to be a cheap plane and a Good-Bye to Embraer.

  7. Hope BOEING is not of those that Preach on that they are the Untouchables and Exceptional, thus “TOO BIG TO FAIL”, a scenario developing contradicting this mindset.

  8. If you believe those analyst are really impartial, wake up!

    They advised clients to keep, buy for years. They can’t go 180..

  9. Interesting that none of the analysts entertain the possibility of an economic slowdown, and the possible impact on airlines and aircraft manufacturers.

  10. I’m surprised nobody is talking about the effect on GE. Engines are mainly paid for on delivery, GE are out a lot of money and aren’t as strong, financially, as they used to be. I’m only assuming Safram are okay, they’ve not been in the (bad) news as much as GE.

    • GE is another supplier

      Safram is a bit unknown but they had a huge bust with the Silvercrest.

    • Martin,
      CFM is a joint venture between GE and Safran. It will not directly impact GE. Even less for their supply chain as the CFM leap engine is also used on airbus. No doubt there will be impact but it will be minor for GE.

      • The LEAP 1A and LEAP 1B use different components with the LEAP 1B having a significantly hotter and aggressively designed core which compensated for the lower BPR. There would be significant commonality but LEAP 1A are assembled in Europe and LEAP 1B in the USA. I Suspect hot components all come from GE.

  11. “Rate 57 in 2020 appears impractical at this stage and likely shifts to 2021. ”

    Actually it seemed impractical at an earlier stage but that did not stop the executive geniuses at Boeing from putting it forward. Therein lies the problem.

  12. Supplying the line for 57 a month will not be a problem. The back log of stored parts will take a long time to go through. They can also take some time to improve production methods and flow. It not often you can stop and make improvements to a line like this.

  13. Boeing has seemed to be a ‘day late and dollar short” in the entire fiasco, not appreciating the problem nor understanding certification.

    Shouldn’t be surprised at the extra scrutiny in the circumstances.

  14. Boeing will not get bankrupt … they can sell their defense and space division or sale their commercial A/C division (once cleaned) … buyers could be Lookheed, Comac or Airbus …a.s.o
    If not “cleaned” commercial division can be sold for 1 USD and get rid of all debts and other potenrial losses

    • Why would Airbus want to buy it? It would also not be allowed.

      What are the fruits in the commercial division that someone else would want to have? There is nothing, not even the brand.

      Buying for $1 and then US courts run wild like with Monsanto?

      It’s unbelievable that Congress, Obama, Trump let Muilenburg and Co run it down. So sad for the honest workers and families, many will suffer depression.

      Will the produced MAX fly domestic? Is that even possible?

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