SEATTLE — Following the grounding of the best-selling 737 Max that has severely strained Boeing’s resources for 13 months, the coronavirus pandemic has now grounded most of the rest of the global commercial jet fleet. As Boeing’s leadership reckons with the new reality that right now few airlines can take the planes they have on order, it will soon be forced to slash planned production rates — a prospect that could bring steep job losses.
If a recovery to former levels of air travel stretches into years, as some experts project, the collapse in the company’s business could rival the three years after the 9/11 terrorist attacks, when management cut production almost in half and 27,000 Boeing jobs in this state melted away.
A former senior Boeing leader, who asked for anonymity to speak freely about the situation, said that to conserve cash and stay in business, production cuts could again go that deep.
“It’s easy to think they’ll go back to not more than half of what they were at peak,” he said.
Desperate airlines have already requested a cascade of jet delivery deferrals. Finished widebody jets are sitting in Everett with delivery dates uncertain and a few assigned to customers that may never pick them up. And with the Max delayed so much that some customers can easily walk away from that commitment, 150 orders for that airplane were canceled last month.
Adam Pilarski, longtime aviation analyst with consulting firm Avitas, said that with the downturn, he foresees no growth in the world airline fleet for the next three years.
“There’s no way on earth you can justify the production levels we had. You don’t need as many planes. You don’t need as many people,” he said in an interview. “By 2023, we’ll get to the level of 2019.”
Rob Morris, London-based global head of consultancy for aviation data analysis firm Cirium, said in an interview that at the start of this year, Airbus and Boeing together were projected to deliver about 3,900 jets over the next two years. Now that total could be cut to about 1,800.
“They are going to halve their production, or more,” Morris said.
Boeing’s rival, Airbus, last week cut its jet production rate by a third, effective immediately. In a press conference, CEO Guillaume Faury said “this crisis will probably be a long one.”
He said Airbus for now will build only “what customers are willing and capable of taking,” and production rates will be reviewed “probably on a monthly basis.”
“What will matter is … the shape and speed of the recovery,” Faury said.
The former Boeing senior leader said that in this crisis the company’s top leaders need “to be visible symbols, demonstrating that they are involved and trying to make things right.”
Yet so far, neither Boeing CEO Dave Calhoun nor new Commercial Airplanes boss Stan Deal have lain out Boeing’s strategy for survival, either internally or publicly.
Boeing’s production has been at zero for almost three weeks, with 30,000 of its roughly 70,000 Washington workers off the job, and this week it is resuming only some low-rate defense aircraft production.
That suspension has allowed its leadership to ponder the next steps as it negotiates the terms of a federal bailout both for Boeing and its enormous supply chain of aerospace manufacturers.
But when Boeing releases its first-quarter financial results on April 29, if not before, Wall Street will demand to know what the plan is.
Shrinking airlines
There are 11,009 Boeing passengers jets in service around the world, and as of Tuesday, 6,614 of those are parked and stored, according to Cirium’s database. Adding in the 422 built but undelivered 737 Maxes not included in that tally — those produced since the Max was grounded — means 62% of all Boeing passenger jets in the world are grounded.
That’s because passenger levels have fallen to levels that require airlines to fly nearly empty planes. Earlier this month, captain John Ladner, vice president of flight operations at Alaska Airlines, noted in an internal memo that passengers loads were less than 10% of normal, and cited data for one day when the airline flew an average of 15 passengers on all its flights.
The International Air Transport Association (IATA) on Tuesday downgraded its projection of global air traffic this year to 48% of the level in 2019. It projects airline revenue worldwide will decline by $314 billion from last year.
With that, airlines are struggling to stay in business and simply don’t need new airplanes.
In March, Boeing delivered just 12 passenger planes to airlines. Ten of those are now parked and stored, according to flight data from Flightradar24. Another, a United Airlines 777-300ER, has been pressed into service carrying cargo. Only one, a Japan Airlines 787, is in scheduled passenger service.
Ken Herbert, an industry analyst with investment bank Canaccord Genuity, said “a complete reset to a lower level of production seems inevitable.”
Even on the other side of a recovery in air travel, the aviation world will have shrunk.
Mike Boyd, founder of the Boyd Group airline consultancy, said that to avoid running out of cash, “airlines will have to restructure to the bare bones.”
In an online seminar last week, Peter Harbison, chairman emeritus of Australia-based consultancy CAPA, was more pessimistic than most. “We’re not going to see an industry the same as last year for perhaps five years,” he said. A slow recovery he added, means “we’re inevitably going to have fewer airlines.”
For example, Norwegian Air — an airline with unfilled orders for 92 Boeing Maxes as well as five Dreamliners — is desperate for immediate government support to stay solvent. If it survives at all, the Norwegian taxpayer can have little interest in preserving the carrier’s ambitious transatlantic service, for which it flies the Dreamliner between airports like London’s Gatwick and Miami.
Norwegian currently has two undelivered Dreamliners sitting on the flight line in Everett and a third half-built on the idled assembly line.
Yet despite such slackened demand, the 787 Dreamliner, a relatively small widebody jet, is actually the Boeing plane with the best prospects to recover its market. Other jets face tougher odds.
The Boeing lineup
Though the 737 Max, grounded after two fatal crashes, is set to return to the skies if as anticipated the Federal Aviation Administration (FAA) grants approval midsummer, Boeing’s hoped-for ramp-up of production — to building 42 of the planes per month by year-end and back up to 57 per month next year — now looks impossible.
And moving the 422 planes already built but never delivered out of storage to airline service will now be more daunting.
Airbus has cut back production of the rival A320 from 60 to 40 jets per month. Analysts believe both manufacturers will eventually scale back to producing around 35 of these smaller jets per month or fewer.
Morris said about 20% of the Max backlog of orders is assigned to Chinese airlines, so the successful return of the Max to service will depend heavily on both China’s recovery from the coronavirus hit and an easing of U.S./China trade tension.
The outlook for the giant Everett-built 777X, which took its maiden flight in January and is now in flight test, looks bleaker.
As countries have closed their borders, the greatest damage to the air travel business is in the international long-haul sector for which the 777X is designed.
With fewer than 10 Airbus A380s left to be delivered, the 777X will soon be the largest new airplane in the sky. Yet with passenger demand so low, airlines are looking to switch to smaller planes.
“The 777X is just too big for what the airlines are needing,” said Bertrand Grabowski, a Paris-based financial consultant to airline investors.
In 2013, Boeing presented a set of blue-ribbon launch customers for the 777X, huge international airlines including Cathay Pacific, Emirates, Lufthansa and Singapore Airlines. But even those carriers are in trouble.
Though Hong Kong-based Cathay Pacific bought the more fuel-efficient 777X to replace its current model, the smaller 777-300ER, efficiency is no longer a vital factor with the price of fuel depressed.
Airlines can now pick up a 10-year-old 777-300ER for no more than $50 million, Grabowski said, whereas the book value of a new 777X after discounts is over $200 million. At a moment when they need to preserve cash and cannot fill planes, many will choose the cheaper, smaller option.
Last month, Cathay signed extended leases of 10 years or more on a dozen 777-300ERs with BOC Aviation. And according to a senior executive with an aircraft lessor — who asked not to be identified to preserve business relations with Boeing — Cathay is in talks with a different lessor to extend the leases on another 10 777-300ERs for another decade.
“Unofficially, Cathay is saying it won’t take the 777Xs,” said the senior lessor executive.
What can Boeing do?
Boeing’s options are limited. Some in the aviation world are whispering previously unimaginable possibilities.
Could the 777X be canceled?
Boeing invested $1 billion to build a fabrication plant for the 777X wing in Everett, and tens of millions more to transform the 777 assembly process for the new model. With the plane now in flight test, walking away from that seems very unlikely.
Slowing planned production to perhaps one per month and pushing deliveries way out until a recovery happens is a reasonable expectation.
Another casualty of the new reality may be Boeing’s proposed acquisition of Embraer’s commercial jet business in Brazil.
The former senior Boeing executive said the company should conserve the $4 billion needed for that transaction.
Scott Hamilton, Bainbridge Island-based aviation analyst with Leeham.net, agreed, noting that if Boeing takes U.S. government support, it wouldn’t look good to invest billions in Brazil.
“I think that deal is dead for the next two years,” said Hamilton.
Is the situation dire enough that Boeing might even go bankrupt?
“I’m not sure America Inc. would accept Boeing, one of its main defense contractors, going into Chapter 11,” said Grabowski.
This raises the issue of a government bailout, which Boeing’s leaders and lobbyists are working to achieve.
Whether Boeing is deserving of a bailout is a hot topic on social media forums, where anger still blazes at the company leadership over its handling of the 737 Max crashes. Yet Boeing’s leaders won’t be the ones who suffer most without such support.
The potential job losses — not just at Boeing but at the hundreds of U.S. aerospace suppliers, large and small, that depend upon its business in this state and all over the country — would be catastrophic.
Besides, the government will bestow loans or grants on companies not because they are without flaws but because it’s in the nation’s economic interest. It’s hard to argue that the nation’s largest exporter, a foremost strategic industry, and a company singlehandedly responsible for about 1% of the US GDP, wouldn’t qualify.
It’s increasingly clear that Boeing will need it, according to Dhierin Bechai, founder of AeroAnalysis and a financial analyst for aerospace.
He points out that though Boeing has $15 billion cash and a $9.6 billion revolving credit facility it can use, that will only sustain the company for a matter of months if the current cash burn continues.
“If this is something that will last into late 2020, Boeing doesn’t seem to have what it takes to cope,” Bechai wrote on Seeking Alpha. “There doesn’t seem to be a way to go without a role from the government.”
Rather than debate whether Boeing deserves government aid, a more relevant question is what conditions might be attached that would mitigate job losses, such as the job support provisions in the aid granted to U.S. airlines.
Boeing CEO Calhoun has said publicly he’s ready to refuse government money if it comes with strings attached.
And comments by President Donald Trump on Friday signaled not only that Boeing — “probably the greatest company in the world,” he said — will be granted government aid, but that the president doesn’t see firm employment protections as a likely part of the package.
After noting that Boeing is going to need help, Trump asked whether that meant the company “should keep the people they actually don’t need?”
“That business is a very cyclical business,” he said. “So that determination has not been made.”
Yet the risks from the spiraling crisis are not only financial. The former senior Boeing leader said that if the company lets go too many employees, and with them the skills and expertise they’ve developed, that too could undermine its future.
“You’ve got to keep a team together,” he said. “If you don’t, you may never be able to do another viable airplane.”
Cirium’s Morris said slashing production rates too much could permanently damage the supply chain if suppliers are forced to go out of business or workers to seek jobs elsewhere.
“There’s only so far you can go before you break everything,” he said.
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