Global Head of Consultancy Rob Morris, provides an overview of the 737Max programme and uses the data available to hypothesis if Boeing should cancel the programme. In addition, Rob evaluates the likelihood of Boeing launching a new single-aisle aircraft in this decade or the next.
Watch Rob Morris provide his view on the 737 Max (16th January 2020)
Prefer to read Rob’s transcript:
As we head into 2020 and the new decade, significant uncertainty continues around Boeing’s 737 Max programme. Much work remains to achieve return to service and airline and lessor customers have limited guidance about when they will be able to take delivery of scheduled aircraft or return their stored aircraft to service. With that uncertainty in mind, we have even seen questions around the future of the Max programme itself, most specifically will Boeing be forced to cancel the programme and instead launch a new replacement single aisle programme – the so-called FSA?
Our answer to this is pretty clear on two counts. In the short-term we believe that Boeing has no choice other than to pursue the Max recertification to completion and return the aircraft both to service and production. Bear in mind that as of today Boeing have more than 400 Maxs which have been built and flown and which customers are expecting delivery of in the near future. We don’t know the exact cost of manufacture for these aircraft, but if we assume $30 million (on the basis that we believe the average selling price could be in the region of $50 million) then that equates to more than $12 billion of inventory cost that would have to be written off. Even if Boeing were able to recover some of that through scrap of the aircraft, there would still likely be in excess of $10 billion write-off required here. Then add the current backlog of 4,420 aircraft, which could conservatively be valued at some $220 billion in 2020 economic conditions and which Boeing would also have to wipe off its backlog, and you have a significant cost of programme cancellation which Boeing is unlikely to be able to bear.
And then of course there would be the replacement programme to consider. Even if Boeing were to launch a new FSA today, they would be unlikely to be able to deliver that aircraft before 2027 at the earliest. There is also the issue of technology readiness – what engine, materials, systems, manufacturing technologies, etc will they have at sufficient maturity to launch, develop and deliver a low risk new aircraft programme which offers significant performance and economic efficiencies over Max, A320neo and most crucially any Airbus response. And at what cost (which would of course be additional to the write-offs we hypothesise above)?
The final piece in this equation is of course the customers. They had 380+ aircraft in service at the time of the grounding which remain grounded today. They also had an expectation that they would have taken delivery of another 400-500 aircraft between March and December 2019. Which means that as we open 2020 there are 800-900 single-aisle aircraft which were expected to be in service but which are not. We conservatively estimate this to be worth around 3.6% of global airline capacity at the end of 2019. So although IATA reported around 3.5% capacity growth in 2019, if Max had been status quo growth could easily have been closer to 7% (albeit probably a bit lower as we may have seen some more retirements than we have seen). Demand is certainly softening and so this lower capacity is a positive for airlines in the short term as it allows them to manage capacity and yields, but in the medium term airlines will need these aircraft for growth and replacement and there is no way they can wait until 2027 for a replacement programme.
About the data behind the story:
Cirium’s fleets portfolio consists of over 400,000 data points and is updated by a team of dedicated aviation data researchers. In regards to the 737 Max a team of analysts are monitoring developments in the market on a regular basis. In addition, Cirium provides valuations on aviation assets including commercial jets, helicopters, business jets and engines.
