Boeing’s 737 Max prepares for long haul to recovery

Ryanair chief executive Michael O'Leary is fond of superlatives, so there was no shortage of them when he placed a $7bn order for 75 of Boeing's 737 Max aircraft last week.

“This is not just a safe aircraft...It is the safest, most audited, most regulated aircraft that has ever been delivered in the history of civil aviation,” he declared, as he signed the biggest firm order for the ill-starred passenger jet since it was grounded after two fatal crashes 20 months ago.

The deal was not the only good news for Boeing, whose credibility is on the line after failures in the Max programme led to the deaths of 346 people.

Safety regulators in the US have begun to issue the first airworthiness certificates to individual aircraft, launching what is expected to be a steady return to service of more than 800 passenger jets that had been parked since authorities banned the Max from the skies in March 2019.

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Gol, the Brazilian airline, told the Financial Times that “a very important milestone” had been passed, as it became the first airline to resume commercial 737 Max flights on Wednesday.

The return of the Max not only begins to close a dire chapter in Boeing's history, it reignites competition in the hottest segment of the aviation market. Boeing's European rival Airbus has been virtually unchallenged in the market for single-aisle aircraft since the Max was grounded.

"That is important for the industry," said Aengus Kelly, chief executive of one of the world's biggest purchasers of aircraft, the leasing company, AerCap. "We have to have competition. We can't have a situation where one manufacturer has so much market share that the other one is irrelevant."

The aerospace supply chain, too, is hoping for a boost from the rehabilitation of the Max, an important cash generator for many companies.

Clouds on the horizon

But the return to service of the Max and Ryanair’s order is only the start of a long haul for Boeing and for the wider industry, which is struggling to pull through one of the worst aviation crises of modern times.

While big carriers such as American Airlines are also expected to start flying passengers on the Max this month, it will be some time before this translates into a flood of new orders from a global airline industry braced for net losses of $118bn this year and nearly $40bn in 2021.

Since the Max was grounded, orders for about 1,000 of the passenger jets have either been cancelled or deemed too risky to include in Boeing’s backlog of roughly 3,300 aircraft.

Even if passenger traffic begins to recover next year after vaccine breakthroughs, airlines will have to deal with the debt taken on during the crisis before they begin buying in bulk.

Moreover, there is little incentive for leasing companies, which accounted for roughly 40 per cent of all aircraft purchases before the crisis, to buy the Max direct from Boeing when airlines are desperate to raise cash by selling and then leasing back jets.

“We are paying less to airlines than we would have done for the aircraft we cancelled. It’s the airline that is taking the haircut,” a senior executive from a top 10 lessor told the Financial Times.

A faultless re-entry

In the meantime, Boeing’s priority is rebuilding passenger confidence through a faultless re-entry into service of the Max. The pace of return will be measured and Boeing employees will be on hand to prepare even those aircraft owned by airlines for commercial service.

"Boeing will want to be very much a part of that process because they can't afford to have any issues," said Phil Seymour, president of IBA, the aviation advisory. "Even something that is not tragic will get on to social media."

Boeing expects it will take roughly two years just to clear the 450 single-aisle aircraft that it could not deliver over the past 20 months. A further 387 sit in airline hangars and they, too, will have to go through extensive work.

Each one of those jets will have to be pulled out of storage, updated with new software to address the malfunction that caused the crashes, and checked for any deterioration caused by months of standing still.

Components in aircraft that were stored in coastal areas may have suffered from corrosion as a result of sea air, for example, while aircraft housed in dry climates such as deserts may have problems with sand or grit.

United Airlines, which has 15 Max aircraft in its fleet, estimates it takes more than 1,000 hours of work to prep a single jet for commercial operation.

Finally, every aircraft will have to be inspected by safety regulators as Boeing has lost the right to self-certification after revelations that it misled regulators on the Max. This right may eventually be reinstated, if regulators are confident about Boeing’s processes.

Playing catch-up with Airbus

The return of the Max will affect Airbus too, which has seen its share of the popular single-aisle segment nudge 60 per cent.

Even before the Max was grounded, Airbus was scooping up orders for its A320neo and A321 family of narrow-body aircraft at a faster pace than the 737 Max.

Now the shadow of a price war hangs over the industry as Boeing seeks to find homes for the orphan aircraft sitting in its hangars and to avert further cancellations.

Boeing and Airbus insist they will not be dragged into one. But industry executives talk of hearing about a deal at just $35m for a 737 Max, against a list price of $121.6m and a more normal average selling price of about $60m.

Industry executives say Boeing must try to close the chasm that has emerged with Airbus. It is not just about the success of the Max programme - the company’s reputation and future as a commercial aircraft maker are at stake.

“At the absolute minimum they have to hold their own and have to do whatever it takes to hold their own because Airbus has had no competition in the last couple of years,” said Mr Kelly.

“Airlines take a decision on a narrow-body plane every 20 years. That makes it very hard to regain market share. If you lose a customer, the next opportunity to flip that customer is 15 to 20 years away.”

Some analysts are pessimistic that Boeing will be able to close the gap. Customers are not only seeking more capacity in their single-aisle aircraft but they want narrow-body aircraft with the range of more costly wide-bodies to help bring down operating costs. Airbus’s A321 - a larger, longer-range derivative of the A320neo - fits the bill better than the Max, say analysts.

"Will Boeing ever catch up? No," said Ron Epstein, aerospace analyst at Bank of America. "While they were fixing the Max, their competitor was putting finishing touches on the 321XLR, a very capable long-range narrow-body aircraft. It is more capable than anything Boeing has."

Boeing’s response to the A321 is the larger Max 10 - due to enter service in 2022. But with a shorter range than the latest A321 variants it is regarded by many as less capable.

As for the core of Boeing’s short-haul offering, the 170-190 seater Max 8 jet is “a wonderful plane for what it does, but it is one plane”, said Mr Epstein.

The danger of doing nothing

Boeing has no illusions about the challenges but remains steadfastly loyal to its Max family. "We have the utmost faith in this product," said Boeing president and chief executive Dave Calhoun last week at the signing of the Ryanair order.

The US company is betting that even before any significant recovery in passenger traffic, airlines already operating older 737s will want to replace them with the greener Max 8.

"You can take any airline in the world and they have retired their older 737s earlier than they planned," said Boeing spokesman Gordon Johndroe. "These airlines will need aircraft to replace the retired jets and for eventual growth. They want the Max because it is cheaper to operate and helps airlines meet their sustainability targets."

But there are those who believe there will be no change in the competitive landscape without a new single-aisle aircraft to take on the A321.

"We are tackling a tectonic shift in market share if Boeing does nothing," said Richard Aboulafia, vice-president at Teal Group, the aerospace consultancy. "The A321 is not the optimal version. Its main virtue is that it is alone."

Yet with more than $60bn in debt and any sustainable cash boost from the Max likely to be two years away, Boeing executives are wary of taking another gamble that could cost the company dear.

Engine technology is not at a stage to allow a new aircraft to claim a step-change in fuel savings. And there are concerns that any talk of a new aircraft could scupper the success of the Max, now intricately tied to that of Boeing. “If Boeing were to announce a new single aisle plane in the next two or three years, no one would buy the Max,” said one Boeing customer.

Boeing is expected to try to delay a new aircraft for as long as possible, to allow technology and time to erase the memories of the Max crisis. In the meantime, it will be sounding out customers for what their needs might be when the market eventually recovers from the pandemic.

“If anyone thinks they know what the market will be like and what airline customers will want in a couple years from now, they don’t know what they are talking about,” said a Boeing executive. “Research continues, but we really have to get through the pandemic before we make any definitive statements.” – Copyright The Financial Times Limited 2020.