Boeing will reevaluate the business plan for the once seemingly preordained New Midsize Airplane (NMA) project and cut production of the 787 from 12 to 10 per month as the company reacts to changing market dynamics amid the continuing crisis surrounding the 737 Max, company CEO David Calhoun said during the company’s year-end 2019 earnings call Wednesday. Hosting his first earnings call as Boeing’s chief executive, Calhoun insisted the reassessment of its product development does not amount to a “delay,” but rather a “refresh,” as the company works toward meeting a target to return the Max to service by mid-year and mitigate several billions of dollars in losses resulting from the grounding.
“We will not lose sight of the importance of investing in our future,” said Calhoun. “That said, there are always some investment re-prioritizing and streamlining that we can do, and we will. “We’ll take the time to reassess our product development strategy in a methodical way. I think that’s a natural course for any new incoming leader to take.”
Also on the call, Boeing CFO Greg Smith added that the new coronavirus originating in Wuhan, China, stands as a short-term “watch item,” as do “pressures” on the freighter and widebody passenger markets such as global trade tensions, notwithstanding the recent accord between China and the U.S. on the first phase of a new trade agreement that calls for, among other things, a return to commercial airplane sales to the People’s Republic. “This is definitely something we’re keeping a close eye on,” said Smith.
On the NMA, Smith noted that Boeing has asked the project team to “step back” and reassess the commercial product development strategy to best align for future product needs.
As for widebody plans, Smith revealed that the production rate on the 787 will fall to 10 starting in early 2021 and return to 12 sometime in 2023.
Both Smith and Calhoun emphasized the importance of working closely with the 737 Max supply chain to ensure the companies involved can effectively cope with the return to production. “Given the backdrop of demand, a healthy supply chain infrastructure is critical to sustaining production system stability,” noted Smith. “Some of the suppliers have had challenges with production rate changes in the past.”
Although both Boeing executives stressed that the FAA will determine the timing of the Max’s return to service, the company must make certain assumptions to plan for its production plans. For now, Boeing expects to deliver most of the airplanes in storage about a year after service re-entry. “We’ve assumed that we will resume 737 Max production at low rates in 2020 as timing and conditions of return to service are better understood,” said Smith. “And then we expect to gradually increase previously planned production rates over the next few years. We’re also assuming that the 737 Max airplanes produced and stored during the grounding will be delivered over several quarters with the majority of them being delivered within the first year after resumption of deliveries.”
Meanwhile, Boeing’s particularly poor financial results in the quarter reflected almost exclusively the effects of the Max grounding and the company expects continued negative forces until it reaches its full production rate. During the fourth quarter, the company added $2.6 billion in program costs to the 737 program to reflect the change in return to service assumptions. The addition raises the total effect to $6.3 billion. The company also recorded $4 billion in abnormal production costs to be incurred mainly in 2020. That expense relates primarily to the company’s decision to maintain 737 production infrastructure during the suspension of the line and during what Smith called low-rate production. The company also reassessed costs associated with customer concessions in the amount of $2.6 billion, bringing total cumulative effects to $8.3 billion.