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The grounding of the MAX has severely distorted the entire aviation market in 2019. Industry experts share their views on the impact of the grounding and opine on its reintroduction and future market impact. 

In October 2018, Lion Air Flight 610 crashed just minutes after taking off from Jakarta, Indonesia, killing 189 people. In March 2019, another 737 MAX, Ethiopian Airlines Flight 302, crashed minutes after takeoff; all 157 people on board died. These tragic events resulted in the worldwide grounding of the 737 MAX aircraft. 

Subsequent investigations have shown that the design of the anti-stall system, known as the Manoeuvering Characteristics Augmentation System (MCAS), causes the 737 MAX nose to be pushed down automatically, leaving pilots fighting for control. Both crashes involved the repeated activation of the MCAS after it received faulty sensor input. 

Boeing has updated the software to provide additional layers of protection; for example, the MCAS now compares information from both angle of attack sensors before activating, and will only respond if data from both sensors agree; moreover, MCAS will only activate a single time, and MCAS will never provide more input than the pilot can counteract using the control column alone. Boeing says that these changes will prevent the flight control conditions that occurred on the Lion Air 610 and Ethiopian Airlines 302 flights from ever happening again. 

Given the pressure the US Federal Aviation Administration (FAA) is under to ensure the aircraft is safe to return to service, the expected recertification date has been pushed back several times, and there is still no certain date for its return as of the end of 2019. 

The loss of life in these two terrible tragedies is horrific, and the grounding of the aircraft was a necessary step to ensure the safety of the flying public. This essential action and the ever-longer period before the aircraft is returned to flight has had a significant and wideranging impact on the aviation industry. 

Cirium’s Fleets Analyzer shows that there are 385 MAX aircraft which were delivered to airlines prior to the grounding and are presently in storage. It additionally shows another 378 aircraft presently in the production cycle that have flown for the first time but that are not yet able to be delivered to customers as a consequence of the grounding. There are also 81 airlines that expected the MAX to be flying, and have thus been forced to find short-term lift to address their capacity shortfall. 

Peter Barrett, SMBC Aviation Capital, describes the situation as “unprecedented”. For airlines that expected to have aircraft delivered over the past year, the cost burden of finding aircraft to lease at short notice and for an indeterminate length of the time has been significant. For aircraft leasing companies that also expected to take delivery of MAX aircraft to place with their customers, the delay has also been significantly disruptive. 

“Our first priority and maybe the only priority in the industry is getting the aircraft back in the air safely,” says SMBC’s Barrett. “That is the first thing that we should be focused on… Looking at the impact it’s had on our business, there were the airplanes that we were expecting to deliver to our customers from Boeing, and that just hasn’t happened. Our balance sheet is going to be smaller than what we might have anticipated.” 

Lessors that ordered the MAX have been disrupted, with balance sheets likely to have shrunk over the past year. However, those that have large diversified fleets have been able to capitalise on the situation and lease other aircraft types to their customers, where they have aircraft available. 

Air Lease Corporation has 135 outstanding orders for the 737 MAX, down from 150 orders in October, when the lessor converted 15 MAX orders into five 787 orders. ALC CEO John Plueger says that the MAX situation has significantly affected his customers. “The shortage created by the MAX grounding has definitely enhanced lease rates for the immediately obvious replacement aircraft or substitute aircraft 737-800s and A320CEOs, etc. Demand for those types has increased and will remain fairly strong for the next several years. But the disruption to the airlines have just been horrible. They’re not able to make their schedules, they have to get substitute lift. For us, out of our fleet of 320 or so aircraft that we have today, only fifteen are MAXs that have already been delivered and are unfortunately now grounded with our airline customers. In terms of its impact on us, it has temporarily dampened our capital expenditure growth rate. Fifteen MAX aircraft grounded is fifteen too many …. but relatively small within the overall context of our fleet and balance sheet size. We still have a very strong growth rate this year despite the MAX delays, despite the grounding and the Airbus delays. It’s had an impact but I worry more about the impact to our customers.” 

Our first priority and maybe the only priority in the industry is getting the aircraft back in the air safely. That’s the first thing that we should be focused on… Looking at the impact it’s had on our business, there were the airplanes that we were expecting to deliver to our customers from Boeing, and that just hasn’t happened. Our balance sheet is going to be smaller than what we might have anticipated.

Peter Barrett, SMBC

Airlines are bearing the brunt of the grounding, leading many to seek – and in some cases secure – compensation from Boeing, while some MAX customers have filed legal cases against the manufacturer. Until the aircraft is cleared to fly, airlines remain in fleet planning limbo, as AerCap’s Aengus Kelly explains. 

“We have customers who were supposed to receive these airplanes in 2019. They didn’t get them, so they had to pay someone else to carry the passengers for them or they had to lease in capacity at very short notice, so it was extremely disruptive for the customer base. My concern now is if this airplane doesn’t get back into service soon or at least achieve FAA approval by the end of the first quarter of 2020, customers are not going to have confidence that they will have the aircraft for summer,” says Kelly. 

That approval was not forthcoming at the end of 2019, and there is no certainty as to when it will arrive. As Kelly explained, since aviation is a northern hemisphere-dominated industry, the summer season is when airlines make their money. If the grounding extends into the second quarter of 2020, which is now accepted by many, airlines will need to make alternative plans for summer now rather than leave it too late again and have to lease in more expensive options. “I think that a lot of customers will have to lease in and pay for additional capacity, pushing back on Boeing and delay taking delivery of the MAX when it does come back into service,” adds Kelly. 

Royal Air Maroc’s CFO, Yassine Berrada, expressed his hope when interviewed in October 2019 that Boeing would be ready to begin MAX deliveries by the end of the year: “As far as we are discussing with Boeing, and like any airline, we don’t have any clear visibility regarding the MAX issue. We do hope Boeing will deliver the aircraft by the end of the year. This depends on FAA and EASA certification; if we have the aircraft in March or April of 2020, that would be fine for us. Obviously, it will impact our summer season. We were expecting to have four aircraft… in peak season it’s definitely important to have four aircraft, so we have quality issues with our customers, a lot of cancelled flights, delayed flights. It is a great problem that we will be trying to solve that in the coming months.” 

My concern now is if this airplane doesn’t get back into service soon or at least achieve FAA approval by the end of the first quarter of 2020, customers are not going to have confidence that they will have the aircraft for summer.

Aengus Kelly, AerCap

Until the aircraft does come back into service, airlines and lessors will continue to lose money. “It’s very hard for us right now, because we’re supposed to have these aircraft out on lease,” adds AerCap’s Kelly. “We’re supposed to earn money, and at the moment, we’re not. Clearly, we’re in discussions with Boeing about what’s the impact on the market when this comes back. How are we going to work our way through this when the market reopens, and how will those risks and rewards be shared? So, that’s a complicated discussion at Boeing at the moment – but yes, we are losing money right now.” 

SMBC Aviation Capital has been able to manage through the lack of MAX by speeding up deliveries from Airbus and managing its trading book “more proactively”, but “it has effectively meant that there was revenue that we thought we have but we don’t have”. 

Like other lessors, SMBC Aviation Capital has been able to capitalise on the spike in short-term demand by extending existing leases and leasing out other unencumbered assets. However, despite the increase in demand for used aircraft, there is also a recognition that this unprecedented situation will have a long-term and significant impact on the industry. “This will be both in the practicality of the situation, but also in other areas such as the relationship between the regulators and the manufacturers,” says Barrett. “In my view, that will be the long-term impact of this situation – it will fundamentally change the relationship between the OEMs and the regulators.” 

Due to the increased demand for narrowbody aircraft to replace the missing MAX, lease rates for A320CEOs and 737NGs initially spiked (but have since stablised), with airlines mostly seeking short-term placements, which is not necessarily ideal for most leasing companies. “We’ve seen a greater demand for 737-800s, for lease rates and security packages, that we probably wouldn’t have predicted,” says Gerry Butler, Merx Aviation. “However, because there’s uncertainty as to when MAX will return, there is also some uncertainty on airline fleet capacity and fleet planning. We’re seeing an appetite for short-term leases for A320s, as well as for 737-800s, but we are holding out for longer-term leases. We don’t see the short-term lease for eight-to-twelve-year old aircraft being ideal for our business.” 

Karl Griffin, CEO of Genesis, which offers narrowbody commercial aircraft for lease across the aircraft’s life cycle, highlights some positives for the industry following the MAX grounding. “In the months after the MAX grounding announcement, airlines were still unsure as what the next step would be. They are realising now that it is not going to be a short-term issue, and nor it should be,” he says. “But there can be some positive takeaways including a resilience of release rates, more certainty on longer term leases for used aircraft, and most importantly, is expectation of reliability. Once you take that for granted, which definitely the industry has, you focus on things like fuel burn and utility of aircraft. Utility of aircraft is principally, how far it can fly and how many people can fly on it, but I think we’ve taken the eye off the prize with regards to the reliability side, and that’s where the sweet spot is in the midlife aircraft. You can get a used aircraft today anything from $250,000 per month way down to $100,000, depending on its age, which is an extremely reliable product with competitive operating economics compared with younger and newer technology aircraft.” 

The renewed importance of the reliability of current generation aircraft is a factor touched on by Austin Wiley, CEO of SKY Leasing, which closed its first aircraft leasing fund with a $300 million equity investment from asset manager M&G Investments (M&G) in October 2019. 

However, because there’s uncertainty as to when MAX will return, there is also some uncertainty on airline fleet capacity and fleet planning. We’re seeing an appetite for short-term leases for A320s, as well as for 737-800s, but we are holding out for longer-term leases. We don’t see the short-term lease for eight-to-twelve-year old aircraft being ideal for our business.

Gerry Butler, Merx Aviation

“Lessors that expected to have the MAX and the NEO delivered and acquired using sale-leasebacks have dipped into the secondary trade market to fill that capital expenditure hole, so that’s made that market more competitive, overall,” he observed. “It has made airlines more cautious on their order books. They are a lot smarter around some of these clauses related to the air worthiness of aircraft. But, 24 or 36 months down the road from now, this will not be an issue. The MAX will be a successful aircraft, it will be produced in large numbers with many operators, and so it’s just something that’s a matter of time that we as an industry have to work through – but I don’t see it as a long-term structural change to how we do business.” 

He added: “The airlines will take delivery of the MAX, they need the capacity, but they now value currentgeneration equipment a lot more for its reliability; the on-time performance of the current generation equipment is just remarkable, and the cost is lower, ultimately. We have a lot of uncertainty around the cost of the new aircraft, and the reliability still needs to be proven out. So, I think you’re going to see airlines hold on to aircraft longer – they may not need to fly them all 12-14 hours a day, but they’re going to be a lot more cautious about returning the aircraft.” 

The re-introduction of the MAX

The absence of the MAX has eased concerns over excess capacity in the system that had delayed the decrease in lease rates and residual values for older aircraft. Aircraft that would previously have been destined to cascade down from first- to second- and third-tier airlines hasn’t occurred yet as airlines have been forced to extend leases on older equipment. This situation has artificially kept lease rates higher, to the benefit of many mid-life players. However, the impact of the reintroduction of the MAX is going to be significant and that cascade of aircraft to lower-tier airlines will resume, although all of this will take time and there will be a period of adjustment. 

On December 17, Boeing announced the suspension of MAX production. After the FAA indicated that the Boeing 737 MAX recertification process would run into 2020, Boeing was left with little choice but to suspend production of the aircraft, starting from January 2020. Suspending production will help Boeing to prioritise pushing out the stacked up deliveries once the aircraft is recertified, and it will also help the manufacturer’s cashflow. 

Boeing confirmed the halt in production in an announcement, along with a note that it remains committed to a robust approval process for the MAX and that the timeline for this process is effectively out of its hands. 

“As we have previously said, the FAA and global regulatory authorities determine the timeline for certification and return to service. We remain fully committed to supporting this process. It is our duty to ensure that every requirement is fulfilled, and every question from our regulators answered.” 

Boeing confirmed that it now has 400 737 MAX aircraft in storage, which need to be delivered once the aircraft is deemed safe to fly. 

“We believe this decision is least disruptive to maintaining long-term production system and supply chain health. This decision is driven by a number of factors, including the extension of certification into 2020, the uncertainty about the timing and conditions of return to service and global training approvals, and the importance of ensuring that we can prioritise the delivery of stored aircraft. We will continue to assess our progress towards return to service milestones and make determinations about resuming production and deliveries accordingly.” 

Boeing has also made promises that the affected employees will continue on what it calls 737-related work, or will be “temporarily assigned to other teams”. 

Restarting a production process is no easy task for any company, and this will impact suppliers – the extent of this impact is as yet unknown given that there is still no firm deadline for the certification process, and after that time, the delivery backlog will take some time to reduce. Boeing said in a statement that it “will keep our customers, employees, and supply chain top of mind as we continue to assess appropriate actions. This will include efforts to sustain the gains in production system and supply chain quality and health made over the last many months.” 

The airlines will take delivery of the MAX, they need the capacity, but they now value current generation equipment a lot more for its reliability; the on-time performance of the current generation equipment is just remarkable, and the cost is lower, ultimately.

Austin Wiley, SKY Leasing

Cowen managing director and senior research analyst, Cai von Rumohr, has stated that Boeing has never delivered more than 69 aircraft in a single month, but that they may be able to deliver up to 100 aircraft a month. That rate depends on the airlines having the ability to take delivery of the aircraft within the Boeing timeframe and ensuring that the financing and other paperwork is in place. It also depends on the engine manufacturers being able to meet any accelerated timeframe. 

“We have MAX customers who want the airplane but they want it safely and in a timely and organised fashion,” says SMBC’s Peter Barrett. “Don’t underestimate the challenge of getting the MAX back in the air, hopefully soon and safely getting the whole programme back on track. That’s going to take time. There are 370 airplanes that are delivered but grounded. There’s 400-plus that are built but not delivered, and then the backlog of airplane orders. It’s a complex process and it’s going to take time. It’s not like there’s suddenly going to be a ‘bang’, and there’s hundreds of airplanes hitting the market. It’s going to be over time due to the practical requirements: you’ve got to think about training, you’ve got to think about logistics, scheduling. Delivering an airplane is not a simple thing. There’s a lot of flight testing and snagging resolving. The capital raising, the funding, the legal documentation, that all has to be done for every airplane. That’s going to be complex and is going to take time.” 

One of the biggest challenges facing both lessors and the airlines over the next 12 to 18 months is undoubtedly going to be the re-introduction of the MAX. James Meyler, CEO of ORIX Aviation, says: “It’s going to be quite a difficult process between new delivery MAXs that were scheduled for 2020 delivery on top of the aircraft that have already been manufactured and parked but need to be returned to service. That’s going to put a lot of pressure on Boeing,the engine manufacturers and their other suppliers but also on maintenance facilities to get these aircraft ready for service. At the same time, it’s going to essentially flow 500-plus aircraft into the market. Some of those are desperately needed and will slot into routes that have already been planned out, but I think unfortunately some of them will come a little bit too early for those airlines that have either extended aircraft or added used aircraft with the uncertainty and are going to have a little bit of oversupply in 2020 and 2021.” 

Managing the MAX return and the potential oversupply that it will provide to the industry in the short-term is going to be a major challenge for the entire industry. 

“Had all the MAX aircraft been delivered as scheduled, we would have had some serious excess capacity, and lease rates as well as values would be under even more pressure. As such, I fear that this will be the case in 2020 or 2021,” says one senior aviation banker. 

Others have a different view and are more confident that Boeing will redeliver the MAX to meet demand. “Even though the capacity wasn’t there this year, the fundamental demand was, and even though capacity has under grown in 2019, the balance between supply and demand has actually widened as demand has continued to grow with capacity artificially constrained,” says one industry expert. “The demand is still there, and in fact, some of the demand wasn’t satisfied because the capacity wasn’t able to be delivered. In 2020, airplanes will return to service and delivery will realign with the demand that exists in the marketplace already.” 

The same commentator also expects some of the short-term capacity measures taken by airlines to replace the lost MAX capacity, to exit the system concurrently with the MAX return, which therefore will not result in an imbalance between supply and demand. 

Boeing has indicated publicly that it is working with customers daily to ascertain how their delivery needs align with the additional lift that they already have in place for their scheduled services. It remains to be seen how this will play out, and how Boeing can structure its redelivery schedule, once the MAX is recertified. 

Wings Capital’s Hannahs agrees that the market will be able to absorb the delivery of many MAX aircraft, but notes that in time, this will cause some distress in the value of older assets. When a sufficient number of MAX aircraft have already been delivered, NG values will be negatively impacted. However, there are over 8000 NGs that have already been sold and most are still in service. If Boeing can sort out the MAX problems and return to an annual delivery profile of 800 to 900 aircraft per year, it will take probably take around three to four years before there are enough MAX aircraft in the system to impact NG values. Of course, this, assumes that there are no additional problems with the MAX and that it will receive a good customer acceptance. There is some disagreement among aviation industry executives in terms of the length of the adjustment period following the MAX’s return to service. 

When a sufficient number of MAX aircraft have already been delivered, NG values will be negatively impacted. However, there are over 8000 NGs that have already been sold and most are still in service. If Boeing can sort out the MAX problems and return to an annual delivery profile of 800 to 900 aircraft per year, it will take probably take around three to four years before there are enough MAX aircraft in the system to impact NG values.

Stephen Hannahs, Wings Capital

Hannahs adds that although his company has benefitted from the shortterm bounce in demand for older 737NGs, the time period for reintroducing the MAX will be elongated. “People underestimate how long it will take Boeing to redeliver the MAX aircraft that have been stored. There are over 400 aircraft in storage today. It will take Boeing anywhere from 18 to 24 months to return those airplanes to service. Some folks think that as soon as the MAX is certified, Boeing will flip the switch and airplanes will be back in service. These aircraft have been in a deep storage. Systems need to be run, fluids replaced, travellers from original production corrected, probably some pilot simulator training and recertification by various air authorities. It’s going to take a long time. It will help some of the older NGs in that they may secure extended leases with airline customers.” 

Financing the MAX

A further concern is the impact that the return of the aircraft type will have on the values for older MAX aircraft that were delivered prior to the grounding. “The MAX grounding has had a positive effect on the demand for used narrow body aircraft and has therefore eased the pressure on lease rates,” says NordLB’s Wulf. “What concerns me more is what impact the grounding will have on the values of 737 MAXs that were delivered prior to the grounding, or on those that were built in 2019 but will only be delivered sometime in 2020. Currently we are not in a position to commit to financing any MAX aircraft until the type has been recertified by all major airworthiness authorities.” 

For the financiers interviewed for this report, the impact of the MAX grounding has been minimal; however, the return will flood the market with demand for financing for this aircraft. The question is whether financiers will have the appetite to fund this aircraft type. 

Ajeeth Narayan, head of aviation at Investec, says that such concerns are unfounded. “New technology aircraft like the MAX and the NEO, the more efficient aircraft, command a premium price,” he says. “The MAX at this point in time, when it comes back, will be one of the top aircraft. Once airlines start running that aircraft and once the proper certification is obtained, I think it will be fine.” 

Moreover, Deutsche Bank’s Richard Moody says: “We had a number of facilities in place that had the ability to finance MAXs, and obviously because of the delays and what’s happened, clients haven’t drawn down against that. There was an expectation that the MAX product would require a fair amount of financing, which obviously hasn’t happened. Our philosophy at Deutsche Bank is to understand what it is that we’re financing. We need to understand what the technological issues and other challenges are with the MAX. It’s the same approach when we previously considered financing other new assets types like the 787s and the challenges on the Trents or the A320 NEOs and the Pratt GTF engines. It’s incumbent on us to try to understand and analyse what the risks are and then find a solution accordingly. We’re not sitting here today saying we won’t finance the MAX or any other new generation aircraft. We’re saying that we will look at each transaction on its own merits, and we consider client requirements as part of that analysis as well.”

Although the impact of the MAX grounding on NordLB’s portfolio has been limited, since it has no MAX exposure currently, Wulf believes that in the short term Boeing’s assumed discounting on new orders will put pressure on appraised values and consequently finance levels: “Longer term, we expect values to stabilise, but as the 737 is losing out to the A320, Boeing may have to launch a successor single aisle sooner, potentially shortening the life cycle of the MAX. The MAX 8 should be fine, but MAX 7, 9 and 10 will likely be less unpopular with financiers.” 

New technology aircraft like the MAX and the NEO, the more efficient aircraft, command a premium price. The MAX at this point in time, when it comes back, will be one of the top aircraft. Once airlines start running that aircraft and once the proper certification is obtained, I think it will be fine.

Ajeeth Narayan, Investec

Ali Ben Lmadani, CEO of asset management firm ABL Aviation, warns that once the MAX returns, there will be an oversupply of MAX RFPs. “I’m sure Boeing and Airbus are going to manage the return of the MAX properly to make sure that there’s no oversupply,” he says, adding, “But there will be many deals coming to market and the lenders are going to be more picky, and if debt becomes more expensive, lease rentals are going to increase.” 

For BNP Paribas the direct impact of the MAX has been immaterial, at least as of December 2019. “The full ramifications are still unknown, and it will take some time for them to play out fully,” says Bertrand Dehouck, head of aviation at BNP Paribas. “There are a host of possible scenarios that are still ahead of us. We continue to monitor the situation but it is difficult to say what the acceptance of the aircraft is going to be if and when it returns to operation – if it’s accepted by the airline, and by passengers. Boeing is working extremely hard for it to re-enter into service as soon as possible and to ensure that people, their customers and their customer’s customers, the passengers, but also the flight attendants and pilots, are all convinced that it’s a good aircraft that will be flying for several decades.” 

There are a host of possible scenarios that are still ahead of us. We continue to monitor the situation but it is difficult to say what the acceptance of the aircraft is going to be if and when it returns to operation – if it’s accepted by the airline, and by passengers.

Bertrand Dehouck, BNP Paribas

Future impact

Ruth Kelly, CEO of Goshawk - which placed its first order for 20 A320neos and 20 B737 MAXs in 2018 - says that the negative impact has been very far-reaching and that the uncertainty regarding the timing of the MAX’s return is a major issue. “Uncertainty is never a good thing, and uncertainty around timing of deliveries has an impact on everyone – on airlines and lessors who have an orderbook and who have built that into their future financial forecast. Our order doesn’t begin to deliver until 2023, but the whole market dynamics are going to be different in 2023 now versus what we’d hoped they would be when we ordered the aircraft in 2018.” 

Although most industry experts are in agreement that there is still demand for the MAX, despite some uncertainty, the entire issue has again raised the question around the design of the MAX versus the NEO. Wings Capital’s Hannahs, who in his past role as CEO of ACG ordered 30 NEOs in 2011 and 60 MAXs in 2012, explains how the MAX issue has brought into question the need for the new-technology aircraft. 

“I ordered those aircraft on the basis that ACG needed growth and oil was at $100 a barrel in 2012 with a forecast and future oil contracts predicting much higher oil prices. The entire business case made by the OEMs was based on fuel economics. Airbus needed to do something with the A320CEO because it didn’t have the same operating envelope, range specifically, of the NG. I think Virgin America really pushed Airbus to develop an aircraft capable of flying between the West Coast and Hawaii. In the case of Boeing, they didn’t want to build the MAX. They could sell all the NGs that they could produce. Their backlog was over five years. Boeing was still sorting through the 787 delivery issues and they wanted to start on an improved 777. Ideally, in my view, Boeing would have rather waited until these capital programs were completed before developing a new clean-sheet aircraft. However, they were pressured into it because they feared that some of the large Boeing customers might become a significant Airbus customers, so they pushed forward with the MAX. With oil at $50-60 a barrel today, the business case is frankly not great. In fact, I, like others, suggested to Boeing to just keep producing the NG. However, supply chain issues would prevent this today, and now it’ll be impossible to go back. Boeing will need to press forward. Boeing will fix the problems with the MAX, and it will get certified. It will return to service, and it’ll have good fuel economics, but the capital costs will be significantly more than expected. The MAX will probably have more reliability than the NG, with a little cost savings. However, the original business case is gone, and I don’t currently see it returning.” 

Although the aviation industry is confident that the MAX will be recertified and be safe, the travelling public may take longer to convince, which is why the future impact on the wider market is still so highly uncertain. The tragic loss of life has triggered a massive confidence crisis among the public regarding the diligence and prudence of the OEMs and the airworthiness authorities. Restoring that public trust will be an industry-wide effort that will start with Boeing and the authorities and continue for many months through the airlines communication with their customers. There are no quick fixes for restoring public trust. 

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