- FAA allowed testing of 737 MAX in June 2020, airplane likely to hit the skies by the end of the year
- Will customer confidence impact the acceptance of the 737 MAX or will fuel-efficiency of the aircraft attract airlines to stick to the model in such lean times
Much like the aviation industry, the first half of 2020 has not been kind to Boeing either. Since the start of the year, the company had to practically freeze production of the 737 MAX, its once popular but now beleaguered model wherein it registered several cancellations throughout the first half of 2020. The model rakedin huge controversy after a series of accidents during the past few years and was finally grounded in March 2019, additionally burdening the company by loss of revenue, suspension of contracts, number of lawsuits as well as compensation from clients. With the advent of the pandemic, the model and the company have further lost out on several deals amidst the drop in travel demand. Even back in January 2020, when the issues due to Covid-19 were not anticipated to be as worse as seen during the past few months, Boeing expected the grounding to cost at least US$ 18 bn, without taking into account the impact on airlines.
Later during July 2020, the company informed that it had registered 373 MAX cancellations in the first half of the year while another 439 orders were under the risk of being cancelled with the number even going higher based on a number of airline bankruptcies filed in the last few quarters. Apart from the slowdown in the aviation industry, another reason for the spike in cancellations is a clause in Boeing’s contracts. “The problem that Boeing has is their contract indicated that if they couldn’t deliver aeroplanes within the year of the scheduled timing, the customer could walk away from any or all of that order. So this is why we’ve seen a fair number of cancellations at Boeing, as there are no penalties for walking away, given the delay that Boeing had with the aircraft grounding,” said Mr. Ernest Arvai, President of AirInsight Group, (an Aerospace Analysis company). Additionally, new orders also seem less likely given the drop in demand and the huge financial losses being suffered by airline operators globally, with several operators expected to struggle while accepting the planes for which they’ve already committed.
When it comes to production, prior to the 737 MAX being grounded, Boeing had a plan of producing 57 aircrafts a month. Now as the situation stands, it might take a few years for that to happen. In its recent quarterly result announcement, the aircraft manufacturer said it was hoping it could make 31 aircrafts a month by the year 2021. As per Ernet Arvai, “Boeing reportedly has more than 450 aeroplanes that it has produced are sitting idle on the ground, so for that number of aircrafts coming in the market is certainly going to take away a lot of demand. Boeing will need to absorb those aeroplanes first. So production rates will remain relatively low for quite some time.” However, that being said, the aircraft manufacturer still has a considerable orderbook for a model with a list price of at least US$ 100 mn.
Positively, in some relief for the company, its 737 MAX was finally given a go-ahead for testing in the last week of June 2020 by the FAA. If all goes well, this means the MAX could possibly once again hit the skies by the end of the year or early next year. However, when it does so, it will return to an industry that has practically been hammered by the pandemic and faces several years-worth of recovery. As of August 2020, ICAO or the International Civil Aviation Organization, predicted that passenger air travel numbers will decline by about 52% - 59% worldwide this year, when compared with 2019 levels. Most experts feel it will be several years before demand for air travel returns to its pre-pandemic levels. In spite of this, some experts suggest that the 737 Max could still survive owing to many airlines still seeing value in it whilst their battle for what few passengers that still remain. For now, it may somehow seem misguided for airlines to buy an infamous jet amidst a major crisis that has cost several millions of dollars, however analysts suggest there is good enough rationale for many airlines such as American Airlines or Southwest Airlines to stick with the 737 Max. The model is known to offer substantial savings both on fuel and maintenance that become even of more importance in such lean times. Boeing claims its 737 Max model utilizes at least 14% lesser jet fuel in comparison to its predecessors, an input that accounts for ~20% of cost for airline companies, which means the savings could actually yield double-digit increases in profits for airlines, as per Vitaly Guzhva (Professor- Aviation Finance at Embry Riddle Aeronautical University).
On the flip side, however, despite the fuel efficiency offered by the MAX, like any other industry, demand for travel will also be driven by the customer. If customers’ express their dissent to fly on the 737 MAX, airlines would not be left with much of a choice but to listen. For instance, WestJet and Air Canada are amongst airlines that are going to inform their passengers regarding the model of the aircraft at the time of booking. So going forward, what is still unknown is the customers reaction to the MAX returning and how well the airplane will be accepted by travellers, in terms of safety, as travellers are way more informed in today’s times with the impact of social media & internet. While the European Union Aviation Safety Agency and Transport Canada both hold specific reservations with respect to concerns over the MAX, the FAA has proposed 4 key changes in the 737 MAX model before it is allowed to hit the skies again (flight control to be updated, display processing software to be revised to generate alerts, revising certain flight-crew operating procedures, changes in routing of wiring cables). While the aviation industry battles turbulent times, Boeing’s troubles are two-fold wherein it is not only trying to not only absorb the drop in demand but also ensuring re-certification of its fuel-efficient 737 MAX. With the huge dip in aviation in 2020 due to COVID-19, Boeing executives will be praying not just for an early re-certification by regulators but also for an early vaccine as well, much like the rest of the world!