Boeing Will Keep Building 737 MAX, Just Won’t Deliver Them or Get Paid

March 15, 2019 by Paul Ausick

The Wednesday U.S. Federal Aviation Administration (FAA) grounding of all U.S.-based Boeing Co. (NYSE: BA) 737 MAX jets will not stop the company from continuing to build the planes at a rate of about 52 a month. Boeing will not, however, deliver those planes to customers.

In a statement Thursday, the company said it will continue to build the planes “while assessing how the situation including potential capacity constraints, will impact our production system.” While the new 737 MAX aircraft cannot be flown with passengers aboard, Boeing is allowed to fly the planes for purposes of repair or storage.

While that may sound like good news, there are two main catches. First, Boeing’s customers typically pay roughly a third of plane’s contract price (typically much lower than the list price) when the order is placed, another third when the aircraft reaches the beginning of the assembly line and the final third on delivery.

Depending on how long the 737 MAX planes are grounded, this could cause a cash flow issue for Boeing. Many customers may not agree to pay the second third of the contract price unless Boeing offers them a discount. None will pay the final third because the planes won’t have been delivered. Boeing could offer some incentives in order to keep the cash flowing, but that will reduce its margin on each plane.

The Seattle Times cites Canaccord Genuity analyst Ken Herbert, who estimated the cost of fixing the likely problem to the planes at $500 million and the lost cash flow at $1 billion a month. There is even another $1 billion monthly at risk, said Herbert, “depending on how much of the airline operating revenues Boeing ultimately reimburses.”

Boeing and the FAA have said that a software fix for the problem will begin being applied in April to the 371 737 MAXs currently operating around the world. That means that the planes may begin flying by the end of next month or, as a Bank of America analyst told investors, the fix could take three to six months to apply.

That leads to Boeing’s second problem. The longer the 737 MAX is kept on the ground, the more it will cost the company in reimbursements to its customers. At this point, Boeing has delivered just 371 of the planes, so the damage to cash flow, though real, is relatively limited. Southwest Airlines flies 34 737 MAXs, the largest number of any carrier in the world, but the planes account for just 5% of the airline’s daily flights.

Boeing also faces a storm of lawsuits from crash victims’ families and even from carriers. Those probably will not be filed until the investigations into the two crashes are completed.

New information from flight radar and the equipment recovered from Ethiopian Airlines crash site continue to point at the 737 MAX’s anti-stall system as a likely contributor to Sunday’s crash that killed 157 passengers and crew. The investigation of Sunday’s tragedy is turning up similarities to the late October 2018 of a 737 MAX in Indonesia that killed 189 people.

Since markets opened Monday, Boeing stock has dropped more than 11%. In Friday’s premarket trading, shares were up about 0.3%, at $374.20 in a 52-week range of $292.47 to $446.01.