Boeing's (NYSE:BA) inventory of 737 MAX white tails -- jets that have been assembled but no longer have a buyer lined up -- represents a major problem for the plane maker. Most airlines have far more airplanes on order than they will need over the next few years, making it hard to drum up new orders. But with the 737 MAX potentially just days away from recertification, clearing the backlog of undelivered jets will be a top priority for Boeing as it looks to stem its cash burn.
To achieve this objective, Boeing has held talks with four of the five largest U.S. airlines -- Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL), Southwest Airlines (NYSE:LUV), and Alaska Air (NYSE:ALK) -- about potentially buying 737 MAX white-tail jets, according to Bloomberg. But will any of these talks lead to deals? Let's take a look.
The white-tail fleet has grown
Boeing hasn't delivered any 737 MAX jets since the fleet was grounded globally 20 months ago. However, for the last 10 months of 2019, the company continued building the 737 MAX at a high rate. It didn't halt production until early 2020 -- and production resumed at a low rate in late May.
As a result, Boeing ended last quarter with about 450 assembled 737 MAX planes in inventory. Nearly a quarter of those are white tails that have lost their original buyer. Typically, if Boeing postpones a jet's delivery date by more than a year (or even six months, in some cases), the buyer has the right to cancel without penalty. A large number of airlines appear to be exercising that right, due to the abrupt change in the global aviation landscape. Other airlines have gone bust this year, eliminating additional 737 MAX orders.
Selling white tails almost always requires big discounts. At the very least, Boeing must cover the cost of repainting the plane and converting the interior to the new buyer's preferred configuration. In 2020, the task is complicated by the simple reality that few (if any) airlines need extra planes in the next year or two.
U.S. airlines are Boeing's best hope
It's no coincidence that Boeing is turning to U.S. airlines to sell white-tail jets. U.S. airlines were solidly profitable before the pandemic and have maintained strong balance sheets: especially Southwest, Alaska, and Delta.
Outside the U.S., airlines tend to have weaker finances. Furthermore, many of Boeing's biggest overseas customers have over-ordered to support aggressive growth plans that seem far-fetched now. Lastly, key international customer Ryanair has ordered a unique 737 MAX variant and probably wouldn't be interested in the white-tail inventory.
None of the major U.S. airlines will singlehandedly fix Boeing's white-tail problem. Collectively, though, it's possible that deep discounts could entice them to take most of the 737 MAX white tails.
Airline by airline
Southwest Airlines is the carrier most likely to take 737 MAX white tails. To be fair, management noted last month that Southwest and Boeing had agreed to limit 737 MAX deliveries to a maximum of 48 through the end of 2021 -- and that the airline wouldn't even need that many new jets. For the right price, though, it could take more. With a rock-solid balance sheet, Southwest can certainly afford the cost, and accelerating its 737 MAX deliveries would allow it to retire less-efficient 737-700s sooner.
For Alaska and United, a key stumbling block is that the 737 MAX 8 variant accounts for most of Boeing's inventory (and, presumably, most of the white tails). However, Alaska and United have both shown a clear preference for the larger 737 MAX 9 and 737 MAX 10 models. Perhaps if the discounts are big enough, they would buy 737 MAX 8s, but it's more likely that they will only have interest in the relatively small number of 737 MAX 9 white tails.
Delta Air Lines could be the wild card. Boeing has been trying to get it to take 40 white-tail 737 MAX jets, according to a Reuters report from early October. Year to date, Delta has announced that it will retire 258 mainline planes early -- with nearly half of those having exited the fleet already -- so it will clearly have a need for extra aircraft in the years ahead. That said, Delta has a lot of jets on order from Airbus and has been trying to reduce near-term capital spending in order to pay down debt.
Given that none of these airlines are particularly eager to buy what Boeing is selling, the aerospace giant may have to offer extremely deep discounts to move its unclaimed 737 MAX inventory in a timely fashion. That's just one of the many reasons why Boeing faces a difficult post-pandemic recovery.