With 737 Max Cleared for Takeoff and Covid Vaccine on Horizon, Aviation Industry Slowly on the Verge of U-Shaped Recovery
On November 18th, U.S. regulators (FAA) ruled that the Boeing 737 Max can resume commercial flights with an extensive package of fixes, ending a damaging 20-month hiatus prompted by a pair of fatal crashes. The aircraft’s return will not end the controversy or provide a cash infusion for the company’s suffering bottom line, but it does appear to, in the words of Winston Churchill, at least be the end of the beginning. Following the FAA ruling, various global regulators are expected to follow suit in the coming months.
This is a major milestone for Boeing and an inflection point for the company, though the COVID-19 pandemic has devastated the airline industry, pressuring airlines and lessors to cancel orders for the 737 Max and foiling Boeing’s plans to quickly reverse its losses. The Max’s comeback will be gradual, as it will not fly for some months. Airlines must first train pilots, inspect the jets emerging from long-term desert storage, and complete the FAA’s required repairs before placing the aircraft back into fleet service.
The FAA action is only the first step in certifying 59 airlines/carriers (32 countries) to operate the 387 grounded planes. The FAA orders cover only US domestic flights for the 737 Max jets operated by American, United, and Southwest Airlines; 72 in total. Of the U.S. operators, only American Airlines (AA) has put the Max jets back into its schedule, with flights beginning Dec. 29th on one route: Miami to New York. Flights to or within other countries will need the approval of those individual aviation authorities.
For context, 450 737 Max jets have been built, but not delivered, amounting to billions of dollars in inventory that Boeing hopes to be able to start turning into cash. Bloomberg News reports that nearly a quarter of those 450 Max jets in storage are “white tails,” or planes whose original buyers have backed out, leaving their tails unmarked by airline logos. In total, more than 1,000 Max jet orders have been canceled this year. Additionally, there are about 1,500 single-aisle passenger jets parked by airlines around the world, according to Ascend by Cirium, a research firm that tracks plane usage. That number does not include the grounded 737 Max jets, yet the plane represents more than 25% of the single-aisle planes worldwide since the pandemic broke out.
Boeing’s chief rival Airbus has not been immune to the fallout from the global pandemic, but the fact that its planes were not grounded made it comparatively harder for airlines to abandon their orders. In fact, Airbus has told its suppliers to be ready to ramp up production on its A320neo family of jets to 47-a-month by the second half of 2021, compared to 40 currently. Airbus had 11 new orders in October across its portfolio, compared to zero at Boeing. The narrow-body jet market is expected to recover faster from the pandemic because the planes are primarily used on shorter-haul flights. As of the end of Q3 2020, Airbus had a commanding 64% share of that market, according to Vertical Research Partners analyst Rob Stallard.
For Boeing, which faces at least $20 billion in Max-related costs, the crisis has become one of the worst in the company’s century-long history. Now, with the collapse in air travel, airlines that had been clamoring for the more efficient Boeing jets (15% more fuel efficient) suddenly are fighting for survival and looking to postpone deliveries. Boeing executives warned last month that the company will burn more cash than it generates until 2022, and that it will take at least a year beyond that to clear the mothballed Max aircraft out of its inventory. The bottom line is that the industry is slowly on the verge of a U-shaped recovery, which will be much needed for the airlines and its related ecosystem of suppliers, MRO (repair shops), distributors, and other players, in this critical sector of the US and global economy.