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The Boeing 737 MAX Could Have a New Problem—Not Enough Engines


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The LEAP engine is used on both Boeing and Airbus jets. Photograph by Jason Redmond/AFP/Getty Images

The Boeing 737 MAX’s troubles have been well-documented. The plane has been grounded world-wide since mid-March after two deadly crashes in a matter of months.

Boeing (ticker: BA) management could have a new problem on its hands, beyond just getting the plane back in service: fewer engines to hang on the airframes. —the joint venture between General Electric (ticker: GE) and Safran (SAF.France)—is going to build more engines for Airbus777彩票地址 (AIR.France) than for Boeing (BA) in 2020. That’s not a good sign for the American commercial aerospace giant.

777彩票地址Even if the CFM partnership isn’t capacity-constrained, the move signals to investors its going to take Boeing a long time to work through its parked MAX aircraft fleet—planes that have been built and not shipped.

The engine powers both the A320 NEO and 737 MAX. Customers can also order an A320 NEO with a produced by United Technologies (UTX) subsidiary Pratt & Whitney. The Leap is the only engine option for MAX customers.

CFM 58% Leap-A variants in 2020 and 42% Leap-B versions, according to the Wall Street Journal. The “A,” as investors might expect, stands for Airbus, and the “B” is for Boeing. The production split was closer to 50/50 in prior months.

Safran wasn’t immediately available to confirm production plans. A GE spokesperson told Barron’s777彩票地址 in an emailed statement, “CFM is fully prepared to meet demand for the Leap engine from both Boeing and Airbus going forward.”

777彩票地址GE appears confident it can make enough engines for all airframes choosing the Leap because CFM production has been ramping up since the new engine’s introduction around 2016. In 2017, for instance, CFM produced about 500 Leap engines. “Our production rate[s] for [2019] are going to be north of 1,800 units,” GE Aviation CEO David Joyce told investors at the recent Paris air show. “That’s a 60% increase year-over-year in our Leap.” CFM’s production rate could hit 2,200 engines in 2020, if necessary.

If the supply chain—including CFM and its suppliers in lower levels of the chain—can still ramp Leap production in 2020, then the CFM action is a signal to investors MAX production isn’t coming back soon.

777彩票地址Boeing has built and parked about 400 jets. And MAX production is shutting down in January as the company prioritizes parked planes over new production. The parked aircraft, by some estimates, need hundreds of thousands of man-hours to prep for commercial flight. Full MAX production might not come back for months.

The time when Boeing increases output of the MAX, boosting profits via economies of scale, is looking further away than investors expect. “We still anticipate ramping back up to, ultimately, to 57 a month,” said former CEO Dennis Muilenburg at a recent investor conference. “We anticipate that ramp-up to occur in, incrementally, from now [into] 2020.”

Muilenburg left Boeing in late December777彩票地址. His goals look aggressive now.

The Leap, however, will survive Boeing’s woes because the engine promises about 15% better fuel efficiency than prior engine generations. That is a huge benefit in aerospace terms. Winglets, the ubiquitous curves at the end of wings, for instance, cut fuel use by about 7%. Airlines retrofitted entire fleets to capture those savings. The Leap’s economics remain compelling for airlines, no matter which model of jet the engines power.

The new engine has more than 10,000 orders in backlog. A majority come from Boeing, but the alternative to the 737 MAX, the largest Leap program, is the A320 NEO. The Leap wins a majority of orders on that aircraft too. Boeing, of course, believes the MAX will fly again, but any all-new single-aisle aircraft, produced by Boeing years from now as a MAX replacement, will incorporate the latest engine technology too.

Engines are a big part of the cost equation for airlines. “Approximately half of the value of a jet is the engines,” Paul Weisbrich, managing director for investment banking at D.A. Davidson, tells Barron’s.

Understanding the MAX drama—which encompasses suppliers, customers, regulators, employees and the flying public—certainly isn’t simple. Investors, have had a tough time dealing with all the layers of the situation too. Boeing shares have fallen about 22% since March, when a crash involving an Ethiopian Airlines flight prompted regulators to ground the plane world-wide. That leaves the stock far behind the gains of the Dow Jones Industrial Average and S&P 500777彩票地址 over the same span. Aerospace suppliers, including Safran and GE, have continued to rise.

Write to Al Root at allen.root@dowjones.com


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