Clearing the 737 Max backlog could take three years, with implications for narrowbody feedstock

The delays associated with the 737 Max are expected to affect the narrowbody passenger-to-freighter feedstock situation into 2023, Cargo Facts Consulting (CFC) finds. The current idle 737 Max fleet stands at more than 740 units, including approximately 380 units that had been delivered at the time of grounding in March 2019.

Boeing has recently announced that the 737 MAX will not be approved to fly until the middle of 2020. At the time of grounding, both Boeing and the industry had expected the plane to be back in the air by summer 2019. A planned fix of the Maneuvering Characteristics Augmentation System (MCAS) software was scheduled to be rolled out last year, but the process to obtain final approval by the FAA has become slow, with every issue discovered receiving more attention than the previous one. Boeing is now prioritizing the delivery of stored aircraft and global training updates. With the idle max fleet at well over 740, the company decided to halt production.

Other global aviation authorities in Europe and China have stated that they will be conducting their own independent reviews of Boeing’s fix, and that minimum requirements will need to be met before the aircraft returns to service. Considering that 80% of the grounded fleet is outside the United States, the level of additional scrutiny in other countries worldwide may add some time to the ungrounding of the fleet. During past groundings, such as the fleet of Boeing 787s grounded for several months back in 2013 due to battery-fire concerns, most world aviation authorities agreed on approval around the same time.

After all regulatory issues are resolved, there will be further challenges ahead of Boeing and the aviation industry; these include clearing the delivery backlog, putting grounded aircraft back into service, restarting aircraft production and training pilots. Based on our forecast (see Figure 1), it is not likely the backlog will be cleared before 2023. Figure 1 - 737 Max Idle Fleet Forecast Jan 2018 - Dec 2022

Our forecast is based on the following assumptions, which we will update periodically as new information becomes available: Ungrounding by the FAA takes place in July 2020, shortly followed by global aviation authorities Deliveries and Redeliveries: Recommence at 40 per month in November 2020, increase to 50 per month in January 2022 and 60 per month in September 2022. Production: recommences in May 2020 with 5 units and then 10 per month, and 15 per month from May 2021, 20 from January 2022 and 30 from June 2022. What does this mean to the air cargo industry?

It is too soon to consider the 737 MAX as a potential candidate for a freighter, but the grounding of this aircraft certainly has an impact in the availability of feedstock for 737 NG as well as A321 conversions. We have seen operators pushing forward retirement dates and extending leases of their older 737 NGs, creating a shortage in feedstock. Under this environment, it is more difficult to source airframe and engines at reasonable prices for passenger-to-freighter conversions, and this can limit the number of conversions in the near term.

The value of a 737 NG engine in half-time condition is in the range of $5.5 to $6 million, therefore, a shipset costs between $11 to $12 million. Supply and demand play a critical role in the engine price gap between newer and older aircraft models. Most of the 737 NG that have been produced are still in operation, so this translates into high demand for engines as replacements or spares when engines are being overhauled.

On the airframe side, the sum of the parts is greater than the whole airframe, which encourages the part out of relatively young aircraft. This mismatch between supply and demand for airframe and engines in the 737 NG can limit the level of feedstock for passenger-to-freight conversions and this is expected to last a few more years.

Once the MAX fleet resumes operations, the number of in-service NGs will begin to diminish due to retirements as the supply of engines and airframe spare parts increases. But we will not see prices dropping immediately. With Boeing’s latest announcement on the ungrounding timeframe, the number of 737 NGs in operation is unlikely to decline until mid-2021, and it will take at least two additional years until we start seeing a substantial difference in engine and airframe costs for the older 737 NG models.

Clearing the 737 Max backlog could take three years, with implications for narrowbody feedstock

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Clearing the 737 Max backlog could take three years, Cargo Facts Consulting finds

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