Boeing Co. is pausing deliveries of some 737 Max jets to address a production issue on the rear end of some aircraft, dealing a setback to the US manufacturer just as it ramps up production of the model that’s a major cash cow for the company.
(Bloomberg) — Boeing Co. is pausing deliveries of some 737 Max jets to address a production issue on the rear end of some aircraft, dealing a setback to the US manufacturer just as it ramps up production of the model that’s a major cash cow for the company.
The shares fell as much 5.3% after Boeing said it expects deliveries to decline in the near-term as it inspects affected aircraft. Spirit AeroSystems Holdings Inc., which supplies the faulty part, slid further.
Boeing was just regaining its footing following years of turmoil caused by the pandemic and a global grounding of the single-aisle Max. The planemaker had been briefing customers on plans to increase production rates of the Max, Bloomberg reported last week. Days later, Boeing reported a surge in quarterly deliveries that outpaced rival Airbus SE for the first time in almost five years.
“Prior to the announcement, Boeing was coming off a high,” Jefferies analyst Sheila Kahyaoglu wrote in a note.
Based on preliminary knowledge, the analyst expects to cut her estimate for Max deliveries this year by 20% from its current level of 425 planes. She sees an $800 million hit to free cash flow for Boeing, where the Max represents more than a quarter of expected 2023 revenue.
Read More: Boeing to Boost Output of 737 Jets in Push for More Cash
The planemaker said late Thursday that it was formally notified of the issue a day earlier by Spirit, which assembles most of the 737’s aluminum frame. The problem involves two of the eight fittings that attach the jet’s vertical tail to the rear end of its fuselage.
The issue involves Boeing’s best-selling 737 Max 8, Max 7, a high-density version, along with a militarized 737 known as the P-8. Spirit and Boeing said they have identified the production numbers of the planes with the problematic fittings, though not every jet is affected.
It’s too soon to tell if the quality flaw will affect Boeing’s plans to speed up 737 production. The planemaker is working to learn the extent of the problem and what’s required to address it, according to the company.
The manufacturing issue doesn’t immediately affect the safety of planes in the air, Boeing said. It likely involves a significant number of undelivered aircraft that are either in production or storage, and a portion of in-service jets built as far back as 2019, according to the company.
Boeing stock was down about 4.8% in European trading on Friday, after closing at $213.59 in New York. Wichita, Kansas-based Spirit fell 12% from its Thursday close of $35.60.
What Bloomberg Intelligence Says:
“The stoppage is concerning given the airplane is vital to Boeing’s turnaround. Its importance likely means a remedy will be urgently pursued, though reworking it could be costly and an extended pause would significantly hurt commercial profit, cash generation and the balance sheet.”
— George Ferguson, BI aerospace industry analyst
Click here to read the research
“We have processes in place to address these of types of production issues upon identification, which we are following,” Spirit said in a separate statement. “Spirit is working to develop an inspection and repair for the affected fuselages.”
Inspections, Rework
The inspections will take place in an accessible area of the structure. That means any rework is likely to be far less disruptive than Boeing’s repairs to address structural imperfections with the 787 Dreamliner, the company said.
Deliveries of those planes were halted for more than a year, starting in mid-2021, over tiny manufacturing flaws in the jet’s carbon-composite frame. In some instances they could only be reached by ripping out aircraft cabins.
Boeing temporarily paused Dreamliner deliveries again earlier this year after learning of a documentation issue with a fuselage component. Analysts expect Boeing officials to provide updates on the company’s efforts to stabilize 737 and 787 production at its April 18 annual meeting and first-quarter earnings report on April 26.
“This is another loss of credibility and trust in Boeing production quality and standards,” said aviation consultant Mark D Martin. “While the extent of the rework required is unknown, on the face of it, it could be extremely expensive.”
–With assistance from Richard Clough, Siddharth Philip and Anurag Kotoky.
(Updates with analysts’ comments, estimate of impact from fourth paragraph.)
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