Boeing’s 737 Max gets double dose of bad news

When it comes to Boeing Co.’s 737 Max, things can always get worse.

On Thursday, American Airlines Group Inc. and Southwest Airlines Co. added to a chorus of order deferrals and cutbacks for the embattled jet, which has been grounded for more than 18 months following two fatal crashes. American has deferred delivery of 18 Max jets that were meant to be delivered in 2021 and 2022 and will take them on a new timeline over 2023 and 2024. Chief Financial Officer Derek Kerr said there would have to be a “substantial improvement in the demand environment” to justify taking the jets before then. Southwest, the largest Max customer, said it, too, may restructure its order after already agreeing to take no more than 48 of the planes through December of next year.

Both the schedule of new deliveries and the pricing of Southwest’s order are on the table, CEO Gary Kelly said in an interview with Bloomberg Television. “In this world that we’re living in, we’re talking to them about everything. I’m not happy that the Max has been delayed for now getting close to two years and we still don’t know when we’ll have it in service,” Kelly said. “We’re looking at the pricing in a whole new environment and obviously we need certainty around the Max, period.”

American is planning to reintroduce the Max in December on a Miami-to-New York route, pending approval from U.S. regulators that finally appears within reach. But Southwest doesn’t see the jet flying as part of its fleet until the second quarter of next year. That’s a reflection of the logistical challenges involved with bringing mothballed jets back into service, but also a sign that Southwest already has more than enough planes as it is.

It’s not just Boeing: Rival Airbus SE is also facing order revisions in the wake of the pandemic and a slower-than-expected recovery in air travel. American said it had delayed some deliveries from the European planemaker, and Delta Air Lines Inc. said last week that it had pushed out the handoff of $5 billion worth of Airbus jets until after 2022. But the Max’s prolonged grounding has made the plane particularly vulnerable. More than 1,000 Max jets have been removed from Boeing’s backlog this year, either because the orders were canceled outright or because delayed deliveries and stressed finances at the buyer made it doubtful they would be filled. There are now 3,357 Max jets on order before accounting for any potential future cuts on the part of Southwest and other carriers. Airbus’s rival A320 family of jets had a backlog of 5,992 at the end of the third quarter, giving it a 64% share of the market for single-aisle jets, notes Vertical Research Partners analyst Rob Stallard. Demand for those planes is likely to recover faster than that for the hulking twin-aisle models used for long-range journeys. 

Before the pandemic, the thinking was that Airbus’s relatively long backlog would somewhat conversely protect Boeing’s market share because airlines anxious to capitalize on a boom in travel demand didn’t want to join the back of the Airbus line. That logic no longer holds in an environment where airlines are shrinking. Asked whether Southwest would consider abandoning its historical position as an all-Boeing carrier and adding Airbus’s smaller A220 model to its fleet, Kelly said, “the only thing I would willingly admit is if there were ever a scenario to make a change in aircraft type it would be now. We’re not desperate to grow the airline and we may not be for a long time.”

Southwest reiterated the fuel-efficiency benefits of the Max on its earnings call on Thursday. But Kelly’s comments on pricing should be particularly concerning to Boeing investors because Southwest likely already got a notable discount for buying in bulk. Perhaps most important, once the pandemic is over (yes, it will eventually be over) and once regulators allow the Max to fly again (yes, that should eventually happen, too), there’s no easy way out of Boeing’s competitive disadvantage.

As the Max grounding dragged on and Boeing’s strategy of simply adapting decades-old designs to new engines came under harsh scrutiny, there was speculation that perhaps the company should just start over and come up with a true successor to the 737 model. The logic of this has only become stronger with the pandemic, but Boeing’s balance sheet has also gotten much more stressed. The company’s debt load has swelled to $61 billion thanks to its pandemic fundraising efforts, up from $28.5 billion at the start of the year. Even if Boeing wanted to start over, it’s stuck with the Max.