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Boeing’s Comeback From Covid Crisis Hinges on Tarnished Max

Julie Johnsson and Mary Schlangenstein
·5 min read

(Bloomberg) -- Boeing Co.’s manufacturing might and financial recovery are riding on the world’s most infamous aircraft, the 737 Max.

How quickly the planemaker rebounds from a devastating financial collapse depends, in large part, on whether travelers and airlines warm to its workhorse jet after two deadly crashes. U.S. regulators cleared the Max for flight Wednesday, ending a 20-month grounding that was punctuated by damaging revelations, executive-suite turmoil and eye-watering cash consumption.

Tarnish and all, the latest 737 model remains Boeing’s best way to spur growth and restore a balance sheet battered by the flying ban and Covid-19 pandemic. The Max accounts for 80% of Boeing’s backlog of 5,121 orders and is the company’s only offering in the crucial single-aisle market. Pricier twin-aisle aircraft, such as Boeing’s 787 Dreamliner, aren’t in demand at a time when borders are closed and airlines are fighting for survival.

“Boeing’s success in the 2020s rests in large part on reviving the 737 Max,” Seth Seifman, an analyst with JPMorgan Chase & Co., said in a report to clients this week.

The shares were little changed at $203.15 at 1:15 p.m. in New York. Boeing had advanced 41% this month through Wednesday, the largest gain on the Dow Jones Industrial Average, buoyed by progress in coronavirus vaccines and the Max’s return.

To change the narrative on its most important product, Boeing must first “turn the tide on Max orders,” which have lagged as the company booked nearly 500 cancellations, Ken Herbert, an analyst with Canaccord Genuity, said in a note to clients.

Critical to that effort are wide-ranging talks with Boeing’s largest 737 customer, Southwest Airlines Co. On the table: a revised delivery schedule when the carrier isn’t growing, compensation for the disruption during the longest-ever U.S. grounding and -- potentially -- an order that would give a boost to the slow-selling Max 7 model ahead of its commercial debut.

Both parties are highly motivated to get a deal done, Southwest Chief Executive Officer Gary Kelly told reporters Thursday. “I don’t want this to go on for another six months,” he said.

As the grounding forced Southwest to cancel hundreds of flights each day last year, the airline considered adding Airbus SE’s A220 jetliner to its fleet -- a move that would mark a historic rupture with Boeing for the all-737 operator. But the pressures from the pandemic “changed our priorities quite a bit,” and the company for now is focused on the Max 7 to complement its order for the larger -8, Kelly said.

“So we are not actively engaged in looking at the A220 at this point,” he said. “That’s not to say we won’t be. Right now, we’re simply focused on our discussions with Boeing and the Max 7.”

Extensive Revisions

Chicago-based Boeing struck a contrite note after the Federal Aviation Administration said the Max can resume flying. Regulators demanded extensive revisions to the aircraft’s flight-control computers and other changes before airlines can use the Max again to carry passengers. “As we have throughout our history, we will keep learning and evolving, because lives depend on the work we do,” CEO Dave Calhoun told employees.

The cash that Boeing unlocks from the Max will help pay down more than $30 billion in debt that the company took on earlier this year to survive the coronavirus pandemic, leverage that has left it among the ranks of “zombie” companies that are earning less than their interest expense.

Boeing stands to reap at least $12 billion by clearing its inventory of the 450 or so jetliners that it built during the grounding, said George Ferguson, an analyst with Bloomberg Intelligence. That’s likely to take three or four years, longer than expected before the pandemic struck.

‘Back in the Game’

Still, Ferguson sees an upside to the Max re-entering the market when travel is depressed and consumers are distracted by Covid-19 and the U.S. election. By the time Boeing is ready to start delivering the jets on a larger scale, vaccines and treatment should be bringing the virus outbreak under control.

“To me, they’re back in the game,” he said in an interview, referring to Boeing.

Boeing has burned through more than $22 billion in cash since the flying ban was imposed in March 2019 after the Max crashed twice within five months, killing 346 people. The Max is also needed to fund development for the new narrow-body family Boeing will eventually need to counter the success of Airbus’s A321neo, the largest single-aisle plane currently available.

Boeing’s Max 8, the same version as the jets that crashed, commands 53% of sales at the center of the narrow-body, according to JPMorgan estimates. But Airbus dominates the other segments and controls about 60% of the overall single-aisle market.

The U.S. planemaker may need to offer lower prices to preserve market share, even at the risk of cutting into its future profits, said JPMorgan’s Seifman.

“If demand for air travel comes back relatively quickly on the back of effective vaccines then that should improve demand for 737s and help Boeing ramp up production,” Seifman said in an interview before the FAA decision.

If such a rosy scenario fails to materialize, he said, then Boeing will be “trying to push the aircraft on a market that doesn’t want them.”

(Updates with comments from analyst, Southwest starting at sixth paragraph)

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