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One of Boeing's Biggest Customers Just Dealt a Blow to the 737 MAX

By Lou Whiteman - Updated Apr 3, 2020 at 5:03PM

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A major airplane leasing company doesn't need all those airplanes it ordered.

Airplane leasing giant Avolon said Friday it was cancelling orders for 75 Boeing (BA -0.18%) 737 MAX planes scheduled to be delivered by 2023, part of a broader adjustment of its order book due to disruptions caused by the COVID-19 pandemic.

The move, though not entirely unexpected, is a setback for Boeing in its effort to get the once-promising 737 MAX program airborne. And it could be a sign of things to come for Boeing and archrival Airbus (EADSY -2.20%) as airlines and leasing companies reassess their need for new planes following an unprecedented global slump in travel.

The 737 MAX has been grounded for more than a year following a pair of fatal accidents, but the company is optimistic it will be cleared to return to the skies by mid-year. The bull case for Boeing is tied to the plane's more than 4,000-unit-strong order book, but as Avolon suggests, that order book is likely to come under pressure in the months to come.

No one needs new planes right now

The airline industry has been among the sectors hit hardest by the pandemic, with global travel demand evaporating overnight. Carriers have responded by cutting flights and grounding aircraft, and if the global economy is drawn into a recession because of the outbreak and the response, it could take some time for demand to recover.

On Friday, Avolon, the third-largest global leasing company, said, "we have acted swiftly and decisively to address the market outlook and have reprofiled elements of our orderbook to better align with market conditions." In addition to cancelling the 737 MAX commitments, it is also dumping orders for four Airbus A330neo aircraft and deferring delivery of an additional 25 aircraft, including 16 737 MAX planes, to 2024 and beyond.

A Boeing 737 MAX in flight over clouds.

Image source: Boeing.

The lessor said it has received requests from more than 80% of its customer base for relief from payment obligations under their leases and has agreed to a number of rent-deferral arrangements for an average of three months.

"Given the ongoing impact on our customers' operations, we expect that additional requests for rent relief will be received and that a number of lessees will fall behind on their rental obligations with a related increase in Avolon's trade receivable balance," the company said.

This is only the beginning

The news comes a day after Boeing said it was offering early-retirement and buyout packages to its workforce, part of the company's attempt to deal with what CEO Dave Calhoun told employees was "our new reality now." Boeing has already suspended its dividend and temporarily shut down aircraft production, but it has dozens of assembled but not-yet-delivered 737 MAX airframes on its property because of the grounding.

The 737 MAX was once seen as the jewel of Boeing's vast portfolio, a fuel-efficient technical marvel that was expected to be among the best-selling airplane models of all time. Boeing had been anticipating a fall in demand for larger, widebody aircraft, announcing late last year that it would trim 787 Dreamliner production in 2021, but the MAX was expected to offset those declines.

Avolon CEO Dómhnal Slattery called the pandemic "the most challenging period in the history of commercial aviation," and indeed, the cancellations are unlikely to be limited to his company. Boeing had more cancellations than orders for February, a trend that is likely to continue.

Boeing's commercial twin-aisle family in formation.

Image source: Boeing.

While Boeing and Airbus are both likely to feel the pinch, Boeing is ill positioned for the slowdown at this time. The company was already under pressure from key customers due to the 737 MAX issues, and if it plays hardball on orders, it will likely face a blowback from customers seeking damage for delays.

Boeing also has a heavier concentration of lessor orders. And with the airlines increasingly trying to adopt a more asset-light model and acquire new planes through these lessors instead of buying them, Boeing can't afford to sour long-term relationships.

Stay away from Boeing shares

Boeing was a tough company to love even before the pandemic, rocked by the 737 MAX issues and embarrassing revelations about the company's internal culture that came out of investigations into the plane. The company fired CEO Dennis Muilenburg in December but replaced him with longtime board member Calhoun instead of going for a clean sweep.

Its defense business has been erratic, and its forthcoming 777X commercial model has been plagued by development delays.

The only argument for buying was the strength of Boeing's order book and the duopoly nature of the commercial aerospace business, which suggested that despite its current issues, Boeing still had a bright future.

Today, that order book is subject to question, and it could take years for Boeing's commercial business to rebound. Meanwhile, the pandemic-related sell-off has discounted the share price on a lot of better-run aerospace businesses with more certain outlooks. It's getting harder and harder to mount a bull case for Boeing.

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