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  HOME | Business & Economy (Click here for more)

Aerospace Giant Boeing Tries to Limit Fallout

CHICAGO – The global grounding of Boeing’s most popular model is likely to generate a host of business challenges for the aerospace giant, which is already wrestling with the reputational fallout from the crash of one of its planes and a swift reaction outside the United States.

Boeing’s race with rival Airbus SE to meet surging international demand for air travel helped make Boeing the top US exporter by sales and the most valuable component of the Dow Jones Industrial Index.

Boeing has more than 100,000 employees around the world and a supply chain that spans the planet.

That corporate engine runs on cash generated by orders for its most popular plane, the 737 MAX. Boeing has amassed orders for more than 5,000 of the jetliners.

It isn’t clear how two crashes in the past five months – among 370-plus jetliners that have entered service to date – will affect that order book and Boeing’s strong recent share performance.

But as airlines and air-safety officials around the world ground the bulk of that fleet and ask Boeing to address the plane’s potential safety problems, Boeing and Chief Executive Dennis Muilenburg face the task of keeping a major engine of the US economy on track.

Muilenburg spent much of Wednesday at Boeing’s main jetliner production facilities in the Seattle area, according to a person familiar with the matter.

He also walked the floor at Boeing’s 737 factory in Renton, Wash., talking with employees, this person said.

It wasn’t immediately clear if the grounding would have implications for Boeing’s plan to boost 737 output, the person said. The FAA’s order appeared to leave room for finished 737s to fly from the small airport by its Renton factory before eventual delivery.

That would ease potential bottlenecks for unfinished planes at the airport, which has little space for parking the jets.

But the global groundings posed at least a short-term challenge: the restrictions would likely hinder Boeing’s ability to deliver planes to customers around the world.

Muilenburg and other executives spent a big part of the day on calls with senior transportation officials and regulators, the person said. Executives were also on calls with suppliers and customers as pressure for the grounding built.

Fixing the roughly 370 jetliners that have been delivered over the past two years could be costly. Software upgrades that Boeing is developing for the 737 MAX could cost $1 million to $2 million a jet, analysts estimated.

Boeing could also see some $2 billion of cash flow pushed into later quarters as airlines hold back on final payments for jetliners they have ordered, said Cai von Rumohr at Cowen & Co.

Boeing has almost $7 billion in cash on hand. But the crisis could weaken Boeing’s hand in future sales contests, and reduce its leverage to push suppliers for better terms or faster production schedules.

“This is his big test as CEO,” said Richard Aboulafia, aerospace analyst at the Teal Group, referring to Muilenburg. “There’s a lot at stake, and a lot of public and political pressure.”

Muilenburg said Boeing supported the grounding as a “proactive step out of an abundance of caution.” He noted the company was assisting investigators and that safety was a core value.

“There is no greater priority for our company and our industry,” he said in a statement shortly after President Trump announced the FAA order.

Deposits from 737 MAX orders helped lift Boeing’s revenue above $100 billion for the first time last year. That drove the Chicago-based company’s market cap over $250 billion this month.

That was before a 737 MAX operated by Ethiopian Airlines crashed minutes after takeoff on Sunday. Another nearly new model of the plane operated by Indonesia’s Lion Air crashed under what safety experts view as similar circumstances less than five months ago.

Airlines and air-safety authorities around the world have since grounded the jets. Boeing has shed almost $40 billion of market value from its peak last month. The company’s shares rose 0.5 percent on Wednesday to $377.14.

Airlines in the US and elsewhere have few options for switching away from the workhorse 737. Airbus already has a five-year backlog of orders for its A320neo, the 737 MAX’s main competitor.

Shares in American Airlines Group Inc., Southwest Airlines Co. and United Continental Holdings Inc., the three US carriers that operate 737 MAX jets, all closed higher on Wednesday after early dips, after the FAA grounded the plane.

The MAX represents 2 percent of US flight capacity.

Carriers would redirect other planes to accommodate fliers on their most profitable routes, analysts said.

Outside the US, Norwegian Air Shuttle A/S said it expects Boeing to compensate it for the time its 737 MAX jets remain out of service.

“It is quite obvious that we will not take the cost related to the new aircraft that we had to park,” Norwegian Chief Executive Bjørn Kjos said.

Analysts said the costs could extend well beyond those related to the grounding of the current 737 MAX fleet. “Reputational damage could also be substantial, although Boeing has weathered previous crash episodes,” said Craig Fraser at rating agency Fitch.

Muilenburg will have to rebuild trust in the company’s cash cow before deciding whether to push forward with the launch of an all-new twin-aisle jetliner, according to industry executives.

Boeing is expected to start marketing the plane this year and decide in 2020 whether to go ahead with production.

Analysts said the immediate financial impact of temporarily grounding the global 737 MAX fleet could be limited.

Boeing’s 787 Dreamliner fleet was grounded for three months in 2013 following a series of onboard battery fires.

Boeing’s shares emerged from that three-month period roughly unchanged, though Boeing was left with accumulated losses of around $30 billion. New 787s only recently turned a profit.

Boeing delivered a record 806 jetliners last year and secured many Pentagon contracts, its first competitive defense wins since 2011.

New labor contracts, reductions to pension obligations and more efficient production methods have helped more than triple Boeing’s stock price since Muilenburg took over as CEO in 2015.

Boeing is boosting monthly production of the MAX by five jets to 57 this year, and Muilenburg has said buoyant global growth in passenger and freight air traffic could underpin further increases.

Muilenburg, a famously energetic executive who cycles more than 100 miles a week on his Boeing-blue bike, previously ran Boeing’s defense arm, which is building drones and trainer jets for the Pentagon.

Fresh problems on a new aerial refueling tanker and a space taxi – both late and over budget – have tested relations with the Defense Department and NASA even as Boeing vies for what would be its largest-ever contract win.

Boeing is competing against Northrop Grumman Corp. to refresh America’s land-based nuclear missiles. The Pentagon is due to select a main supplier for the $100 billion program by early next year.

Now Boeing will have to focus first on fixing the 737 MAX.

Inside a Renton, Wash. factory where Boeing makes 737s, the grounding of the MAX fleet was weighing heavily on morale.

“It’s very somber in the workplace,” said one person familiar with the factory’s operations. “They take great pride in their work so this kind of thing hits hard.”

 

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