Boeing Cuts Production for 737 MAX
Boeing announced that it would cut the production of its 737 MAX planes by 20%. This year, the company won’t deliver more than 500 aeroplanes of this model to its client, and the figure might go lower than that. The best-selling aircraft is not wanted anymore after the crash of an Ethiopian Airlines flight last month, in which all 157 people onboard died.
Delivery Numbers Decline
On Tuesday, Boeing published fresh data indicating that only ten planes were ordered by its customers in January and February of this year. No orders came in March, the month when the crash happened in Ethiopia. It was the second fatal crash of a MAX model in the last few months, with the previous one involving Lion Air in October 2018.
Deliveries fell drastically compared to 112 orders for the MAX planes recorded in the first quarter of 2018 when Ryanair ordered 25 units and Southwest Airlines (LUV) ordered 40.
When it comes to other commercial Boeing jets, the number of orders actually slightly increased, as the company received orders for 85 other commercial planes in the first quarter, compared to 68 orders in the same period of 2018.
Investors and analysts are now drawing conclusions about the potential impact of Boeing’s recent decision to cut production of 737 MAX. Brokerage firms Cowen and Jefferies lowered their 2019 delivery forecast, with the former expecting annual deliveries of about 500, down from its previous prediction at 639 for the MAX planes. Jefferies anticipates the company to deliver 497 737 MAX jets this year, down from 580.
Cowen analysts said:
It looks like BA won't deliver its MCAS fix to the FAA until late April and the FAA will have to test the fix before approving it and lifting the grounding. This could delay a resumption of MAX deliveries to US carriers (10% of backlog or about 480 planes) until June. Foreign deliveries may not resume until Q3 or possibly Q4.
Stock Price is Heavily Affected
After Boeing announced that it would cut production, the price of the stock traded on the New York Stock Exchange (NYSE) fell about 1% on Friday. On Monday, the share price declined a further 4.44%, after several analysts lowered their expectations for the company’s performance this year. On Tuesday and Wednesday, the stock fell 1.46% and 1.11% respectively, to the current level close to $365 per share.
Cowen analysts noted that while cutting production is beneficial for the MAX crisis, the company would have to face a massive cash hit this year. The brokerage reduced its price target to $460 from $475.
Besides dealing with the MAX crisis, Boeing will have to deal with a financial penalty for costs like clients concessions and productivity loss from issues related to the fleet grounding, analysts say.
Out of 26 analysts covering the company’s performance, four gave a “hold” rating on the stock while two recommend a “strong sell.”
The problems related to the 737 MAX plane caused Boeing losses of about $25 billion in market value since the start of the year, making it one of the worst performers of Dow Jones index.
The Sensors Might be at Fault
The crash investigations are now paying attention to the plane’s automatic safety system, which relies on special “angle of attack” sensors to warn pilots when they get close to a dangerous aerodynamic stall. However, it seems that Boeing decided to allow the sensors on the MAX planes to automatically force the jet’s nose down rather than warning the pilots only. The company said it was developing a software fix for the system.
The Federal Aviation Administration (FAA) said:
The FAA expects to receive Boeing's final package of its software enhancement over the coming weeks for FAA approval.
The agency said in a statement:
Time is needed for additional work by Boeing as the result of an ongoing review of the 737 Max Flight Control System to ensure that Boeing has identified and appropriately addressed all pertinent issues.
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