Here’s what Boeing’s next moves say about the slow resumption of travel

Apr 29, 2020

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The downturn in travel demand isn’t just hitting airlines and hotel chains. It’s also causing trouble for big industrial companies like Boeing that — as one of the two largest manufacturers of commercial airplanes in the world — is also seeing swift changes to its business.

Since the coronavirus pandemic came to the U.S., the Chicago-based aerospace giant has shuttered production at its factories, though work on its lines is beginning to resume again, albeit slowly.

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During the company’s first-quarter earnings call Wednesday, Boeing CEO David Calhoun largely agreed with the long term outlook voiced by airline executives and analysts. He said he expects travel demand to recover to 2019 levels in 2 to 3 years, and for long-term growth patterns to fall back into place a few years beyond that.

However, he emphasized that a recovery over that period means Boeing will be forced to downsize as demand for new airplanes will likely be depressed by contracting airlines.

Related: Southwest Airlines is betting it won’t need 140 737 jets for a while.

Boeing plans to reduce its workforce by about 10% across the company in response to lower demand, said Calhoun. However, the cuts could be as high as 15% in the particularly hard-hit commercial airplane division.

He said the downsizing will happen through a combination of attrition, buyouts and voluntary layoffs, though he did not rule out the possibility of involuntary layoffs if other measures are insufficient.

Even so, Calhoun said Boeing is prepared to meet shifting market requirements, even if demand for travel recovers unevenly.

“Narrow-body airplanes will lead the way to recovery,” he said, suggesting short-haul domestic travel will likely rebound first as stay at home orders are lifted. “International route structures are going to come back much slower than the domestic ones.”

Related: April long-haul routes at major U.S. airlines.

Calhoun’s comments are bolstered by recent airline announcements that reveal plans to maintain deep cuts across long-haul networks. For example, American Airlines plans to resume some international flying to major cities and partner hubs in May and June, but it has cancelled nearly all seasonal long-haul routes this summer and postponed any new market inaugurations to at least 2021.

In addition to the impact of COVID-19 on Boeing’s business, it is also still dealing with the grounding of its best-selling 737 MAX. The jet has been barred from flying by global regulators since March 2019 following the second of two fatal crashes overseas.

During the call Wednesday, Boeing executives expressed optimism that the MAX would be cleared for takeoff again later this year. They plan to resume production of the jet by June and begin delivering planes to customers by October pending regulator sign off of their planned fixes.

Deliveries will depend on customer demand. Boeing is in “intense discussions” with MAX customers over delivery needs and potential deferrals, said Calhoun. 

Earlier this week, Southwest Airlines said it had a deal with Boeing to cut MAX deliveries to 48 aircraft from 123 by the end of 2021. The airline plans to take delivery of the 27 737 MAXes already assembled by Boeing but stored due to the grounding this year.

Read more: What travel experts have to say about the industry’s recovery.

Calhoun believes that the fuel-efficient MAX will be well-positioned to help airlines recover and realize cost savings when it’s once again able to fly, he said. This comes as many carriers look to pare their fleets of older, less-efficient jets.

For the MAX, Boeing plans a gradual resumption. The planemaker expects to turn out “low rates” of MAXes monthly in the second half of 2020 before ramping production up to 31 per month by the end of next year. This is far short of the more than 40 MAX jets that it built monthly in 2019.

Underscoring the assumption that long-haul travel demand will recover sluggishly, Boeing is cutting production of many of its wide-body models. The 787 line will drop to seven per month by 2022, down from 14 currently. And the 777 and 777X line will drop to three per month next year from five today.

Calhoun pointed to one other issue that Boeing will continue to feel long after demand for travel has recovered. Retirement of older passenger jets coupled with fleet update programs will mean that the company’s aircraft-servicing business could be hit with a longer-term drop in demand, as newer, smaller fleets will require less maintenance.

Related: A smaller Delta would have to retire planes after coronavirus. What types could go?

Contributing: Edward Russell, TPG

Featured photo by Zach Wichter/The Points Guy.

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