Shares of Boeing (NYSE:BA) dropped 4.3% on Monday on reports that its board is nearing a decision to halt production of its troubled 737 MAX aircraft, a move that highlights the worst is far from over for this aerospace and defense titan.
Boeing's 737 MAX has been grounded since March as a pair of fatal accidents are investigated and modifications to the plane's control systems are tested and certified. The company originally had hoped to have the planes back in service before year's end, but it is increasingly looking like it will be late in the first quarter of 2020, at the earliest, before regulators sign off on the aircraft.
Boeing has continued to manufacture 737 MAX planes through the grounding at a rate of 42 frames per month, in part to help support the aircraft's sprawling supply chain. But The Wall Street Journal reported on Monday that with certification now unlikely in early January, as Boeing had hoped, the company is considering reducing its production rate or shutting the line down completely.
The status quo is unsustainable because Boeing is burning through an estimated $4 billion per quarter due to the grounding, according to Jefferies estimates. It is also creating a logistics nightmare at Boeing's Renton, Washington facility, where the company has been forced to store airplanes in employee parking lots because of the backlog.
Historical moment in Aviation history! ✈️— Aviation photo ✈ (@Airplane_pic) June 23, 2019
Aerial images show the Boeing 737 MAX aircraft parked in the staff car park because there is no more capacity left at the airport. pic.twitter.com/TZ3MKH8rdM
Built but undeliverable 737 MAXs can't pile up in Boeing facilities forever, but neither a rate cut nor a production shutdown is an appealing option for the company. Shutting down the production line risks losing highly trained employees and damaging the supply chain, which would make it harder for the company to eventually ramp up production. But slowing production would mean more planes in storage, which would raise costs and drag out the timeline to reduce inventory and return to normal once the 737 MAX is airborne.
Of the many options, a temporary shutdown is likely the wisest option because it should allow Boeing to retain workers, either by temporarily reassigning them or providing a short-term furlough, and minimize the disruption to Spirit AeroSystems and other key suppliers.
But even if it is the right move, it does show that the 737 MAX crisis is far from over. It is becoming increasingly clear that the 737 MAX will eat into Boeing's cash flow and results throughout 2020 and into 2021.