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How a rollercoaster week left Boeing's credibility on the line

Published 02/02/2024, 17:40
Updated 02/02/2024, 19:15
© Reuters. FILE PHOTO: A Boeing 737 MAX 7 aircraft piloted by Federal Aviation Administration (FAA) Chief Steve Dickson lands during an evaluation flight at Boeing Field in Seattle, Washington, U.S. September 30, 2020. REUTERS/Lindsey Wasson/File Photo

By Tim Hepher, Rajesh Kumar Singh, David Shepardson and Valerie Insinna

(Reuters) -Boeing is reeling from a week of turmoil that has snagged production and development timelines and tested confidence in CEO Dave Calhoun almost a month after the mid-air blowout of a dummy door on a 737 MAX 9, industry insiders said.

From Seattle where 737s are built, to Washington where they are regulated and Dublin, centre of the air finance world, the company has faced a perfect storm of competing pressures.

In just eight days, Boeing (NYSE:BA) has seen an unprecedented ceiling on 737 production growth imposed by regulators, bowed to lawmaker pressure to drop a request for a temporary exemption from design rules for its next model and faced a possible revolt by a top customer.

The tumult is not over. U.S. investigators are soon expected to release a preliminary report on the Jan. 5 Alaska Airlines blowout after visiting the 737 factory last Friday.

The head of the Federal Aviation Administration (FAA) will appear at a U.S. House hearing on Tuesday and Calhoun may face lawmakers in a hearing as early as March. The FAA will be asked whether it found "persistent" quality issues, according to a preparatory letter reported by Reuters.

Industry experts said the period is shaping up as a critical test of management's ability to overcome Boeing's latest crisis amid efforts to be more open than lawyer-crafted responses to MAX crashes that killed 346 people in 2018 and 2019.

"What they need to do now is restore credibility with the FAA and customers, and obviously somebody will have to pay the price," said Adam Pilarski, senior vice-president at Avitas and former chief economist at Douglas Aircraft, now part of Boeing.

"I can't see how the CEO can survive and how he should survive," the well-known industry veteran told Reuters.

A Boeing spokesperson said the company had no comment on industry speculation.

Some respite came with quarterly earnings on Wednesday when Boeing said 737 output reached a higher level than feared before getting capped.

But a frosty exchange between Bank of America (NYSE:BAC) analyst Ron Epstein and Calhoun exposed a sensitive issue likely to dominate hearings: Why it had taken until now, following a near-disaster, to step up quality checks five years after crashes placed the MAX factories under intense scrutiny.

"I'm still trying to get my head around how we got here," Epstein said on the post-earnings analyst call. "Wasn't the 737 line like the most scrutinized production line in the world?"

Calhoun said he took exception to the premise and quality data had improved, though such problems should never happen.

SCRUTINY 'WILL MAKE US BETTER'

After a decade on Boeing's board, Calhoun took over as CEO in 2020, promising to regain trust after the earlier MAX crisis.

But his longevity has raised questions about whether he can distance himself from the company's past and carry out the changes needed for Boeing to regain its stature.

In a Jan. 31 letter to employees released by Boeing, Calhoun said "increased scrutiny – whether from ourselves, from our regulator, or from others – will make us better."

Speculation of a shake-up intensified this week after the company withdrew a request for a safety exemption that could have accelerated certification of its next plane, the 737 MAX 7.

While the decision was taken under pressure from lawmakers, it left questions over Boeing's handling of core customers like Southwest Airlines (NYSE:LUV), the largest customer for the MAX 7, and raised questions about the timing of a MAX 10 sister model.

Boeing's desire to certify the MAX 7 with a temporary waiver while it designed an improved anti-icing system unravelled as the industry's power brokers gathered for their annual Airline Economics finance summit in Dublin.

When Dublin speaks, planemakers take notice. In 2012, Airbus dispatched a top executive to allay lessor concerns about A380 wing cracks.

This week, however, public reaction was muted. Leasing CEOs backed Boeing management, and the head of budget carrier Ryanair (LON:0RYA) defended Calhoun, offering to take MAX 10 orders dropped by other airlines after Reuters reported that United Airlines had approached rival Airbus.

"There's no point piling on because they couldn't feel it any more intensely probably than they do right now," Aviation Capital Group CEO Thomas Baker told Reuters.

But on the sidelines of the conference, the mood was more sombre and discussion of changes at Boeing or its commercial unit was rife. The abruptness of the MAX 7 U-turn took many by surprise, after Calhoun previously said the application would not be withdrawn. Airlines scrambled to understand what it would mean for the more widely sold MAX 10, next in the pipeline.

Although the MAX 7 redesign focuses on potential debris from an engine case in the event of an anti-icing failure, delegates questioned whether that could indirectly affect other systems in a tougher regulatory climate.

"It could be a can of worms," one MAX customer told Reuters.

Boeing told analysts it would not get into "what ifs" on the larger MAX 10, with Chief Financial Officer Brian West saying it will be certified when the FAA decides.

Some industry officials blamed the decision to backtrack on a misfired attempt by Boeing to lobby its way around regulation - including visits by Calhoun to several lawmakers - ahead of a yet-to-be-scheduled Senate Commerce Committee hearing.

Other industry officials told Reuters after the Alaska incident there was little to no chance in the current climate the FAA would have approved the exemption.

Calhoun's decision followed a 90-minute meeting last week with Senator Tammy Duckworth, who heads the Commerce Committee's aviation safety subcommittee. He defended his visit to lawmakers, adding he had been swayed by "sound, principled argument."

© Reuters. FILE PHOTO: A Boeing 737 MAX 7 aircraft piloted by Federal Aviation Administration (FAA) Chief Steve Dickson lands during an evaluation flight at Boeing Field in Seattle, Washington, U.S. September 30, 2020. REUTERS/Lindsey Wasson/File Photo

Duckworth told Reuters she appreciated Calhoun's decision to withdraw the MAX 7 application.

"I thanked him for making what I know is probably a tough decision for the shareholders and but also the right decision for the people who will be flying as passengers on the aircraft," Duckworth said.

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