Remember Boeing's Max? It's still grounded

Remember the 737 Max? Hard to believe that this time last year fixing the plane and getting it into the hands of customers clamouring for more capacity was Boeing Co's biggest worry. But 15 long months after the second fatal crash of the jet, the Max remains parked in deserts and employee car lots across the country. The worst-case scenario of the Max simply never flying again looks likely to be averted, but the jet's unique situation — in particular, the relative ease with which customers can cancel their orders after such a lengthy grounding — makes it one of the best benchmarks for measuring the post-pandemic recovery in aviation.

Bloomberg News this week reported tangible signs of progress on the plane's return to commercial service. These include: a fix for both the flight-control software system blamed for the two crashes and wiring bundles that had the potential to short-circuit; the distribution of draft materials for new pilot training; and a goal to schedule the milestone recertification flight with US regulators later this month. The aerospace publication Air Current, however, concludes that the earliest the plane will fly is September, as certain other steps in the regulatory process that were initially scheduled for May haven't yet occurred. There remain serious challenges, for instance, with coordinating a review of the Max among key international regulators, particularly the European Union, which is conducting its own independent safety analysis and has repeatedly indicated it may require additional fixes. These regulatory hurdles are nothing, though, compared to the thornier question of who actually still wants or needs the Max after the coronavirus pandemic forced an unprecedented decline in air travel.

"It's really all about the Max," Southwest Airlines Co CEO Gary Kelly said on an earnings call last July. "Everything else within the company is rock solid." So much so, that at the time he was willing to entertain the possibility of buying more Max jets. But now, nothing within the company or any other airline is rock solid. Even as a modest uptick in demand gives airlines the confidence to slowly start bringing back flights, Kelly warned last month of a "brutal low-fare environment" as carriers compete over a still historically low number of customers. Southwest, the largest Max operator, will take no more than 48 Max deliveries through 2021, compared with an initial plan for 123 new jets. At least it's just delaying deliveries at this point. Boeing said this week that other customers scrapped 14 orders for the Max in May, bringing the year-to-date total of cancellations to 313. Those who have trimmed orders include General Electric Co's leasing arm, Air Canada, and Brazilian carrier Gol Linhas Aereas Inteligentes SA

Suppliers are also feeling the pinch. Spirit AeroSystems Holdings Inc said this week that it was unlikely to meet its target of producing 125 Max fuselages this year after Boeing asked it to halt work. Production is likely to be trimmed by at least 20 planes and probably more, Spirit said, forcing the company to make adjustments to its already slimmed-down workforce. Bear in mind that the 125-plane production goal was set in early May and is itself a reduction from a previous agreement for 216 shipments. Jefferies analyst Sheila Kahyaoglu estimates Spirit ultimately will deliver just 75 parts packages for the Max this year. With 450 yet-to-be-delivered Max jets sitting in storage, Boeing is likely to keep production at a reduced rate through 2023, Kahyaoglu writes.

Further complicating things for the plane maker is the fact that no one seems too keen to take deliveries of its 787 Dreamliner right now either, with demand for the kind of international flights it's made for still staggeringly anaemic. Boeing didn't sell or deliver a single 787 in the month of May, the first time that's happened since that plane was grounded in 2013 following battery fires, according to Bloomberg Intelligence. While rival Airbus SE declined this week to make deeper cuts to its own production plans, Boeing's latest Max rejiggering may indicate further reductions are inevitable. The company recorded no new cancellations in May, but also no orders. It delivered a mere 24 planes that month and CEO Guillaume Faury has acknowledged that discussions with airlines have turned contentious, telling Politico that the plane maker is prepared to go to court if carriers aren't willing to engage in some compromise over purchasing contracts.

It all adds up to a much-needed dose of reality for an aerospace sector that's been caught up in the irrational exuberance around a potential "V-shaped" recovery from the coronavirus pandemic. While there are green shoots in other parts of the economy, such a turnaround remains remote for the makers of planes. And yet, after a wipeout in aerospace stocks on Thursday, it only took American Airlines Group Inc. reiterating a modest improvement in booking trends for the sector to be off to the races once again on Friday. "WE GET IT — you buy aero stocks in the downcycle to be there for the next upcycle, and you can't get worse than traffic down 94%!" Vertical Research partners analyst Rob Stallard wrote in a report this week (capitalization his). But similar to the market reaction in the wake of a post-9/11 downturn in air travel that was way less severe than what the world is currently experiencing, "we are wary that this aero rally is going to meet aero reality, and the outcome isn't going to be pretty," Stallard wrote.

The times, they are a changin'

Boeing Co and FedEx Corp took action this week took action against employees who engaged in offensive behaviour amid a national outcry over systemic racism. Boeing CEO Dave Calhoun said a worker who made an "abusing and harassing racial remark" had been suspended and was now no longer an employee of the company. "When these things happen, you will know about them," he vowed. FedEx condemned the "appalling and offensive behaviour" of an employee who took part in a counter-protest mocking the killing of George Floyd, whose death at the hands of Minneapolis police officers spurred the demonstrations across the country. That worker has now been fired. We talked last week about the debate over whether companies are just virtue-signalling by making statements in support of the protests or whether they truly recognize a need to do more for the cause of equality. But here are two major American enterprises putting action to their words in a matter of a week. It's fair to argue that if these companies had been more aggressive about enforcing their expectations for a diverse and inclusive workforce before the death of George Floyd, maybe these incidents with their workers wouldn't have happened. There's plenty more work to do in corporate America to untangle rigid inequalities, but you have to start somewhere. However you slice it, change is afoot and companies are taking these issues seriously. Please note that the link to Eaton Corp. CEO Craig Arnold's statement on policy brutality and racial injustice in last week's email edition of newsletter was misdirected. Here is the statement in case you missed it.

Deals, activists and corporate governance

Executive pay: There has been less progress on the issue of funneling giant compensation packages to management teams that are concurrently announcing layoffs, furloughs and massive cost-cutting programs. There was some hope that the response to the current downturn might be different and that CEOs had learned from the financial crisis and would make more of an effort to share in their employees' pain this time around. Many CEOs announced they would take a pay cut or forgo their salary for the remainder of the year. But an analysis by the Financial Times found that many companies have offered extra equity grants to company bosses that more than make up for temporary cuts in salary. Of the 554 companies that had announced cuts to executives' salaries by May 29 as measured by pay consultant Equilar, the FT found 51 that had both the same CEO and stock-award programs as the previous year. Those leaders received 52% more options or shares this year than in 2019, the FT said, with some companies seemingly increasing grants to compensate for depressed stock prices in March. Of course, those same stock prices have now seen significant rebounds, driving an even more outsize windfall for executives. One such company is Raytheon Technologies Corp., which tweaked a calculation for the conversion of executive equity awards into the new merged company in a way that boosted their value by more than $100 million, according to a Bloomberg News analysis.

ZF Friedrichshafen AG closed its $7 billion takeover of brake and truck-safety systems-maker Wabco Holdings Inc. in late May. Just one day earlier, the auto-parts maker had sent a letter out to its employees warning of the need for steep job cuts to help stave off its creditors. Some 15,000 jobs — or 10% of the workforce — could be eliminated and about 80% of ZF's 50,000 German employees have already had their hours reduced. Shareholders of Wabco were acting like they'd been low-balled when the deal was announced in March of 2019, but the all-cash purchase now looks painfully expensive and poorly timed, as my colleague Chris Bryant notes. ZF's unique ownership structure — about 94% of the company's shares are controlled by the Zeppelin Foundation — and 10 billion euros ($11.2 billion) of cash, equivalents and credit facilities may help it avoid too hard a crash, but leverage is still uncomfortably high, Chris writes.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement