Boeing warns of 737 production halt as grounding affects Q2 results

Boeing has warned it could decide to stop 737 Max production should the ongoing regulatory review extend beyond the company's current expectation.

The Chicago-based aircraft manufacturer is working under the assumption that regulators will begin lifting the grounding of the beleaguered aircraft in the fourth quarter of 2019.

"Should our estimate of the anticipated return to service change, we might need to consider possible further rate reductions and other options, including a temporary shutdown of the Max production," Boeing chief executive Dennis Muilenburg said on July 24 during the company's second quarter earnings announcment.

Boeing also announced a delay to the 777X programme and revealed that some global regulators might require pilots to complete simulator training prior to flying the 737 Max.

The grounding has badly affected Boeing's second quarter results, with the company reporting a $5.6 billion charge against revenue. That figure reflects the expected impact, over several years, of concessions Boeing will make to customers due to 737 Max delivery delays. The company has also added $2.7 billion to the 737 Max's programme cost, with that amount to be spread among deliveries of some 3,100 aircraft, noted Muilenburg.

Boeing's second quarter revenue dropped 35% in one year to $15.8 billion, resulting in a net loss of $2.9 billion. The company earned a $2.2 billion net profit in the second quarter of 2018. The commercial aircraft unit posted an operating loss of $4.9 billion, reversing a $1.8 billion operating profit for the same period last year. Commercial aircraft revenue slipped 66% year-on-year to $4.7 billion.

Boeing's other units however, performed well. The Global Services division's revenue surged 11% in one year to $4.5 billion for the quarter, with operating profit jumping 14% to $687 million. Boeing's defence, space and security revenue jumped 8% year-on-year to $6.6 billion, with operating profit up 159% to $975 million.

During the quarter Boeing announced new service deals with the International Airlines Group (IAG), Delta Air Lines and JetBlue Airways. Notably, the IAG deal includes work in support of A320-family aircraft operated by British Airways – Boeing's first such deal for an aircraft outside its portfolio.

"We aim to continue growing faster than the average services growth rate of 3.5%," said Muilenburg.

Commentary on the company's earnings returned to the 737 Max however, with the manufacturer noting that it had hoped regulators would have already lifted the grounding, which took effect in March following the second accident. But in June the Federal Aviation Administration announced it discovered a data processing issue involving the 737 Max's flight computer, creating further delays. Boeing now anticipates it will complete a certification flight and deliver a final software package to regulators in the "September timeframe", according to Muilenburg.

Regulators will then likely need several weeks to review the data, resulting in a "return to service early in the fourth quarter", he suggested. "If that timeline changes significantly, we will have to evaluate these other scenarios."

Boeing reduced 737 production following the grounding from 52 to 42 aircraft monthly, and it hopes to maintain the 42-monthly rate until the grounding lifts and to raise production to 57 737s monthly in 2020. Some analysts doubt the aircraft will return to the skies until the first half of 2020.

Muilenburg suggests some regulatory agencies may mandate pilots complete 737 Max simulator training, a requirement some observers have suggested would create further delays owing to the limited number of Max simulators. "There will likely be some selective use of simulator training," said Muilenburg. "Some airlines will use simulator training as part of their recurring training. Some may want training up front before they fully return the fleet to service." Boeing has also developed a "comprehensive set of computer based training modules", added Muilenburg.

777X DELAYS

The second quarter's difficulties extended to the 777X, with Boeing announcing that aircraft's first flight has been delayed into 2020 due to a problem with a stator in the GE9X turbofan's high-pressure compressor.

"The GE9X engine remains the pacing item as we work toward first flight," said Muilenburg. "GE is working through some challenges with the engine that are putting risk on the overall test schedule."

Boeing still maintains its target of deliveries beginning in 2020, but analysts have doubts. "This seems highly unlikely," says a July 24 report from JPMorgan. "We are not surprised to see the 777X slip."

In response to the 777X delay, Muilenburg said Boeing intends in 2020 to produce more current-generation 777 Freighters.

NMA TAKES BACKSEAT

Boeing's executives also say the company's conceptual New Mid-market Airplane (NMA) remains under study but secondary to the 737 Max effort.

"We continue to have a dedicated team that's working on NMA," said Muilenburg. "In terms of real priorities, its clear that our top priority is getting the 737 Max returned to service safely."

The decision to launch the NMA will rest partly on Boeing's ability to squeeze more cost out of production, said Muilenburg. Toward that end, Boeing is investing in technologies like 'model-based engineering' – systems that help better integrate development teams and the entire development process.

"We are investing significantly in improving development programme performance," continued Muilenburg. "Our confidence in…those new tools and the ability to implement them at scale on a development programme will be part of the decision process."

Boeing has said the NMA would have capacity for some 270 passengers and a 4,000-5,000nm (7,400-9,300km) range.

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