Boeing 737 MAX deliveries in limbo after deadly crash

Reuters | Published: March 14, 2019 15:04:36 | Updated: March 14, 2019 19:05:01

Photo via Boeing

Deliveries of Boeing’s best-selling 737 MAX jets were effectively frozen on Wednesday, though production continued, after the United States joined a global grounding of the narrowbody model over safety concerns, industry sources said.

The 737 MAX is banned from flying in most countries across the world following an Ethiopian Airlines crash on Sunday that killed all 157 people on board. It was the second deadly incident for the relatively new Boeing model in five months.

Airlines, aircraft industry experts and financiers said that although the ban would theoretically not prevent some domestic deliveries, most airlines would avoid taking a jet banned from entering service on the wake of two crashes in five months.

“Who is going to take delivery of a plane they can’t use,” said an aviation financier, asking not to be named.

Boeing produces 52 aircraft per month and its newest version, the MAX, represents the lion’s share of production, although Boeing declined to break out exact numbers.

Boeing is expected to continue with production of the 737 at its factory outside Seattle, and has been planning to speed up production again in June.

Manufacturers avoid halting and then speeding up production as this disrupts supply chains and can cause industrial snags. But having to hold planes in storage consumes extra cash in increased inventory.

Each month of the grounding could cost Boeing around $1.8 billion to $2.5 billion in delayed revenue, according to analyst estimates, although that could be recouped once the ban is lifted and the planes are delivered.

Boeing in January provided guidance it would report $109.5 billion to $111.5 billion of revenue in 2019.

Asked how the global grounding of the 737 MAX would impact deliveries, a Boeing spokesman said: “We continue to assess.”

Boeing’s main U.S. customers — Southwest Airlines Co, American Airlines Group Inc and United Airlines — declined comment. So far they have voiced their confidence in the safety of the MAX.

“Although this MAX crash is clearly ‘bad news’ for Boeing, we think the company will ultimately battle through,” Vertical Research Partners analyst Robert Stallard said in a client note.

Boeing’s 787 Dreamliner was grounded for 123 days in 2013 after its lithium-ion battery packs caught fire. The jet went on to become a popular twin-aisle with a strong safety record.

Aircraft contracts do not typically contain a clause that automatically allows airlines to claim compensation for a regulatory action like a grounding.

However, planemakers do sometimes pay out compensation to cover the cost of financing when an airline is left without a promised airplane, said a senior industry source.

Even then, they generally balk at paying for other indirect costs borne by the airline.

UK-based aviation consultancy IBA estimated the financing cost of a 737 MAX at $360,000 a month or $12,000 a day.

Norwegian Air said on Wednesday it would seek compensation from plane maker Boeing for costs and lost revenue due to the 737 MAX 8 grounding.

Stallard said it was very difficult to estimate the amount of compensation Boeing would provide customers.

He added it would be impractical for airlines to try to switch their orders to the rival Airbus SE A320 narrowbody because there were no delivery slots available for a few years.

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