Boeing’s comeback from Covid crisis hinges on tarnished 737 Max

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 on Wednesday cleared the Max to fly again, 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, analyst with JPMorgan Chase & Co., said in a report to clients earlier this week.

The shares fell 3.2% to $203.30 at the close in New York, giving up earlier gains that followed the FAA’s decision. Boeing had advanced 45% this month through Tuesday, buoyed by progress in coronavirus vaccines and the Max’s impending return.

The Chicago-based company 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,” Boeing Chief Executive Officer 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 so-called “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.

Max Upside

Still, Ferguson sees an upside to the Max re-entering the market at a time when travel is depressed and consumers are distracted by Covid and the U.S. election.

“To me, they’re back in the game,” he said in an interview, referring to Boeing. “They can generate cash again and sell it. The news will fade before the traveling public gets back into the air in large quantities.”

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.

But reversing that isn’t enough for the Chicago-based aerospace titan. The Max is also needed to fund development for the new narrow-body family Boeing will eventually need to counter the success of Airbus SE’s A321neo, the largest single-aisle plane currently available.

Advantage: Airbus

Boeing’s Max 8, the same version as the jets that crashed, holds the sales lead in the heart of the narrow-body market with a 53% share, according to JPMorgan estimates. But Airbus dominates the other segments and holds about 60% of the total 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.”