Boeing Company (BA)

[DiscoverGold]

Boeing MAX Production Is at a Crawl. It Would Take 20 Years to Fill the Backlog at This Rate
By: Barron's | April 5, 2024

Boeing's 737 MAX production has slowed to a crawl. That's probably a good thing though airline customers might not agree. Boeing suppliers, on the other hand, should be all right — if Boeing can get its act together.

Boeing's targeted and Federal Aviation Administration-permitted MAX production rate is currently 38 a month. The company delivered 42 MAX jets in January and February. Boeing will report March deliveries in a few days. Investors shouldn't expect a big number.

"Cirium data shows that Boeing only test flew 13 MAX planes in March, similar to the 11 that it flew in February," wrote Vertical Research Partners analyst Rob Stallard in a report Thursday. Cirium is an aviation consultancy used by the industry and Wall Street.

All signs point to another month of around 20 MAX deliveries. Along with new production, Boeing is still delivering MAX jets built and parked during the worldwide MAX grounding between March 2019 and November 2020 following two deadly crashes within five months.

Melius analyst Robert Spingarn believes the first-quarter production rate will end up lower than 20 per month. There is a good reason for lower production. Boeing is working "to minimize traveled work," wrote the analyst in a report Friday.

Traveled work refers to doing jobs on the production line somewhere other than originally designed. Less travel work is a sign Boeing is trying to get its production system under better control. That change came in the aftermath of the early January emergency door plug blowout on a 737 MAX 9 operated by Alaska Air.

More control and better quality is a positive, but it does put short-term and long-term estimates at risk. Wall Street expects Boeing to deliver about 450 MAX jets in 2024, up from 387 delivered in 2023. In the long term, Boeing expects to produce 50 MAX jets a month. "Given the current state of the 737 ramp, Boeing's targeted rate of 50/month in 2025/2026 seems unlikely," added Spingarn.

Boeing has some 4,800 unfilled orders for 737 MAX jets. At 20 a month, that's 20 years of backlog. It's great to have a big backlog but Boeing's airline customers would balk. Things should improve, still, at 40 a month Boeing has 10 years of backlog and some airlines would be waiting longer than expected for new jets.

That has some implications for Boeing as well as the airlines. Jefferies analyst Sheila Kahyaoglu noted in a report that Boeing paid Alaska $160 million in compensation for the MAX 9 grounding and lost airline capacity. Extrapolating that payment to other airlines lacking MAX capacity is difficult — only one door plug blew off — but she expects Boeing to report more than $420 million payments to airlines for the first quarter. Boeing "expects additional compensation to be provided beyond Q1, the terms of which are confidential," added the analyst.

The production delays make life harder for the airlines and Boeing. There will eventually be an impact on suppliers too. Spirit AeroSystems and Hexcel are two at the biggest risk of estimate cuts, Kahyaoglu wrote. Both companies' estimates imply production rates closer to 38 a month; she now expects an average of about 30 MAX jets made a month in 2024.

Boeing can still take parts at a higher rate than it is making planes, but investors should, at least, be aware of the potential for cuts given how the year has started.

At 30 a month, it would take Boeing some 13 years to work through its existing MAX backlog. Production rates shouldn't stay at that level forever. Still, the entire aerospace value chain — from suppliers to airlines — is waiting for things to improve.

Boeing stock was up 0.4% in premarket trading Friday, while S&P 500 and Dow Jones Industrial Average futures rose 0.4% and 0.5%, respectively.

Coming into Friday trading, Boeing stock has fallen about 30% this year. MAX troubles have weighed on investor sentiment.

Read Full Story »»»

DiscoverGold