The company’s stock came under pressure Monday after reports surfaced about the production halt.
Washington: Boeing Co said Monday that it would temporarily stop producing its grounded 737 Max jet starting in January as it struggles to get approval from regulators to put the plane back in the air.
The Chicago-based company said production would halt at its plant with 12,000 employees in Renton, Washington, near Seattle. But it said it didn’t expect to lay off any workers “at this time.”
The move amounts to an acknowledgement that it will take much longer than Boeing expected to win approval from the US Federal Aviation Administration and other global regulators to fly the planes again.
The Max is Boeing’s most important jet, but it has been grounded since March after crashes in Indonesia and Ethiopia that killed total of 346 people. The FAA told the company last week that it had unrealistic expectations for getting the plane back into service. Boeing has missed several estimates of a return date for the plane, and the company didn’t give a date on Monday.
Even if no employees are laid off, ceasing production still will cut into the nation’s economic output because of Boeing’s huge footprint in the nation’s manufacturing sector. Through October of this year, the US aerospace industry’s factory output has fallen 17 per cent compared with the same period last year, to USD 106.4 billion, in part due to previous 737 Max production cuts.
The shutdown also is likely to ripple through Boeing’s vast network of 900 companies that make engines, bodies and other parts for the 737, and layoffs are likely.
Richard Aboulafia, an aircraft industry analyst at the Teal Group, said the shutdown would probably hinder the economy in the coming months and could worsen the nation’s trade balance.
“This is the country’s biggest single manufactured export product,” Aboulafia said.
In a statement, Boeing said it would determine later when production can resume, based largely on approval from government regulators.
“We believe this decision is least disruptive to maintaining long-term production system and supply chain health,” the statement said.
Boeing said some of the Renton plant’s workers could be reassigned to 737 or other programs elsewhere in the Seattle area. Some could also help to prepare the 400 Max planes Boeing has built and stored, so they’re ready whenever approval comes to return to the skies.
Investigators have found that flight control software designed to stop an aerodynamic stall was a major factor in the crashes, and Boeing is updating the software, making it less aggressive. But regulators have yet to approve the changes.
Jeff Windau, industrials analyst for Edward Jones, said the 400 planes that Boeing has built but can’t deliver likely were a major factor in the decision to halt production. This comes “both in consideration of storage space and how efficiently can you get them delivered once the plane is ready to return to service,” he said.
Boeing has made progress on some FAA requirements to get the Max back in service, Windau said, but he still views the production halt as a negative for the company.
“The flight control system is complex and there are still unknowns with the timing of regulator reviews and approvals,” Windau wrote in an email. He also wrote that it may be difficult to restart an idled factory once production ramps back up.
Boeing will likely face some tough negotiations with suppliers about what level of payments it will provide during the production hiatus. The company will want to avoid any layoffs or shutdowns by suppliers that would keep it from quickly restarting production once its safety is approved.
“It’s really in Boeing’s interest to identify who needs payments to keep workers and capabilities in place for when the ramp up eventually happens,” Aboulafia said.
The production halt means that it will take longer than expected to get FAA approval, he said.
“If they had gotten some information quietly, behind the scenes from the FAA, that things were looking good for January or February, they wouldn’t have done this,” he said.
Boeing already is having cash flow problems. In October, the company reported that free cash flow went from USD 4.1 billion a year ago to a negative USD 2.9 billion in the third quarter, worse than analysts had expected.
The company’s stock came under pressure Monday after reports surfaced about the production halt. It closed down USD 14.67, or 4.3 per cent, at USD 327.
The stock slipped another 1 per cent in after-hours trading following the company’s announcement that it would stop Max production. It has fallen 23 per cent since the March 10 crash of a Max flown by Ethiopian Airlines, which followed the crash of a Lion Air Max off the coast of Indonesia in October 2018.