Boeing Rolls the Dice on China for Expanded 737 Max Output

(Bloomberg Opinion) -- China still hasn’t signed off on the return of Boeing Co.’s 737 Max. But the planemaker isn’t backing off its target for an aggressive step-up in production starting in early 2022. Does the company know something the rest of us don’t, or is it just foolhardy? 

The Max returned to service late last year in the U.S., but China — which was the first country to ground the plane after its two fatal crashes — has given little official indication of when it might allow the embattled jet to fly again. With Chinese airlines still barred from accepting deliveries, Boeing handed over just 62 of the jets in the third quarter, slightly short of projections. It has cleared out only about a third of the 450 planes that piled up in its parking lots during the nearly two-year global grounding and the pandemic. But when the company reported its latest results on Wednesday, it reiterated a plan to start churning out 31 Max jets a month by early 2022, up from a pace of 19 now.

Boeing is also “evaluating the timing of further rate increases.” That’s slightly more optimistic and definitive language than what Boeing used in the second quarter when it said “the company will continue to assess the production rate plan as it monitors the market environment and engages in customer discussions,” with “further gradual increases” expected to correspond with market demand. Boeing Chief Executive Officer David Calhoun had previously said a lack of measurable progress on China recertification by the end of this year would force the company to “consider real actions with respect to what the future rate ramp looks like” for Max production. On a call with investors Wednesday, he expressed optimism that China approval would still come before the end of the year, with deliveries then resuming in the beginning of 2022. But Calhoun also appeared willing to extend his patience, telling CNBC that if China still hadn’t signed off on the Max by the middle of next year, that’s the point where the company would reevaluate. “We wouldn’t cut rates, but we would not increase rates at the pace we would otherwise,” Calhoun said. “I think we have plenty of time.”

Except the middle of next year isn’t the same thing as the end of this one. Max orders have rebounded as airlines recover from the pandemic, but the 31-jets-a-month production pace looks aggressive without deliveries to China. Boeing currently has about 370 Max jets in inventory, with about a third of those designated for Chinese buyers, Chief Financial Officer Brian West said. It aims to clear the vast majority of that stockpile by the end of 2023, based in part on the assumption that China deliveries resume in the first quarter. Cowen analyst Cai Von Rumohr estimated Boeing would need to deliver more than 500 Max jets next year to meet its goals, pointing out to Calhoun on Wednesday that this implies “a huge increase” compared with the roughly 20-a-month average from the third quarter.

The head of Boeing’s China business commented to Reuters late last month that recent certification test flights had gone well. Around the same time, U.S. Commerce Secretary Gina Raimondo complained about the blockade on Boeing deliveries and said China wasn’t fulfilling its purchase commitments under the trade deal struck in early 2020. But it’s been crickets ever since. “All I can do is read what’s on the ground with our customers in China, which has been very constructive,” Calhoun said in the CNBC interview. “I’m feeling good about the work and the effort being applied from our side of the house and our administration, and China.” 

A clear timeline on the ramp-up of 737 Max production matters because the aerospace sector has proved it’s not immune to the labor shortages and supply-chain snarls bedeviling the rest of the economy. Honeywell International Inc. cautioned that smaller forging and casting suppliers were having difficulty snapping back from the Covid doldrums and that component constraints may cause it to miss out on hundreds of millions of dollars worth of aerospace shipments in the fourth quarter. “We are not sure where we are in that improvement cycle because it really just kind of popped up,” CEO Darius Adamczyk said. Raytheon Technologies Corp. warned labor and supply constraints may cost it $275 million in sales this year, although its defense businesses appear more impacted at the moment. General Electric Co. — which makes the Max’s engines through its joint venture with Safran SA — said it was working through material and labor availability issues and was positioned to deal with them “at least as best we can see.” That commentary is arguably understating the challenge of rehiring the thousands of aerospace workers that were laid off during the depths of the pandemic when just about every other corner of the manufacturing economy is looking for labor as well.

Calhoun said in July that Boeing was willing to take some risks and bear the costs of making sure the supply chain was ready when it needed it to be. It may have no choice but to gamble on China approval coming sooner rather than later. That’s not an insignificant bet though when the company’s not getting cash flow from its 787 Dreamliner. Deliveries have been halted for much of this year while the Federal Aviation Administration reviews changes to analytics and process controls that Boeing put in place to address quality control lapses. The company gave no clear indication on Wednesday of when they would resume. Lower production rates and a reworking of the 787 are expected to result in $1 billion of abnormal costs. 

The 737 Max crisis feels like a lifetime ago in many ways. But Boeing is still very much living it. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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