Boeing to indefinitely suspend 737 Max production in January

Bloomberg News and The Seattle Times

RENTON — The Boeing Co. will indefinitely halt production of the grounded 737 Max in January, a move that will deepen the crisis engulfing the planemaker, complicate its eventual recovery and ripple through the U.S. economy.

Employees at the Renton factory where the Max is built will continue 737-related work or be temporarily reassigned to other programs, the company said in a news release Monday.

The production pause deepens one of the worst crises in Boeing’s 103-year history as the company waits for regulators to clear its best-selling plane to resume commercial flights after two crashes that have been linked to flight-control software. The factory shutdown will also jolt a supplier base that stretches from Renton and Everett to Kansas, adding a headwind for U.S. industry ahead of the 2020 elections.

Since the Chicago-based company isn’t allowed to deliver 737 Max aircraft while the grounding remains in place, financial pressure on Boeing is rising. Some 380 newly built aircraft languish in storage — most of them in Moses Lake, Seattle and Everett — due to the global flying ban that began nine months ago, after the second crash. The timing of regulatory approval for the jet’s return is uncertain, and Boeing’s relationship with the U.S. Federal Aviation Administration is in tatters.

“We believe this decision is least disruptive to maintaining long-term production system and supply chain health,” the company said in the news release. The decision to suspend assembly was based on such considerations as “the extension of certification into 2020, the uncertainty about the timing and conditions of return to service and global training approvals, and the importance of ensuring that we can prioritize the delivery of stored aircraft.”

A Boeing insider briefed on the decision told The Seattle Times that the Renton factory’s manufacturing operation is Boeing’s “crown jewel.”

“It’s an amazing facility. You try to keep the team together as best you can,” he said. “They all still have jobs.”

The insider said Boeing didn’t announce any timeline for the production stoppage because it has no control over the jet’s return to service.

While Boeing isn’t planning layoffs at the Renton plant, which employs about 12,000, the production suspension heightens the risk of job cuts at suppliers.

“If it shuts production down, it risks losing employees and having greater difficulty ramping back up in the future, and the same goes for the supply base,” Cai von Rumohr, an analyst with Cowen, said in a note to clients before the company’s announcement. “If it only trims its rate, it risks further extension in the already lengthy time required to liquidate its sizable inventory” of stored Max planes.

Before the announcement, Boeing stock closed down 4.3% Monday at $327.00 on news that the company might halt 737 production. After the announcement, Spirit AeroSystems, a Boeing supplier that makes about 70% of the Max’s fuselages, tumbled 5.4%.

The production decision became more urgent after the FAA signaled it wouldn’t certify the revamped Max this year. Boeing executives had repeatedly warned they would have to address plans for output if the grounding extended into 2020.

The Max was grounded after an Ethiopian Airlines flight plunged into a field on March 10, the second tragedy within five months. The disasters combined killed 346 people and prompted the longest flying ban for a U.S. airliner in the jet age.

Boeing slashed 737 production by 19% in the weeks following the Ethiopia crash. But inventory costs have ballooned to record levels as the company plotted a quick rebound once the narrow-body jet was cleared to resume flights. Boeing left its supply chain mostly running at the original pace, while the plant in Renton lowered monthly output to 42 jets.

Boeing is burning through $4.4 billion in cash for each quarter that the Max remains grounded, according to Jefferies analyst Sheila Kahyaoglu. Halting production would save about half that amount, she said in a report.

Boeing’s board gathered Sunday after a bruising week for the aerospace giant. In a sign of growing rancor between the company and its regulator, FAA Administrator Steve Dickson chastised Boeing Chief Executive Officer Dennis Muilenburg in a Dec. 12 meeting for pursuing an unrealistic schedule for the Max’s return to service.

The FAA said it was worried that Boeing was publicly pressuring regulators to take action, even as the company failed to provide data as requested. In a message to Congress ahead of the session, the regulator exhorted the manufacturer to focus on the “quality and timeliness of data submittals for FAA review.”

The rare public admonishment came a day after Dickson was grilled for hours by the House Transportation and Infrastructure Committee over the FAA’s decision to allow the 737 Max to continue flying after an initial fatal Max crash off the coast of Indonesia on Oct. 29, 2018.

The FAA’s insistence that the Max wouldn’t be cleared to fly until next year, and Dickson’s refusal to estimate a timeline, signaled that the U.S. agency is increasingly unlikely to clear the Max before regulators in other regions.

The uncertainty raises the possibility that U.S. carriers will be hamstrung for a second summer while awaiting Boeing deliveries and training pilots. American Airlines has delayed a return of the planes to its schedule until early April. Southwest Airlines, the largest operator of the single-aisle plane, said it was considering a similar move.

With the halt to production, the largest U.S. industrial company by market value risks a potential unraveling of manufacturing expertise across a broad swath of North America.

Boeing so far has shielded the 600 mostly U.S. companies building components for the jet from rate cuts, mindful that its own recovery would be greatly complicated if layoffs prompted engineers and mechanics at suppliers to move on to other jobs.

The 400,000 parts that go into each Max arrive in a tightly choreographed sequence, timed, in some cases, down to the hour. But suppliers regularly navigate stoppages telegraphed in advance, such as for strikes and Boeing’s traditional year-end factory closing.

With production suspended, Boeing will have to carefully nurse suppliers back to the current pace before contemplating an even faster production tempo it had once planned for 2020.

Further complicating matters, the FAA is insisting on inspecting planes coming out of storage before they are delivered. That raises the prospect of bottlenecks as the agency takes over certification tasks it handed over to Boeing more than a decade ago.

Boeing news release:

CHICAGO, Dec. 16, 2019 /PRNewswire/ — Safely returning the 737 MAX to service is our top priority. We know that the process of approving the 737 MAX’s return to service, and of determining appropriate training requirements, must be extraordinarily thorough and robust, to ensure that our regulators, customers, and the flying public have confidence in the 737 MAX updates. As we have previously said, the FAA and global regulatory authorities determine the timeline for certification and return to service. We remain fully committed to supporting this process. It is our duty to ensure that every requirement is fulfilled, and every question from our regulators answered.

Throughout the grounding of the 737 MAX, Boeing has continued to build new airplanes and there are now approximately 400 airplanes in storage. We have previously stated that we would continually evaluate our production plans should the MAX grounding continue longer than we expected. As a result of this ongoing evaluation, we have decided to prioritize the delivery of stored aircraft and temporarily suspend production on the 737 program beginning next month.

We believe this decision is least disruptive to maintaining long-term production system and supply chain health. This decision is driven by a number of factors, including the extension of certification into 2020, the uncertainty about the timing and conditions of return to service and global training approvals, and the importance of ensuring that we can prioritize the delivery of stored aircraft. We will continue to assess our progress towards return to service milestones and make determinations about resuming production and deliveries accordingly.

During this time, it is our plan that affected employees will continue 737-related work, or be temporarily assigned to other teams in Puget Sound. As we have throughout the 737 MAX grounding, we will keep our customers, employees, and supply chain top of mind as we continue to assess appropriate actions. This will include efforts to sustain the gains in production system and supply chain quality and health made over the last many months.

We will provide financial information regarding the production suspension in connection with our 4Q19 earnings release in late January.