Boeing’s new 737 woes are an ugly plot twist in a comeback tale

Boeing Co.’s executives had a golden opportunity to talk up the planemaker’s turnaround at its annual shareholder gathering Tuesday. Instead, they’ll be in damage control mode — again.

The company is grappling with a manufacturing issue affecting its cash-cow 737 jetliner, which has temporarily brought some deliveries to a halt. While it’s too soon to know the full repercussions of the setback, one thing is clear: Boeing is in for a rocky few months.

Disruptions at the planemaker’s factory and with its supplier base come just as Boeing was cranking up 737 output in an effort to boost cash flow. United Airlines Holdings Inc., Southwest Airlines and Ryanair Holdings Plc. are among the airlines counting on deliveries of those workhorse jets for the busy summer travel season. And Chief Executive Officer Dave Calhoun is working to keep the trust of investors, some of which he only recently won over after years of crises and snafus. 

“This is another loss of credibility and trust in Boeing production quality and standards,” said aviation consultant Mark D. Martin.

Calhoun is expected to address the issue head on during Tuesday’s virtual annual meeting. He’ll be in front of investors again on April 26 for first-quarter results.

It’s a reminder that even as demand soars for air travel and new jetliners, investors are still skittish. Before the issue was disclosed after-market on Thursday, Boeing shares had surged about 49% since November, when Calhoun said he was working to triple the company’s yearly free cash flow to $10 billion by the middle of the decade. Shares rose again April 11 when the planemaker announced first-quarter deliveries that beat rival Airbus SE, the first in nearly five years.

On Friday, Boeing stock dropped 5.6% to $201.71, the biggest decline in more than six months. 

Flawed Fittings

The new 737 problem involves two of the eight fittings where the jet’s vertical stabilizer is attached to the rear of its fuselage. A contractor, Spirit AeroSystems Holdings Inc., discovered that since 2019 two of its suppliers for the fittings — but not a third — had at times used non-standard manufacturing processes, according to Cai Von Rumohr, an analyst at Cowen & Co.

Spirit assembles most of the 737’s aluminum frame on Boeing’s former Wichita, Kansas, campus. 

Boeing and Spirit said they’ve determined, along with the Federal Aviation Administration, there’s no safety threat, meaning they’ve avoided a major crisis. 

“I just don’t see this as a massive, stop-everything problem,” said Michel Merluzeau, a director at AIR, a strategic advisory firm.

But the issue affects a “significant” number of undelivered aircraft which are either in storage or in production at the companies’ factories, Boeing said. The planemaker and Spirit haven’t provided details about the faulty workmanship, or the costs of fixes that may require tearing the sections apart. 

Cash Flow

Boeing won’t be able to meet its $10 billion-a-year cash-flow goal without ramping up 737 deliveries. The family of jets probably accounted for two-thirds of the company’s revenue in the first quarter, according to George Ferguson, a Bloomberg Intelligence analyst.

The planemaker had been briefing customers on plans to hike production rates of the 737 by 23% to 38 jets a month by midyear, Bloomberg reported in early April. The company hasn’t yet said how the manufacturing issue will affect that. 

Before Friday, Boeing was on track to deliver 448 aircraft in 2023, according to Jean-Pierre Picchiottino, founder and director of Aero Analysis Partners, and former chief of competitive intelligence for Airbus. 

The planemaker will likely still reach its objective of handing over 400 to 450 of its 737 jets in 2023, because it has plenty of margin for error, Picchiottino said. The company’s European competitor, Airbus, has similarly ambitious output targets.

Both planemakers rely on thousands of smaller companies, many of which are still addressing hiring and financial strains following the Covid-19 pandemic.

Boeing and Spirit are working with US regulators on plans to inspect and repair the affected airframes, they said. Meanwhile, Boeing is moving forward with getting customers planes that don’t have the flaws.

Aero Analysis said Boeing delivered four of its popular narrow-body models on April 13 — the day it revealed the new issue — and at least one 737 Max a day later.