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Aviation safety regulators may diverge over Boeing 737 MAX's return

European safety regulator EASA will reportedly choose its own moment to approve the return to service of the Boeing 737 MAX, rather than simultaneously following the FAA, the US regulator. China may also follow its own timetable.

The FAA would prefer a coordinated global decision, since additional delays by other regions after US approval would leave lingering doubts over the aircraft and could be seen to undermine the FAA's authority.

Historically, decisions to ground aircraft and subsequently to approve their return to service have usually - but not invariably - been taken in a globally coordinated manner, with the lead coming from the regulator in the jurisdiction where the aircraft manufacturer is based, or which originally approved the aircraft for service.

However, that gentlemen's agreement was broken at the outset in the case of the MAX when the Civil Aviation Authority of China became the first to ground the aircraft on 11-Mar-2019, beating the FAA by two days.

Boeing hopes for a 4Q2019 return to service, but several operators of the aircraft are planning on Jan-2020 or Feb-2020.

In the meantime, the grounding is hitting Boeing's bottom line and weighing on the wider US economy. Regulators acting out of phase with each other could further complicate the return of the MAX.

Summary

  • China grounded the 737 MAX on 11-Mar-2019, but the FAA reiterated its airworthiness on the same day, only grounding the aircraft on 13-Mar-2019, following strong words from President Trump.
  • Boeing is aiming for 4Q2019 return to service, but this could slip. Meanwhile, the grounding is hitting its cash flow and earnings and weighing on the wider US economy.
  • There is also an impact on the reputation of Boeing, and the return of the MAX will take time to implement, even when approved by all regulators.

On 11-Mar-2019 China grounded the MAX, but FAA reiterated its airworthiness

The Chinese regulator's decision to ground the MAX on 11-Mar-2019 was soon followed the same day by a temporary suspension of operations by Indonesia's Ministry of Transportation.

However, also on 11-Mar-2019, the FAA issued a Continued Airworthiness Notification, but the CAAC decision had flat-footed it.

FAA's grounding decision was taken on 13-Mar-2019

On 12-Mar-2019 regulators in Singapore, India, Turkey, South Korea, Malaysia and Australia, in addition to EASA, also issued some form of grounding notice for the MAX fleets in their jurisdictions, and some of them also banned third-party MAX operations in their air space.

When Canada also grounded the aircraft on 13-Mar-2019, the FAA was then effectively forced to follow suit a few hours later that same day. Many other national authorities also then fell in behind the decision.

The FAA has been criticised for being too willing to take its cue from Boeing, which itself has been criticised for being slow to action.

Even before the CAAC's decision, Ethiopian Airlines pre-empted the regulators and grounded its own MAX fleet after its accident on 10-Mar-2019. Many other MAX operators also then quickly grounded their fleets before regulators forced them to do so.

Boeing aims for 4Q2019 return to service, but this could slip

Boeing has said that it expects the MAX's return to service to begin in 4Q2019 and is planning to phase an increased monthly production rate from 42 to 57 by late 2020.

This has slipped before and could slip again (and Boeing concedes that the timeframe could change).

A number of airline customers are planning for a Jan-2020 return to service, whereas Southwest Airlines (the largest MAX operator) and Air Canada are aiming at Feb-2020. On 4-Nov-2019, Ryanair said it now expected its first MAX deliveries in Mar/Apr-2020.

The grounding is hitting Boeing's cash flow and earnings

Meanwhile, the grounding has had a significant financial impact on Boeing's cash flow, since most of the price of an aircraft is only received on delivery. For more than seven months the company has incurred the costs of MAX production but has not received cash inflows on completing sales of the aircraft.

In 3Q2019 its free cash flow (operating cash flow less capital investment) was minus USD2.4 billion, compared with positive USD4.6 billion for the same quarter a year earlier. 

In its 2Q2019 results Boeing announced a USD5.6 billion charge for compensation to airlines in connection with the MAX grounding. There were also increased production costs.

According to consensus forecasts from S&P Global Market Intelligence and published on marketscreener.com, stock market analysts expect Boeing's 2019 net income to plummet from USD10.46 billion in 2018 to USD1.97 billion in 2018.

Nevertheless, Boeing's liquidity improved in 3Q2019 relative to a year earlier, thanks to its ability to raise new debt.

The grounding is weighing on the wider US economy

Not only has the MAX grounding had a negative impact on Boeing, but it is also weighing on the wide US economy.

Writing in the Financial Times (21-Oct-2019), Megan Greene, an economist and senior fellow at Harvard Kennedy School, said that it had lowered US GDP growth, reduced productivity and trimmed earnings at a number of American companies.

Boeing is a significant employer and the largest manufacturing exporter in the US, with a big supply chain – its impact matters. Different estimates of the drag effect of the MAX grounding on US GDP in 2Q2019 range from 0.25ppts to 0.4ppts.

There is also an impact on the reputation of Boeing

There is also a harder to measure reputational impact on Boeing – particularly on perceptions of the 737 MAX.

Airline passenger surveys have suggested that a significant minority would avoid the aircraft in the first six months after its return to service, even if this means paying more or taking a less convenient route. Some passengers have suggested that no amount of safe operation would remove their concerns about the MAX.

A change of name for the MAX has been mooted, although Boeing does not seem to be in favour of this idea. Its priority is to assure the aircraft's safety, to satisfy regulators of its safety, and to reassure its airline customers, pilots and travel bodies of its safety.

The return of the MAX will take time to implement

Even after regulatory approval, the MAX's return will not be an overnight exercise.

According to the CAPA Fleet Database, there are currently 384 MAX aircraft that have been delivered to customers but which are grounded. In addition, Boeing has produced more than 300 since the grounding and this figure could be towards 400 or more by the end of 2019.

When the ban is lifted, each aircraft will need testing. The programme of returning existing aircraft to service and delivering those manufactured since the grounding, while still making yet more aircraft each month, will keep Boeing busy for some time.

Some observers have estimated that even if regulators approve the MAX's return in Dec-2019, it could be late in the winter schedule before commercial flights resume.

How long a full return to normal will take – with all aircraft back in service and the backlog caught up – is not yet clear, but it could take a year or two.

Any delay by regulators in regions outside the US in approving the return of the MAX could further complicate this timetable.

Airlines may take their own approach

Moreover, individual airlines may take their own approach to the MAX when its return is approved.

Ethiopian Airlines has said that it will be the last operator to resume MAX operations. According to the airline's CEO Tewolde GebreMariam (Bloomberg, 4-Oct-2019):

"If we're convinced the problems are fully addressed, and that the recertification is done in a collaborative manner with all regulators, then we will take the time, effort and energy to convince our pilots, crew and passengers that the aircraft is safe to get back in the air".

United Airlines, for example, plans to let passengers know when they book a flight on a MAX aircraft and to give them the choice of another aircraft if they prefer. This may seem like a pragmatic approach aimed at ensuring optimal satisfaction of customer preferences, but may also contribute to furthering doubts about the MAX's safety.

EASA's stance highlights the erosion of mutual trust

According to reports in the Wall Street Journal, EASA (European Union Aviation Safety Agency) has said that it might need as much as four weeks longer than the US to approve the MAX's return to service, allowing for independent tests and gaining approval from EU member states.

In many ways, the European regulator's stance could be seen as perfectly normal. Different countries and regions have their own aviation safety regulations and regulators, and should not be expected to fall in line with another body without satisfying themselves of the correctness of that decision.

That said, the old collaborative approach has practical benefits. It reflected a world of mutual trust and recognition of standards – at least between EASA and the FAA, which are often seen as the two leading global aviation safety bodies.

However, the apparent new norms reflect a world where the US is just as content embarking on a trade war with an ally such as the EU (Donald Trump has even referred to the EU as a foe) as it is with a rival such as China. Mutual trust and recognition now seem somewhat old-fashioned.

The grounding of the 737 MAX has not itself been a factor in taking the world to such new norms, but perhaps it is shining a light on the transition.

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