The Boeing Co. logo sits on the side of a 737 Max aircraft during preparations ahead of the Farnborough International Airshow 2016 in Farnborough, U.K. (Photographer: Luke MacGregor/Bloomberg)

Boeing Cuts 737 Jet Output 19% as Global Groundings Drain Cash

(Bloomberg) -- Boeing Co. is cutting production of its 737 jetliner for the first time since the Sept. 11 attacks as the planemaker works to limit financial damage from the global grounding of its newest and best-selling aircraft model.

By slashing output 19 percent -- to 42 airplanes a month by mid-April -- Boeing will be able to reduce its spending on the 737 and preserve cash. As work slows in a Boeing factory south of Seattle, two key suppliers, CFM International and Spirit AeroSystems Holdings Inc., indicated they would continue full-tilt at the current record pace.

Boeing Cuts 737 Jet Output 19% as Global Groundings Drain Cash

Boeing Chief Executive Officer Dennis Muilenburg outlined the plan Friday as the company ramps up efforts to restore public confidence in the 737 Max and the planemaker’s commitment to safety after two of the aircraft crashed within five months. Boeing is facing criminal and Congressional probes stemming from the disasters. To help quell concerns, the company’s board named a committee dedicated to reviewing the design and development of its aircraft.

“Safety is our responsibility, and we own it,” Muilenburg said in a statement Friday after the close of regular trading. “When the Max returns to the skies, we’ve promised our airline customers and their passengers and crews that it will be as safe as any airplane ever to fly.”

Even at the slower production pace, Boeing faces about $3.6 billion in quarterly losses, said George Ferguson, an analyst with Bloomberg Intelligence. As it continues to build planes, the company is foregoing payments from customers who aren’t able to take delivery because of the grounding.

What Bloomberg Intelligence Says

“Boeing’s 737 rate-cut to 42 a month from 52 starting in mid-April tells us the company thinks it will take longer than expected for regulators to end the grounding of the 737 Max.’’

--George Ferguson, Americas aerospace analyst
Click here: to view the research.

Before the Lion Air and Ethiopian Airlines crashes, Boeing had planned to raise output of the 737, a workhorse for budget carriers, about 10 percent by midyear. The reversal squeezes suppliers who’d hired workers and invested to expand capacity. Some had already started moving toward a 57-jet monthly pace under a carefully orchestrated schedule.

Boeing will coordinate with customers and suppliers to blunt the financial impact of the slowdown, and for now doesn’t plan to lay off workers from the 737 program, Muilenburg said.

“It’s cash conservation,” said Stephen Perry, co-founder of Janes Capital Partners, an investment bank that focuses on aerospace and defense deals. A short-term slowdown could help Spirit AeroSystems and CFM work out supplier issues of their own, he said. Though “if it lasts longer, it’s problematic.”

Both CFM and Spirit AeroSystems were plagued by delays last year. The slowdown at Boeing will give them a chance to bolster the weak links in their own supply chains, Perry said. By continuing at full speed, the companies will be positioned to accelerate to an even higher rate, if needed, once Max deliveries resume, he said.

Supplier Plans

Maintaining the status quo will “help ensure the stability of the global CFM supply chain,” Jamie Jewell, a CFM spokeswoman, said in a statement. Spirit AeroSystems, which makes the fuselages for the Max, said it plans to store the 737 fuselages and other components around its factories. "This staggered production approach allows us and our supply base to better prepare for and support 737 production," said CEO Tom Gentile.

Boeing shares fell 2.4 percent to $382.69 in after-hours trading. The stock has declined 7.2 percent since the March 10 Ethiopian crash, the second-worst performance among the 30-member Dow Jones Industrial Average. Spirit Aero fell 1.9 percent to $87.97.

Boeing Cuts 737 Jet Output 19% as Global Groundings Drain Cash

The planemaker doesn’t rule out further cuts to production if the grounding proves to be lengthy. “We’ll continue to assess our production plan,” Boeing spokesman Chaz Bickers said.

Boeing’s announcement comes a day after Ethiopian officials released a preliminary report on the latest Max accident, concluding that the jet experienced the same equipment failure as a Lion Air 737 that crashed off Indonesia in October. The two incidents killed a combined 346 people.

If regulators take their time in certifying the Max’s return to the skies, Boeing would be forced to stash hundreds of factory-fresh jets in airports across the Western U.S. until commercial flights resume. As of Friday, there were 21 of the jets stored at Paine Field north of Seattle, according to 737 production blogger Chris Edwards, and eight at Boeing Field to the city’s south.

A swift return to normal looks increasingly unlikely for the Max and Boeing. Engineers are still finishing work on a software update for a stall-prevention system linked to a Lion Air crash in October and the fatal dive of an Ethiopian Airlines plane near Addis Ababa last month. The disasters killed a combined 346 people.

Ethiopian Transport Minister Dagmawit Moges recommended Thursday that Boeing review its flight-control system after releasing a report that she says showed pilots had followed proper procedures to counter the flawed anti-stall system in the plane.

Rigorous Review

Muilenburg on Friday said he asked Boeing directors to establish a committee to review “company-wide policies and processes for the design and development of the airplanes we build.” The group, chaired by Retired Admiral Edmund Giambastiani Jr., will study the safety of the 737 Max and other programs and recommend improvements.

Boeing said April 1 that it would be several weeks before the software patch for the Max is submitted to regulators. The U.S. Federal Aviation Administration vowed a rigorous review, while authorities in Europe, Canada and China plan to do their own analysis.

By establishing a common cause behind the two crashes, the Ethiopia report eliminates the worst-case scenario for Boeing -- a new technical issue that would’ve made it far more complex for Boeing engineers to resolve.

“There now appears to be a sound technical fix,” Douglas Harned, analyst with Bernstein, said in a note to clients Friday morning. “Timing is still uncertain, however, with multiple investigations underway. Still, we are now looking at scenarios we believe can keep 2020-21 free cash flow roughly the same, even though 2019 will likely see large swings in inventory.”

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