Boeing’s 737 MAX grounding spills over into economy, weighs on GDP

  • Business Premium
  • Tuesday, 23 Jul 2019

THE prolonged grounding of Boeing Co.’s 737 MAX aircraft is rippling through the U.S. economy, hurting the nation’s trade balance and clouding the outlook for airlines, suppliers and their tens of thousands of workers.

Companies ranging from American Airlines Group Inc., AAL -0.54% to engine maker General Electric Co. and smaller parts suppliers have cited the grounding and halt in deliveries of the jetliner for financial damage or the suspension of profit guidance. Several U.S. and foreign airlines are cutting back on routes and capacity growth or delaying pilot hiring and promotions because of the MAX.

Boeing continues to make the MAX and other versions of the 737 at a rate of 42 a month, after cutting monthly output from 52 in April. Economists say the production cuts likely weighed on U.S. gross domestic product in the second quarter, and warn the negative impact could intensify as long as the plane maker is unable to resume deliveries.

Boeing is the largest U.S. manufacturing exporter and one of the nation’s top private employers. The MAX is its best-selling plane, and jets worth more than $30 billion sit idle since global regulators grounded the aircraft following a second fatal crash in March.

The company hopes to resume deliveries in the fourth quarter, but some airlines and officials expect the MAX to stay out of service until next year. That would further dent U.S. exports and durable-goods orders at a time when some manufacturers are experiencing higher costs and lowering their output due to tariffs and trade tensions.

“It has already been a significant part of the slowdown story,” said Ward McCarthy, chief financial economist at Jefferies LLC.

U.S. durable-goods orders in May fell 1.3% from the prior month, including a $2 billion drop in sales of civilian aircraft and spares, the Commerce Department said last month. U.S. exports of commercial aircraft were down 12% in the first five months of 2019 compared with a year earlier.

Two crashes and the global grounding of Boeing’s 737 MAX commercial airliner led to extensive disruption in the international aerospace industry. WSJ’s Robert Wall explains the continuing effects of the plane’s grounding. Photo: Getty Images
The U.S. economy is still growing, with analysts surveyed by The Wall Street Journal pegging expansion in the second quarter at an annualized rate of 2%. Michael Feroli, chief U.S. economist at J.P. Morgan Chase, estimates Boeing’s production cuts shaved roughly a tenth of a percentage point off his forecast.

“The economy is big. It’s moving along quite well even in spite of the issues that Boeing is having,” Mr. Feroli said. Economists say that the impact would be more pronounced if Boeing cuts production further, as some analysts have said it might need to.

Boeing has reduced output to limit the number of planes piling up at its factories, and that has pressured thousands of suppliers that invested heavily in operations to feed MAX production. Uncertainty over the return of the MAX and Boeing’s production plans have made it tougher for those suppliers to make hiring and investment decisions.

“We probably modeled four, five scenarios literally a week as to when are they going to get back in the air,” said GE Aviation President David Joyce at the Paris Airshow last month.

GE, the sole engine provider for the MAX through its joint venture with France’s Safran SA, expects the MAX slowdown to cost it as much as $300 million in the second quarter. The partners have trimmed MAX engine output by 5% but are keeping their own suppliers working at a higher clip in anticipation of Boeing boosting output again next year.

Boeing last week said that it expects to pay up to $5.6 billion in compensation to affected airlines over several years. That is in addition to $2.7 billion in charges for the expected higher cost of producing the planes. The company is due to report its second-quarter earnings on July 24.

Boeing hasn’t cut any staff because of the MAX crisis, though some employees have said they worry layoffs could be coming. Boeing has trimmed from its ranks of contractors recently as it tries to be prudent with its cash. A spokesman said that pruning wasn’t related to the MAX grounding.

Boeing said last week it plans to boost 737 production from the current rate of 42 planes a month to 57 sometime next year while also delivering the backlog piling up at its factories. Analysts estimate there could be as many as 300 undelivered jets by the end of the year.

Many of Boeing’s 13,000 domestic suppliers have said they continue to produce at a rate of 52 planes a month. Boeing’s recent commitment to avoid further cuts and ramp up production when the MAX is cleared to fly have buoyed some big suppliers.

Spirit AeroSystems Holdings Inc., which makes the MAX fuselage and engine parts, suspended financial guidance this year after the plane was grounded. Spirit’s shares gained 7.1% on Friday after Boeing laid out its bullish production target. Stocks of other suppliers such as Triumph Group Inc. and Allegheny Technologies Inc. climbed more than 2% and 3%, respectively. Boeing closed up 4.5%, though lost some ground in Monday trading.

Airlines have also been buffeted by the changing outlook for the MAX’s return. United Airlines Holdings Inc. said last week that the grounding has cut into its planned capacity growth this year. American Airlines said earlier this month that it canceled 7,800 flights in the second quarter due to the grounding, resulting in a $185 million hit to pretax profits.

Southwest Airlines Co. , the biggest carrier of domestic passengers and the world’s largest U.S. MAX operator, had hired at a rapid clip in anticipation of adding over 40 more of the jets this year to the 34 already in its fleet. Now Southwest is tapping the brakes. It has postponed initial training for about 50 new pilots and put promotions on hold for another 50 seeking to advance from co-pilot to captain.

Some pilots said the MAX suspension has cut into flying they count on for additional cash.

One Southwest pilot said there has been about a 25% reduction in the extra flying he would typically take on at this time of year. “You make hay when the sun shines, but this summer, the sun’s not shining,” he said.

A majority of the roughly 400 Air Canada pilots who were flying the carrier’s 24 MAX planes before the grounding are now on leave and receiving partial pay, two people familiar with the company’s operations said.

Air Canada declined to comment on the matter. - WSJ

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