After botching the development of its 787 Dreamliner -- leading to big delays and even bigger cost overruns -- Boeing (NYSE:BA) was much more cautious with the 737 MAX, an upgraded version of its best-selling line of jets.
Up until very recently, this approach was working extremely well, putting the 737 MAX on track to be delivered several months early. However, last week, Boeing seemed to hit a snag, as it was forced to ground the entire 737 MAX test fleet because of a manufacturing problem related to some 737 MAX engines.
However, as many industry experts had predicted, the fleet grounding turned out to be a non-event. This allowed Boeing to go ahead with its first delivery of the 737 MAX on Tuesday.
Boeing is relying on the 737 MAX
While the Boeing 737 MAX has often been dismissed as an inferior competitor to Airbus' A320neo family, it is still a hugely important product for Boeing. Indeed, it is the fastest-selling jet in Boeing's history.
As of the end of April, Boeing had a backlog of 5,704 firm orders across all of its commercial aircraft lines. More than 3,700 of those orders were for the 737 MAX.
The 737 MAX thus represents Boeing's most important potential driver of revenue, profit, and cash flow growth for the coming decade. Getting the first one delivered on time and then ramping up production smoothly has been a critical priority for Boeing.
No need to worry
As one aerospace analyst put it, last week's brief period of concern about 737 MAX engine defects was "a tempest in a teapot." First, the cause of the problem was already known by the time the fleet was grounded. Second, there were never indications that these defects were part of a larger problem. Third, the component in question was manufactured by multiple suppliers -- and only one of them was responsible for the defective parts.
Still, Boeing needed to get regulators to sign off before it could resume test flights and start delivering planes. This could have caused problems due to launch operator Malindo Air's aggressive plan to put its first 737 MAX into service on May 19.
Fortunately, the FAA quickly cleared Boeing to restart test flights using engines without the potentially defective components. As a result, it was able to deliver the first 737 MAX to Malindo Air on Tuesday, just a day later than previously planned. That may still allow the carrier to get the plane back to Malaysia in time for the scheduled entry into service on Friday.
Avoiding a big delay in that first delivery was particularly important because Malindo Air is a subsidiary of fast-growing Indonesian airline group Lion Air. Lion Air is the No. 1 customer for Boeing's 737 MAX, with 201 firm orders.
Now comes an even bigger challenge
The 737 MAX isn't nearly as technically complex as the 787 Dreamliner, but it's still notable that Boeing was able to execute a more-or-less flawless development program.
That said, ramping up production may prove to be the real challenge. Over the next two to three years, Boeing plans to switch over all of its 737 production to the new-engine models, while simultaneously ramping up output from 42 per month to 57 per month.
Aggressive output targets at Boeing and Airbus have put suppliers under a lot of strain, particularly for the new engines. Boeing's engine supplier, CFM, will now have to address the recent manufacturing defect in the midst of this aggressive production growth. Time will tell whether it is up to the challenge, or if Boeing will instead have to modify its production plans.