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Boeing Forced to Halt 737 MAX Production

The latest blow to the next-generation aircraft could prove extremely costly

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Dec 17, 2019
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Boeing Corp. (

BA, Financial) is facing an ever deepening crisis. The embattled aerospace giant spent months promising a swift return to service of the grounded 737 MAX passenger aircraft, only for its timeline to slip ever further into the future. Now, with the path back to service increasingly unclear, Boeing has been forced to suspend production.

Shuttering production

After months of promises about the 737 MAX returning to service, Boeing appears to have its back against the wall. On Dec. 16, the Wall Street Journal reported that Boeing may be forced to suspend production of the troubled aircraft:

“Boeing management increasingly sees pausing production as the most viable among difficult options as the plane maker’s board began a meeting Sunday in Chicago, these people said. Support for halting production comes days after U.S. regulators warned the aerospace giant it had been setting unrealistic expectations for when the jet would be allowed to fly again, these people said.”

That is a far cry from the repeated claims by Boeing executives that the 737 MAX’s recertification process would be concluded in short order. After the market closed on Dec. 16, Boeing announced that it would indeed halt production.

Unable to keep pretending that “business as usual” is a viable strategy, Boeing is being forced to deal with the challenging reality. As the Wall Street Journal observed, this could prove a financial disaster:

“Cutting production further, following an earlier reduction in April, would inflate Boeing’s costs and trigger charges against its financial results as fixed expenses would be spread among fewer planes. It could also spur job cuts and furloughs across the global aerospace industry, as well as further disruption to airlines hit by the grounding of a fleet of around 800 jets that is likely to stretch to nearly a year.”

The high price of cheap products

The 737 MAX was supposed to be a next-generation wonder for Boeing. The company worked to keep design and production costs low. Unfortunately, these efforts ended up coming at the cost of quality. Instead of investing in high-quality engineering, CEO Dennis Muilenburg oversaw a shoestring development process that relied on software fixes for physical deficiencies.

Evidently Muilenburg and his compatriots never heard the ancient Japanese proverb, “There is nothing more expensive than something free.” As Jin SEO, a prolific trader and active member of the Twitter investing community, observed on Dec. 11, the lesson of the 737 MAX will prove very expensive for Boeing:

“It's not going to be cheap and the whole point of the MAX was ‘it's cheap’. At some point, airlines are going to have to write down (off) these planes.”

Boeing has already lost one of its key value propositions for the development of the 737 MAX. Without the cost element, it becomes nothing but a dubious commercial aircraft. That is bad news for the company’s forward-looking profitability. It has already taken impairment costs of more than $5 billion. That will likely be just the tip of the iceberg.

Fatal loss of confidence

Even if the 737 MAX is eventually cleared to fly again, Boeing’s problems will not be over. Another, arguably bigger, problem is the lack of confidence in the platform and its manufacturer. In July, Peter Atwater, an expert on confidence-driven decision making, offered this assessment of the 737 MAX’s plight:

“The aerospace industry is uniquely vulnerable when it comes to confidence. Confidence requires perceptions of certainty and control, but aeroplane passengers are inherently powerless: they can’t and don’t fly the plane. The result is that passengers demand extreme certainty on flight safety. The odds of a crash must be so insignificant as to be easily dismissed. The challenge for Boeing is that back-to-back crashes and repeated problem-driven delays will make it all but impossible for passengers to feel at ease any time soon. Relabelling the planes as something other than Max — which some people have advocated — won’t undo the psychological damage.”

Airline passengers expect high safety standards. Indeed, the safety standards for air travel are much greater than those of everyday methods of transportation such as cars. In order to get people to feel comfortable shooting through the air, aircraft need to be so safe as to instill immense confidence. A rubber-stamp approval from federal regulators after the same process approved a faulty aircraft is not going to cut it for many travelers.

Verdict

For a long time, Boeing’s stock managed to weather all of the storms that had been battering at it from all sides. Hope for a government and regulatory reprieve for the 737 MAX continued to buoy the stock, even as Boeing’s timelines stretched ever further into the future. Now, at last, the market is being forced to contend with the reality that the 737 MAX has serious issues for which there are no clean or simple fixes.

The stock will not fall out of the sky overnight, but the illusion that everything will be fine has been shattered.

Disclosure: Author is short Boeing.

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