By Rajesh Kumar Singh, Abhijith Ganapavaram and David Shepardson
(Reuters) -Boeing's troubles with its 737 MAX jets are upending the aerospace industry's 2024 plans, changing airlines' fleet and expansion goals as U.S. regulators froze production of the best-selling jets.
The Federal Aviation Administration ramped up scrutiny of Boeing (NYSE:BA) after a frightening Jan. 5 incident when a cabin panel tore off of an Alaska Airlines jet mid-flight. The plane landed safely with only minor injuries to people on board - but that experience has forced the industry to grapple with problems with Boeing's manufacturing and quality-control processes.
The FAA on Wednesday froze increases in production of the single-aisle 737 MAX due to the issues, which have frustrated executives dependent on Boeing, one of only two major global plane manufacturers.
"Boeing needs to get their act together," said American Airlines (NASDAQ:AAL) CEO Robert Isom. "It is hard enough running an airline. We need quality product, and that's what we demand."
The FAA's order means Boeing can continue producing MAX jets at its current monthly rate, but it cannot increase that rate. It offered no estimate of how long the limitation would last and did not specify the number of planes Boeing can produce each month.
The FAA's unprecedented intervention in production schedules could further delay some deliveries of new planes to airlines and hurt suppliers already reeling from an earlier MAX crisis and the pandemic.
Boeing CEO Dave Calhoun told Reuters on Thursday that he supported the FAA decision. "We all want safe airplanes. This is a safe airplane," he said in Washington, where he has been meeting with U.S. legislators.
Some airlines could be significantly impacted by any freeze on higher production, a senior industry source said, though many have already factored in some delays as aerospace firms continue to recover from the pandemic.
Several U.S. carriers said on Thursday they had adjusted their plans for 2024.
Alaska Air (NYSE:ALK) Group, the operator of the 737 MAX 9 that suffered the mid-air incident, forecast a $150 million profit hit in 2024 from the aircraft grounding that has lasted nearly three weeks. It also cast doubt on its capacity growth plans for the year, citing the grounding and "the potential for future delivery delays."
Southwest Airlines (NYSE:LUV) altered its fleet plans for 2024 due to the supply-chain challenges and uncertainty over certification of the smaller MAX 7. Before the Jan. 5 accident, Southwest was expecting the MAX 7 to gain certification by April.
CEO Bob Jordan, however, said on a Thursday earnings call he has "absolute confidence" that Boeing will work its way through and "come out of this a better company."
Senator Tammy Duckworth, who chairs the Senate Commerce Committee's air safety subcommittee, told reporters after a meeting with Calhoun that she had asked the Boeing CEO to withdraw a request to exempt the MAX 7 from certain regulations so it could attain FAA certification. Calhoun said he would consider it but made no promises, according to Duckworth.
Texas-based American has 20 MAX planes on order for deliveries this year. Chief Financial Officer Devon May told Reuters that the FAA's order may have a "modest" impact on those deliveries.
American is looking to place a new order for planes for deliveries in 2027 and beyond. May said the company is talking to Boeing, Airbus and Embraer for the new order, but is mindful of Boeing's ongoing issues.
"We absolutely take current events into consideration as we're going through our analysis of this order," May said in an interview.
United Airlines has 100 MAX deliveries scheduled for this year, according to regulatory filings. It warned of a wider-than-expected first-quarter loss due to the grounding, and CEO Scott Kirby (NYSE:KEX) said the company would also build a new fleet plan because of Boeing's delays.
The FAA did allow grounded MAX 9 planes to return to service once inspections were done, a relief to U.S. MAX 9 operators Alaska and United Airlines, which had been forced to cancel thousands of flights and aim to begin returning the planes to service on Friday. Panama's Copa Airlines started flying the grounded aircraft again on Thursday, a spokesperson for the company said.
Boeing on Thursday paused production for 15 hours at the Renton, Washington-area factory where it makes the 737 MAX for a "quality stand-down." During the event, about 10,000 employees gathered in small teams to identify quality and safety improvements that could be put in place in various work areas around the facility, Boeing said.
Boeing shares closed down 5.7% on Thursday in a volatile session for the sector, while supplier Spirit Aerosystems fell 7.9%.
Shares of Alaska closed up 4.5%, United's gained 5.2%, while Southwest's fell 2.3% and American rose 10.3%.
PRODUCTION LINE PLANS
Boeing is seeking to increase production of the 737 MAX family to keep pace with demand and close a gap in the market with Airbus.
Analysts have expressed concerns that extra scrutiny of Boeing factories would temper production increases for the smaller and more widely sold MAX 8, a key source of cash for Boeing and many suppliers.
Boeing's latest 737 master schedule, which sets the production pace for suppliers, calls for production to rise between now and late 2025, Reuters reported in December. However, Boeing's own production can lag the supplier master schedule.
The FAA's decision could impact plans to start a new 737 MAX production line in Everett, Washington, by mid-2024.
The line, set to be the fourth 737 line overall and the first outside its Renton plant in suburban Seattle, is needed to meet strong demand.
Boeing declined to comment on any potential impact on the Everett line.