Boeing Slashes 737 Production By 20%, US GDP Threatened

Just a few hours after Ethiopian Airlines warned of a "stigma" associated with the 737 Max that may make them choose not to take delivery of the planes they ordered, Boeing has released a statement after-hours that the company will slash production of the 737 plane from 52 to 42 airplanes per month.

Bloomberg reports that 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.

“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,” Boeing Chief Executive Officer Dennis Muilenburg said in a statement Friday after the market close.

Boeing had planned to hike output of the 737, a workhorse for budget carriers, about 10 percent by midyear, to meet the backlogs.

Full Statement from Boeing:

As we work closely with customers and global regulators to return the 737 MAX to service, we continue to be driven by our enduring values, with a focus on safety, integrity and quality in all we do.

We now know that the recent Lion Air Flight 610 and Ethiopian Airlines Flight 302 accidents were caused by a chain of events, with a common chain link being erroneous activation of the aircraft's MCAS function. We have the responsibility to eliminate this risk, and we know how to do it. As part of this effort, we're making progress on the 737 MAX software update that will prevent accidents like these from ever happening again. Teams are working tirelessly, advancing and testing the software, conducting non-advocate reviews, and engaging regulators and customers worldwide as we proceed to final certification. I recently had the opportunity to experience the software update performing safely in action during a 737 MAX 7 demo flight.  We're also finalizing new pilot training courses and supplementary educational material for our global MAX customers. This progress is the result of our comprehensive, disciplined approach and taking the time necessary to get it right.

As we continue to work through these steps, we're adjusting the 737 production system temporarily to accommodate the pause in MAX deliveries, allowing us to prioritize additional resources to focus on software certification and returning the MAX to flight. We have decided to temporarily move from a production rate of 52 airplanes per month to 42 airplanes per month starting in mid-April.

At a production rate of 42 airplanes per month, the 737 program and related production teams will maintain their current employment levels while we continue to invest in the broader health and quality of our production system and supply chain.

We are coordinating closely with our customers as we work through plans to mitigate the impact of this adjustment. We will also work directly with our suppliers on their production plans to minimize operational disruption and financial impact of the production rate change.

In light of our commitment to continuous improvement and our determination to always make a safe industry even safer, I've asked the Boeing Board of Directors to establish a committee to review our company-wide policies and processes for the design and development of the airplanes we build.  The committee will confirm the effectiveness of our policies and processes for assuring the highest level of safety on the 737-MAX program, as well as our other airplane programs, and recommend improvements to our policies and procedures.

The committee members will be Adm. Edmund P. Giambastiani, Jr., (Ret.), former vice chairman, U.S. Joint Chiefs of Staff, who will serve as the committee's chair; Robert A. Bradway, chairman and CEO of Amgen, Inc.; Lynn J. Good, chairman, president and CEO of the Duke Energy Corporation; and Edward M. Liddy, former chairman and CEO of the Allstate Corporation, all members of the company's board. These individuals have been selected to serve on this committee because of their collective and extensive experiences that include leadership roles in corporate, regulated industries and government entities where safety and the safety of lives is paramount.

Safety is our responsibility, and we own it. 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. Our continued disciplined approach is the right decision for our employees, customers, supplier partners and other stakeholders as we work with global regulators and customers to return the 737 MAX fleet to service and deliver on our commitments to all of our stakeholders.

As Bloomberg notes, 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, and those suppliers are also fading in the after market.

The bigger question, as we previously detailed, is what effect a 20% cut to Boeing's production will have on US GDP in Q2?

...a recessionary catalyst may be the fiasco involving the Boeing 737 MAX, which according to JPM economist Michael Feroli, could begin impacting the economic dataflow. According to the biggest US bank, the issues affecting the 737 MAX should have no short-run impact on GDP, as production of this airplane is continuing, but will affect the composition of GDP, implying more growth in inventories and less growth of business investment and gross exports.

However, if the issues are not resolved in a timely manner and production of the 737 MAX needs to be halted for an extended period of time, it would take about 0.15% off the level of GDP, or about 0.6%-point off the quarterly annualized growth rate of GDP in the quarter in which production is stopped.

Some context: the value of total shipments of aircraft by domestic producers in the US totaled $129 billion in 2016. Extrapolating that figure using monthly shipments data by the aircraft and parts industry implies a similar figure for 2018, around $130 billion. The NIPA-based data arrive at a similar number and indicate that by category of demand, around 55% of that production is destined for export, 35% is purchased by domestic businesses, and 10% by the Department of Defense.

Of this total in 2019, sales of the 737 were projected to total about $35 billion, with about 90% accounted for by the MAX model, or about one-quarter of total domestic aircraft production according to JPM's equity analysts. This value of shipments figure includes parts suppliers, not just the value added by Boeing, and so should be a reasonably accurate approximation of the GDP impact of the 737 MAX for this year: about 0.15%. For now, Boeing is continuing to produce the plane, with most, if not all of the final product, being put into inventory pending the completion of the investigation. In principle, this means that GDP should be largely unaffected for now, as weaker exports and business investment would be offset by more stockbuilding.

On the other hand, should the 737 MAX orderbook collapse if passengers and potential clients back away as a result of the plane's devastated reputation, and Boeing be forced to delay or suspend production indefinitely, these will be foregone dollars that will directly hit US GDP.

So how to keep track of what impact the 737 MAX has on the aggregate economy? According to JPM, there are a number of government statistics that will allow us to track how the 737 MAX issues are affecting the economy. The Census Bureau’s factory goods report contains data on aircraft shipments (Figure1) and orders (Figure 2) as well as related inventories (Figure 3); these figures are also reported about a week ahead of the factory goods report in the advance durable goods data.

In the Census Bureau’s data, ordersare reported net of cancellations; so, any cancellations will count as “negative” orders in the month in which they occur. Separately, the Census Bureau’s monthly trade reports contain data on civilian aircraft exports (Figure 3). Away from official government statistics, Boeing publicly reports a variety of statistics about its orders and shipments of aircraft.

Of course, with the media acutely focused on every single development in the scandal, it is likely that any flood of order cancellations will be publicized long before it hits the US ledger.