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Boeing said Wednesday that it was considering halting production of the 737 Max if the grounding of its most popular plane persists, a move that could damage airlines, suppliers and even the U.S. economy.
The company is struggling to contain the fallout from two deadly crashes of the Max. It has already announced more than $8 billion in costs related to the accidents and is producing the planes at a slower rate.
The damage is spreading through the constellation of companies connected to Boeing, the nation’s largest aerospace manufacturer. Airlines around the world have canceled thousands of flights, costing them billions of dollars, and some carriers have reined in expansion plans. Suppliers like General Electric, which makes engines for the Max, are expecting lower revenue in the quarter.
The economic toll is also rising. Orders of durable goods in the United States, which include commercial airplanes, were down 1.3% in May, the third drop in four months, according to the Census Bureau.
By one estimate, a production halt would shave about six-tenths of a percent off the gross domestic product growth rate, the financial equivalent of a prolonged government shutdown or a significant natural disaster.
“The fact that they talked about it for the first time is significant,” said Scott Hamilton, managing director of Leeham Co., an aviation consultancy. “When Boeing starts talking about a topic and repeating it, especially in the same event, they’re signaling that something is going on.”
Boeing’s chief executive, Dennis Muilenburg, and its chief financial officer, Greg Smith, both raised the prospect of halting production of the 737 Max on a conference call discussing the company’s second-quarter earnings Wednesday.
“We might need to consider possible further rate reductions or other options, including a temporary shutdown of the Max production,” Muilenburg said.
After the crashes, Boeing slowed production of the 737 family to 42 planes per month in April, down from 52. It cannot deliver any Max jets until regulators clear the plane to fly and has stockpiled more than $30 billion worth of planes in Seattle.
Boeing has said it expected the Max to return to service late this year. But Boeing and regulators keep finding new problems with the model, leading to a cascading series of delays.
“If that timeline changes significantly, we will have to evaluate these other scenarios,” Muilenburg said. “There’s no one specific trigger.”
Muilenburg said the decision to halt production would depend on various issues, including the date the Max is likely to return to service as well as its ability to store and maintain the hundreds of completed planes not yet delivered.
He added that temporarily halting Max production might make more sense than reducing production levels. Given what it costs to operate and staff the production line, the Max program could become unprofitable if Boeing does not make enough planes each month.
“It is significant that not only Muilenburg talked about, but that Greg Smith talked about it, too,” Hamilton said. “For those of us that have followed Boeing for decades, this is them raising the caution flag.”
The longer the Max stays grounded, the bigger the financial fallout.
The three U.S. carriers that fly the Max - Southwest Airlines, American Airlines and United Airlines - have canceled thousands of flights into November, depressing their revenue. Ryanair, the Irish budget airline, said this month that it would scale back expansion plans because the Max planes it ordered were delayed.
SpiritAerosystems, the largest supplier for the Max, has already cut hours and pay for 4,000 workers and is especially vulnerable to a production halt. And General Electric, which makes the Max engines through a partnership with Safran of France, is also expected to record a dip in revenue as a result of the grounding when it reports earnings next week.
“If Boeing has to halt production, which we do not expect but which is a possibility, it would have a big ripple effect on suppliers throughout the supply chain,” said Jim Corridore, an analyst at CFRA Research.
A production shutdown would be particularly painful in the Seattle area, where Boeing makes the 737 Max and most of its other commercial airplanes.
“For every direct Boeing job, there are three to four indirect Boeing jobs,” Hamilton said.
