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Boeing’s Future Success Depends on What China Decides on the 737 Max

Madhu Unnikrishnan

July 28th, 2021

Boeing 737 Max-10 airborne

Boeing has China on its mind as the geopolitical gamesmanship between the world’s two largest economies — China and the U.S. — could upset its plans to recover from the 737 Max grounding and position itself for its post-pandemic future.

The Chicago-based airframer aims to increase the Max production rate from the current 16 per month to 31 per month early next year, but this rate increase depends on China re-certifying the aircraft’s return to service. China’s aviation regulator, the CAAC, remains the biggest holdout in re-certifying the aircraft, which was grounded for almost two years in the wake of two fatal accidents traced back to a flawed flight-control system.

China’s delay is the main impediment to the production-rate increase occurring, CEO David Calhoun told analysts during the company’s second-quarter earnings call on Wednesday. The company’s suppliers are ready for the ramp up but also are prepared should Boeing need to trim its ambitions. “If we get to the end of the year … we do have to consider real actions with respect to what the future rate ramp looks like,” he said.

Chinese airlines now have about 100 Max aircraft on the ground awaiting re-certification. Calhoun believes the country will re-certify the type by the end of the year and in advance of the 2022 Beijing Winter Olympics, when the country’s airlines will need the capacity. But much about the timing of China’s re-certification remains in question and will depend on the state of U.S.-China relations for the balance of this year.

The timing of the CAAC’s decision will weighs on Boeing’s workforce. The airframer currently has 140,000 employees, with no plans to reduce its headcount further, unless the CAAC withholds certification this year, Calhoun said.

Boeing is working through its backlog of built — but undelivered — Maxes. The company expects to deliver half of the 390 Max aircraft that were stored during the grounding this year, with the balance delivered next year. “We are turning a corner, and the recovery is gaining momentum,” Calhoun said.

The airframer’s next product could be a freighter version of the 777X. The company is confident of the passenger version’s certification and expects to begin delivering the type by the end of 2023. But strong cargo traffic and demand for freighters prompted the company to consider beginning work on a freighter variant. Calhoun noted that 72 percent of the world’s air cargo traffic now is carried on dedicated freighters, versus 48 percent before the pandemic. Cargo traffic is up 8 percent worldwide, despite the decline in belly-hold capacity as international passenger flights remain a fraction of their pre-pandemic level.

The move could solidify Boeing’s already-dominant position in the freighter market. Last month, Air Lease Corp. Executive Chairman Steven Udvar-Hazy recommended Boeing double down on freighters, noting that Airbus is playing “catch-up” in the sector and currently doesn’t have a freighter that can compete with the 777. Boeing should allocate engineering resources to freighter development, Udvar-Hazy said.

Boeing is more likely to focus on a 777X freighter variant than a clean-sheet aircraft, Calhoun said. The issue remains that propulsion suppliers are still developing the next generation of engines, and ones that are optimized for sustainable aviation fuels. Until then, Boeing’s engineering resources are better spent on a freighter, he said.

Calhoun brushed off concerns, recently reported by Bloomberg, that the company is losing the battle for engineering talent to Silicon Valley. Boeing has the talent it needs, and he is confident the company will attract young engineers through its internship and college-recruitment programs. “I like our chances,” he said. “It’s about the mission of the company, and [young engineers] like what we do.”

He also dismissed concerns that recent orders — like United’s order for 200 Maxes and Southwest’s order for 34 of the jet — are “opportunistic” and taking advantage of the company’s travails. United’s order was split between Airbus and Boeing, Calhoun said, with the bulk going to the U.S. airframer. “I like the way our product line competed,” he said. “I’m pleased with how it went.”

The United and Southwest orders, he said, spoke more of the strength of those airlines’ recovery from the pandemic than any perceived weakness at Boeing. The orders were strategic, for the airlines’ future growth plans. “That’s about as fundamental as it gets,” he said.

Meanwhile, the 787 production rate has fallen to fewer than five per month as the airframer works with regulators on a fix for quality-control issues on the fuselage. Deliveries of the type have been suspended but could resume this year. The company expects to deliver half of its backlog of 100 already-built 787s this year, Calhoun said. But with international passenger traffic depressed, “customers are not knocking down our doors to get their airplanes,” he said.

But Boeing is confident of the 787s enduring success. The program is near breakeven, Calhoun said. “No widebody airplane has been flown more aggressively during the pandemic as the 787,” he said. “It’s everywhere.” About 90 percent of the world’s 787 fleet has continued to fly during the crisis, he added.

During the Covid crisis, airlines around the world retired 1,500 aircraft. Calhoun believes most of those aircraft will not return to active service. Instead, airlines that are in the financial position to do so will focus on rejuvenating their fleets with more efficient aircraft. Airlines now are operating about 80 percent of the world’s pre-pandemic fleet. This positions Boeing well for its post-pandemic future, he said.

But when that future will arrive remains unclear. Boeing forecasts the recovery to occur in three phases. First, domestic travel will return, as is already happening in large markets like the U.S., EU, China, and Russia, and is starting to happen in India, Brazil, and within Latin America. Next, regional markets, like intra-Asia, intra-Americas, and intra-Africa, will return. The long-haul international market likely will not return to growth until after 2024, Boeing predicts.

The airframer reported second-quarter revenues of $17 billion, a 44 percent increase from last year. The company reported a $567 million profit, its first in almost two years, driven mainly by the strength of its defense, space, and services businesses. Operating margins at its defense and services business approached 14 percent each. The company’s Commercial Airplanes unit, on the other hand, reported a -8 percent margin, although revenues rose almost 300 percent from last year — the depths of the Max crisis — to $6 billion.

At the end of the quarter, Boeing’s commercial backlog stood at 4,100 aircraft, about 3,300 of which are for 737-family aircraft.

Madhu Unnikrishnan

July 28th, 2021

Photo credit: Boeing is pinning much of its hopes for recovery on China re-certifying the Max. Boeing

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