Boeing Co. will cut output of its 737 jetliners by mid-April and is creating a special board panel to review safety and design after two fatal crashes prompted regulators worldwide to ground the newest and best-selling member of the aircraft family.
The planemaker will temporarily cut its production rate to 42 airplanes a month from 52 today. Boeing plans to coordinate with customers and suppliers to blunt the financial impact of the slowdown, and for now it doesn’t plan to lay off workers from the 737 program, Boeing Chief Executive Officer Dennis Muilenburg said.
“When the Max returns to the skies, we’ve promised our airline customers and their passengers and crews that it will be as safe as any airplane ever to fly,” Muilenburg said in a statement Friday after the close of regular trading.
Boeing shares fell 1.9 percent to $384.49 after the announcement. The stock has declined 7.2 percent since the March 10 Ethiopian crash, making the company the second-worst performer in the 30-member Dow Jones Industrial Average for that period.
Boeing had planned to hike output of the 737, a workhorse for budget carriers, about 10 percent by midyear. Suppliers who provide the 600,000 parts needed for each plane had already started moving toward a 57-jet monthly pace under a carefully orchestrated schedule set in place long before the Lion Air and Ethiopian Airlines disasters.
The company doesn’t rule out further cuts to production if the grounding proves to be lengthy. “We’ll continue to assess our production plan,” Boeing spokesman Chaz Bickers said.
With the 737 Max now grounded indefinitely, the production slowdown will help Boeing preserve cash. The Chicago-based manufacturer faces losses of $1.5 billion to $2.7 billion a month as customers halt advance payments for jets whose deliveries are suspended, Seth Seifman, an analyst with J.P. Morgan, estimated before the production cuts were confirmed.
Boeing’s announcement comes a day after Ethiopian officials released a preliminary report on the latest Max accident, concluding that the jet experienced the same equipment failure as a Lion Air 737 that crashed off Indonesia in October. The two incidents killed a combined 346 people.
If regulators take their time in certifying the Max’s return to the skies, Boeing would be forced to stash hundreds of factory-fresh jets in airports across the Western U.S. until commercial flights resume. As of Friday, there were 21 of the jets stored at Paine Field north of Seattle, according to 737 production blogger Chris Edwards, and eight at Boeing Field to the city’s south.
The reversal squeezes suppliers who’d hired workers and invested to expand capacity. With order books oversold through 2023, Boeing and Airbus SE had considered hiking production to as high as 70 a month next decade.
Spirit AeroSystems Holdings Inc., which makes the fuselages for the Max and derives about half its revenue from the 737, fell 4.1 percent to $85.97 after the announcement.
While the slowdown dials back production to 2016 levels, doing so will provide some breathing room for suppliers straining to keep up with the previous tempo, like CFM International.
CFM International, a joint venture of General Electric Co. and Safran SA that builds engines for the 737 Max, doesn’t currently plan to cut output of the turbofans, according to Jamie Jewell, a spokeswoman.
Maintaining the status quo will allow it to “build on the momentum it has gained over the last year in meeting the historic Leap ramp up requirements and will help ensure the stability of the global CFM supply chain,” Jewell said in a statement, referring to the new engine model that powers both the 737 Max and Airbus A320neo.
Boeing’s 737 final assembly in Renton, south of Seattle, borrows from the lean manufacturing techniques honed by automaker Toyota Motor Corp. to churn out more than two planes a day. About 90 percent of the jetliners made there this year are expected to be Max aircraft, according to Boeing.
A swift return to normal looks increasingly unlikely for the Max and Boeing. Engineers are still finishing work on a software update for a stall-prevention system linked to a Lion Air crash in October and the fatal dive of an Ethiopian Airlines plane near Addis Ababa last month. The disasters killed a combined 346 people.
Ethiopian Transport Minister Dagmawit Moges recommended Thursday that Boeing review its flight-control system after releasing a report that she says showed pilots had followed proper procedures to counter the flawed anti-stall system in the plane.
Muilenburg on Friday said he asked Boeing directors to establish a committee to review “company-wide policies and processes for the design and development of the airplanes we build.” The group, chaired by Retired Admiral Edmund Giambastiani Jr., will study the safety of the 737 Max and other programs and recommend improvements.
Boeing said April 1 that it would be several weeks before the software patch for the Max is submitted to regulators. The U.S. Federal Aviation Administration vowed a rigorous review, while authorities in Europe, Canada and China plan to do their own analysis.
By establishing a common cause behind the two crashes, the Ethiopia report eliminates the worst-case scenario for Boeing — a new technical issue that would’ve made it far more complex for Boeing engineers to find a solution.
“There now appears to be a sound technical fix,” Douglas Harned, analyst with Bernstein, said in a note to clients Friday morning. “Timing is still uncertain, however, with multiple investigations underway. Still, we are now looking at scenarios we believe can keep 2020-21 free cash flow roughly the same, even though 2019 will likely see large swings in inventory.”
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