Supply Chain Struggles, China Uncertainty Continue To Weigh Down 737 Program

Supply-chain struggles and continued uncertainty around the Chinese market will hold down Boeing’s ability to ramp up 737 production and monthly delivery totals well into 2023, company executives acknowledged Oct. 26. 

“I suspect it won’t be untill we get to the end of next year before we can really make sizable [737 production] rate increases,” President and CEO Dave Calhoun said on the company’s third-quarter (Q3) earnings call. Boeing’s notional 737 production rate is 31 per month, but actual rollout and corresponding delivery figures have varied due to a variety of factors. Chief among them from long-term rate stability and ramp-up standpoints is engine availability, Calhoun reiterated. 

“We’ve been talking about this for quite a while,” he said. “We get on regular calls with our counterparts at the engine suppliers ... In our case, it’s predominantly CFM [International] and then [General Electric, or GE] broadly across the widebody fleet.” CFM, the GE Aerospace/Safran joint venture, is the sole 737 program engine supplier.  

Calhoun pointed to castings as the engine suppliers’ primary constraint and expressed confidence that the situation is manageable.  

“The best thing I can say now is that we are clearly on the same page [with] our suppliers,” he said. “I think the most important thing is we’re not being surprised as frequently as we used to be and I do think the engine suppliers are getting there.” 

Boeing’s inability to increase its 737 production rate is part of a larger issue holding down delivery totals. The others: China’s refusal to take new Boeing aircraft and the prolonged certification of the 737-7 and 737-10.  

Boeing has 270 737 MAX-family aircraft awaiting delivery, including about 160 built during the model’s global grounding and related delivery pause from March 2019 to December 2020. Among the stored inventory are 138 aircraft earmarked for Chinese operators.  

While the country’s regulator has signed off on changes Boeing made following two fatal 737-8 accidents that triggered the grounding, it has not granted final regulatory approval for operations and Chinese operators are not accepting 737 MAX deliveries. China’s COVID-19 protocols, particularly lockdowns of major cities, have helped limit air traffic demand, making the lack of 737 MAXs easier for domestic carriers to manage. 

In the meantime, the fate of new Chinese orders and deliveries—at least from Boeing—has grown beyond an aviation matter into a geopolitical one, leaving the key U.S. exporter as a mere observer of talks between top Chinese and U.S. officials. 

“My hope is that these two big geopolitical forces get together and endorse free trade again and the COVID policy is ultimately lightened ... so that they can take more deliveries of airplanes,” Calhoun said.  

While Boeing will “keep supporting our customers” in China, Calhoun said it is working to find new buyers for the on-hand 737 MAXs slated to go to Chinese operators. 

“I have not gotten a single signal—and I am surprised by it—that they’re going to take deliveries in the near term,” Calhoun said. “It is really hard for me to find signals that things are going to change in China and move in our direction. So, we have begun and we’re going to continue to re-market” affected aircraft, he added. 

Further complicating 737 MAX delivery planning is the lack of FAA approval for the 737-7 and 737-10 variants. Boeing has built at least 16 of the yet-to-be-certified models and is working on getting FAA’s sign-off. The company remains confident that a pending deadline that would force upgrades to the two models’ flight crew alerting system will not come into play because lawmakers will grant the company an extension to get the aircraft approved under FAA-granted exemptions.  

“We remain confident that we can get an extension of that deadline because this is the safe answer,” Calhoun said. “We’ve heard from airlines. We’ve heard from pilots and we’ve heard from our workers ... So, we remain not just hopeful but confident that we can get this across the finish line.”  

Most 737-7 and 737-10 customers and related pilot groups support granting an extension that would permit Boeing to build the 737-7 and 737-10 without a modern flight-crew alerting system and keep the 737 MAX family flight decks common. The Allied Pilots Association, which represents American Airlines’ pilots, is the most notable exception. 

The persistent 737 problems forced Boeing to revise its full-year program-delivery target. Originally at 500 and then adjusted down to close to 400, the company now is projecting 375 737 MAX deliveries in 2022. The company delivered 267 through Sept. 30, meaning it needs to average 36 per month in the fourth quarter.  

Looking ahead, the lingering uncertainty with China and the 737-7 and 737-10 certification headaches suggest Boeing seemingly has significant work remaining to satisfy the FAA. This means liquidating the 737 inventory will take longer than the company’s most recent two-year projection. 

“We now expect most of the inventory airplanes to deliver in 2023 and 2024 with some moving into 2025,” CFO Brian West said. 

On the widebody front, despite the welcome boost given by the resumption of 787s to the operating cash flow, Boeing is still struggling with large volumes of rework on each airframe as it wades through the backlog of undelivered aircraft and tries to increase monthly production at its Charleston, South Carolina facility. Broad supply chain issues also continue to hamper rate recovery plans, which remain well below the company’s target of five per month. 

West noted Boeing delivered eight 787s in Q3—the first customer hand-overs in more than a year due to a spate of production issues—and has 115 remaining in the undelivered inventory.  

“The pace of deliveries from inventory going forward will be based on finishing rework, as well as customer fleet planning requirements,” West said. “We expect most of these airplanes to be delivered over the next two years.” 

Supply-chain issues remain a “key watch item” for 787 production and deliveries, West said, adding that Boeing will “continue to produce at a low rate and will gradually return to five airplanes per month over time.”  

Longer term, with more than 400 787s on the orderbooks, “we anticipate higher production rates due to expected widebody market recovery,” West said. “As customers return to medium-term fleet planning, we continue to have positive discussions with our customers on the 787.” 

Not surprisingly, the extensive rework costs and huge delays to deliveries continues to be a major drag on Boeing’s finances. “We recorded $303 million of abnormal 787 costs in the quarter, in line with expectations, and we still anticipate a total of about $2 billion—most being incurred by the end of 2023. These costs are driven by rework and production rates below five per month,” West said. 

Costs also continue to mount up on the delayed 777-9, deliveries of which have been pushed back into 2025 amid continuing hold-ups to the start of certification tests. While Boeing still anticipates holding to the revised development and delivery timeline, there is still no indication of when the FAA and the European Union Aviation Safety Agency will change course from the twinjet’s agreed certification basis. A change in what Boeing must comply with could force design modifications and further prolong development. The program has yet to receive FAA type inspection authorization, which would clear Boeing to begin flight testing for certification credit. 

Boeing continues “to coordinate with the FAA to prioritize resources across our development programs,” West said. “We booked $111 million of 777X abnormal costs in the third quarter, in line with our expectations, and we still expect to record about $1.5 billion of these costs through 2023 while 777-9 production remains paused during the quarter.”