On Wednesday, the FAA formally recertified the Boeing (NYSE:BA) 737 MAX for commercial service. After being grounded for more than 20 months, Boeing's top-selling model can finally take to the skies again, once airlines complete necessary maintenance work and pilot training.
However, the ungrounding of the 737 MAX doesn't mean Boeing can expect smooth sailing ahead. Now, it must confront an even tougher task: selling the 737 MAX despite an unprecedented aviation industry downturn.
The backlog is not enough
As of Oct. 31, Boeing reported a backlog of 3,365 firm orders for the 737 MAX. While that's down from a peak of more than 4,700 firm orders two years ago, it's still a sizable backlog. After all, 737 family deliveries peaked in 2018 at 580 units. Boeing's current 737 MAX order book is equivalent to nearly six years of production at that rate. As a result, many bulls are confident that Boeing's business will be back to normal within a few years.
Reality is more complicated, though. Among the largest 737 MAX customers are Asian budget airlines flydubai, Lion Air, and VietJet, all of which ordered too many planes based on unrealistic growth plans. For example, flydubai has orders for 237 737 MAX jets, despite having about 50 planes in its fleet today. Clearly, flydubai won't be able to take most of those 237 jets on order until the late 2020s and early 2030s, if at all.
Another 700-plus orders come from aircraft leasing companies. Lessors don't have customers lined up for most of those orders yet, and they won't take delivery of planes until they do. Meanwhile, even relatively stable airlines are trying to defer orders to later years, given that global air travel demand isn't expected to recover fully until at least 2023 or 2024.
In short, while Boeing's 737 MAX backlog is equivalent to nearly six years of production at 2018 rates, those orders aren't neatly lined up. Some are likely to be delivered far more than six years from now. Others ultimately may be canceled.
Boeing's current goal is to deliver the more than 450 already-built 737 MAX jets it has in storage over the next two to three years while ramping up production to a rate of 31 per month by early 2022. It then hopes to continue increasing production toward pre-grounding levels in the following years. To meet these objectives, Boeing needs to ramp up 737 MAX sales in a hurry.
The road ahead
Boeing's first priority must be selling the 100 or so "white-tail" 737 MAX jets in its inventory. Those are planes that have lost their original buyer and need to be resold.
Boeing has a decent chance at scrounging up enough orders from the top five U.S. airlines to clear out that inventory by the end of 2022, but it may come at the expense of deferring or canceling other existing orders. Furthermore, buyers are likely to demand deep discounts, given that they don't actually need extra aircraft over the next year or two.
Looking further ahead, Boeing must get existing 737 MAX customers to expand their order books while convincing some Airbus A320neo customers to diversify their single-aisle jet fleets. It has some good prospects here. Alaska Air's recent fleet decisions hint that it may soon place a big 737 MAX order to replace its Airbus planes. IAG (parent of several European airlines, including British Airways and Iberia) signed a letter of intent for 200 737 MAX jets last year. Finalizing that deal would be a big step in the right direction, too.
Two huge challenges
Still, as Boeing tries to rebuild its 737 MAX order book, it will face two major challenges. First, Airbus has a massive backlog of 6,517 narrow-body orders. That will make it difficult to win customers away from Airbus, as many of those airlines already have enough narrow-body jets on order to meet their needs for the foreseeable future.
Second, over 40 airlines have failed year to date, idling nearly 500 aircraft. Many more are on the rocks, such as European discounter Norwegian Air, which recently filed for the Irish equivalent of bankruptcy protection. Others have downsized their fleets through the bankruptcy process. As a result, there will be lots of relatively affordable used jets on the market. That will complicate Boeing's efforts to convince cash-strapped airlines to order new aircraft. Similarly, aircraft lessors have thousands of jets on order or coming off lease and will need to place most of those with customers before ordering additional aircraft.
Boeing faces a long slog back to health. Depending on the airline industry's future growth rate and how quickly Airbus ramps up production, it's possible that Boeing 737 output will never get back to its 2018 high. That could cause Boeing stock to continue underperforming the market in the coming years.