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December 17, 2019 | Boeing Will Suspend 737 Max Production: Thousands of Jobs at Risk

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Boeing has over-promised and under-delivered on getting the 737 Max back in service. In Jan, it will suspend production.

The Boeing 737 Max was grounded by Trump on March 13 following fatal crashes in Indonesia and Ethiopia that claimed a combined 346 lives.

Boeing expected flights to resume in a couple months, then by October, then December.

Boeing is the largest U.S. manufacturing exporter and one of the nation’s top private employers. The MAX is Boeing’s best-selling plane.

On December 16, Boeing announced 737 Max Production Will Be Suspended in January.

“It would be hard to have any other single company stop the production of a single product and have it hit the economy as hard as this would,” said Luke Tilley, chief economist at investment-management firm Wilmington Trust. He estimated that stopping MAX production for one quarter would shave 0.3 of a percentage point from quarterly annualized GDP growth.

“It’s not catastrophic, but we don’t need anything more corrosive in manufacturing right now,” said Diane Swonk, chief economist at Grant Thornton LLP. “It erodes our ability to grow because it’s such a big-ticket item.”

Boeing had 4,545 MAX orders in backlog as of Nov. 30 and had been building the aircraft at a rate of 42 a month since April, according to the company. Most MAX suppliers had already cut output in line with that rate, which allowed some—such as engine maker CFM International, a joint venture between General Electric Co. and Safran SA —to catch up from production bottlenecks that hobbled deliveries last year.

GE has said it expects the grounding to drain as much as $1.4 billion from its cash flow this year as its factories produce fewer engines for the aircraft and can’t get paid for them in full.

Supplier Impact

Boeing said it would shift workers to other planes and that layoffs would not be necessary.

However, supplies complain that stopping machinery would be harder than lowering production, and that restarting assembly lines would be costly.

Cancelled Flights

Carriers around the world have pared routes, paused expansion and canceled thousands of flights they had planned to operate with the grounded aircraft.

Southwest Airlines Co. and United Airlines Holdings Inc. aren’t planning to fly the MAX commercially until March. American Airlines Group Inc. has removed the MAX from its schedule until early April.

Southwest last week said it reached an agreement with Boeing to address $830 million in lost operating income resulting from the grounding this year. The airline didn’t disclose the terms of that deal but said it would distribute $125 million to employees.

Boeing 737 Max Order Backlog and Deliveries

Lead Times

The lead times on orders at Boeing and Airbus stretch out for for year.s It’s not as if an airline can cancel a Max and pick up the phone and get an Airbus a month later.

Big Compensation Losses

Gary Kelly, Southwest’s chief executive, said in an interview last week that the airline and Boeing will have to reach a further agreement on compensation for losses from the grounding next year. “It will be a big number,” he said.

Judging from the order backlogs, this suspension seems to make little economic sense unless the 737 is going to be suspended indefinitely or permanently grounded.

Order Cancellations?

In November, the WSJ reported that Boeing announced 200 cancellations.

OK, but 200 cancellations out of a backlog of 4,500 planes with only 47 a month being produced doesn’t seem like much of a reason halt production.

The only thing I can come up with is there’s absolutely no place to park the finished planes.

A reader proposes a criminal investigation, but I do not think that’s it.

I thought of another angle this morning. Boeing wants to pressure Trump to pressure the FAA. Production will be back on as soon as the FAA says OK.

Mike “Mish” Shedlock

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December 17th, 2019

Posted In: Mish Talk

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