Boeing’s 737 MAX aircraft was cleared for return to service after the US Federal Aviation Administration officially rescinded the grounding order for the aircraft on November 18, 2020 together with a list of required return-to-service maintenance and pilot training tasks for operators before their aircraft can return to service. The entire fleet of the MAX aircraft type was grounded in March 2019 after two separate crashes which killed 346 people.

The first commercial 737 MAX flight was made by GOL on December 9, with domestic flights from its hub in São Paulo. Aeromexico, which has six 737 MAX 8 aircraft, was the next commercial airline to fly the MAX, followed by American Airlines, which resumed two MAX flights per day from Miami (MIA) to New York LaGuardia (LGA) on December 29 with more scheduled to be added throughout January. 

American is providing passengers with full details on which aircraft the flight will use and is allowing passengers to change flights with no charge if their flight is changed to use the MAX aircraft.Rebuilding passenger confidence in the aircraft is paramount to its success. All of the airlines that are resuming MAX services are highlighting their absolute confidence in the safety of the aircraft, which has been checked and double checked by regulators over the 20 months it has been on the ground. 

Celso Ferrer, VP of Operations at GOL, who is a commercial pilot and already trained to fly the 737 MAX, described the re-certification of the MAX as the “most comprehensive safety review in the history of commercial aviation” and as a result of the new certification approved by the FAA and ANAC, the National Agency Civil Aviation Administration in Brazil, he is “fully confident in the MAX’s return to service”.

Before reintegrating the MAX-8 into its fleet, GOL confirmed that it had conducted training for 140 of its pilots in conjunction with Boeing using a MAX simulator in the US, meeting all the technical and operational requirements outlined by regulators. GOL also stressed the fact that it had completed a rigorous series of technical flights that exceeded the requirements set out by aviation regulatory agencies, which “reinforced the meticulous work of removing the MAX-8 aircraft from storage by the aviation engineers at GOL Aerotech”.

GOL operates a single fleet of 127 Boeing aircraft, and has orders for 95 737 MAX aircraft to replace its NGs, scheduled for delivery in 2022-2032. 

CEO Paulo Kakinoff stated: “We are pleased about the return of the Boeing 737 MAX to our network. The MAX is one of the most efficient aircraft in aviation history and the only one to undergo a complete recertification process, ensuring the highest levels of safety and reliability... We reiterate our trust in Boeing, our exclusive partner since GOL’s inception in 2001.”

American Airlines too issued a number of similar statements detailing its trust in Boeing and the re-certification of the MAX. The US carrier has an entire webpage dedicated to the aircraft type, which sets out in detail the airline’s process for ensuring the aircraft’s safe return to service: “American has put in place rigorous processes to ensure that every plane in the air is safe and our pilots, flight attendants, team members and customers are confident in the return of the 737 MAX.” American adds that it has invested in extensive pilot training and that its storage program has enabled the airline to keep its aircraft in excellent condition with regular care and maintenance in anticipation of its return to service. The webpage details the extensive maintenance requirements the team will complete and have signed off by FAA-licensed technicians before the aircraft returns to the skies.

Repairing the MAX

In a virtual conference hosted by Boeing Capital Corporation in late 2020, Mike Flemming, vice president, 737 MAX Return to Service, Global Aviation Safety System and Customer Support at Boeing Commercial Airplanes, gave a thorough overview on the recertification process, including the software changes, and the processes for returning to MAX to full service. The main changes to the aircraft from Boeing concerned the manoeuvring characteristics augmentation system, or MCAS, which is the flight control software that decreases pitch-up tendency at elevated angles of attack. The fault with the previous system was that it was inputted with data from a single angle of attack (AOA) vane that erroneously caused the software to fire numerous times that required the pilots to trim during manual flight. Boeing has addressed that problem in the software in three ways:

  1. The flight control system will now compare inputs from both AOA sensors. If the sensors disagree by 5.5 degrees or more with the flaps retracted, MCAS will not activate. An indicator on the flight deck display will alert the pilots.
  2. If MCAS is activated in non-normal conditions, it will only provide one input for each elevated AOA event. There are no known or envisioned failure conditions where MCAS will provide multiple inputs.
  3. MCAS can never command more stabilizer input than can be counteracted by the flight crew pulling back on the column. The pilots will continue to always have the ability to override MCAS and manually control the airplane. 

These changes have been rigorously tested and examined by the regulatory agencies to ensure the software now functions as intended. Boeing has conducted 390,000 engineering test hours developing those solutions and had over 1,800 hours in flight simulators testing the solutions as well as more than 3000 flight hours to evaluate the software on the airplanes.Boeing also refined the training programme for MAX flight crews, starting with amended reference documents to provide pilots with more information on the manoeuvring characteristics, augmentation system on the aircraft as well as additional training materials to utilise to become more familiar with the aircraft. A series of training modules has been developed to provide guided instruction around MCAS, and other areas such as airspeed and accidental manual trimming, as well as simulator training hours where pilots will fly a series of conditions like a runaway stabilizer condition and an unreliable airspeed condition to demonstrate they can handle those problems. 

Aside from the software changes, after such a thorough review of the aircraft, Boeing has also made changes in some of the wiring and software systems to put in more protections for the airplane procedures. Boeing is assisting operators with returning the stored aircraft to service. The manufacturer has created a 24-hour operations centre operations with a dedicated team of MAX engineers that will be solely focused on the safe operation of the aircraft to resolve any issues as they arise. Boeing is also providing entry-into-service, on-site support to its customers to ensure their aircraft exit the preservation process efficiently and safely.

The simple fact is that Boeing has an inventory problem in in a world that needs much less capacity. “The economics are obvious… but we can help.”

John Plueger

At the time the aircraft was grounded, Boeing had delivered 387 MAX aircraft, and had more than 400 manufactured aircraft on the ground waiting to be delivered. The logistics of returning such a large amount of aircraft to the air will be a significant challenge but Boeing will be keen to ramp up deliveries as much as possible to improve cashflow. In December, Boeing’s latest Orders & Deliveries report confirmed it had delivered 27 737 MAX aircraft. Financing those deliveries, although difficult in this stressed environment, has already begun, primarily with support from the leasing sector. 

Boeing resumed deliveries of the 737 MAX on December 9, with one 737 MAX 9 – the first MAX delivery in more than 21 months – to United Airlines. On December 15, Dubai Aerospace Enterprise (DAE) delivered the first of 18 737 MAX 8 aircraft to American Airlines as part of a purchase and leaseback agreement signed in the third quarter of 2020. Delivery of the remaining aircraft is expected to be completed in next few months.

Firoz Tarapore, Chief Executive Officer of DAE, used the delivery as an opportunity to express his own confidence in the aircraft: “We are pleased to further invest in these technologically advanced and fuel-efficient aircraft types in line with our commitment to environmental sustainability. The Boeing 737 MAX boasts superior fuel efficiency and reduced emissions and noise pollution, underpinning DAE’s commitment to transition its fleet to newer technology assets, reducing the environmental impact of our business and supporting DAE’s customers’ ambitions to become more sustainable operators.” DAE’s owned and committed fleet includes 22 737 MAX 8 aircraft.

Meghan Montana, Vice President and Treasurer of American Airlines, commented that DAE’s ability to “facilitate an agreement of this size in today’s environment is a testament to their reputation and their confidence in American Airlines”.

In December, CDB Aviation also completed the financing for nine 737 MAX 8 aircraft under the purchase and leaseback agreement with WestJet. The aircraft were originally delivered to WestJet over the past three years. In October, Tui agreed a $90 million sale and leaseback deal for two new 737 Max-8 aircraft with BOC Aviation. The aircraft are expected to be delivered during winter 2020-21. More sale-leaseback deals with MAX aircraft are expected. 

Rob Morris, Global Head of Consultancy, Ascend by Cirium, commented that the healthy sale-leaseback (SLB) market – as airlines seek to leverage any assets they can to boost liquidity – will be a willing recipient of the MAX aircraft type.

“Airlines taking delivery of a new Boeing 737 MAX will be able to offer the aircraft in the sale and leaseback market immediately,” he says. “We have already seen appetite for Max sale-leasebacks with several lessors and thus those airlines will be able to liberate the cash they have paid for the aircraft (deposit, PDP, final payments) and even potentially book an immediate profit on the sale. There are some airlines, Spicejet for example, whose business model depends upon sale-leasebacks at delivery and such airlines will be very pleased to see the MAX back in service and deliveries available again.”

Speaking at the Airline Economics Growth Frontiers New York virtual conference held in October, ALC CEO John Plueger also gave his backing to the MAX, despite having cancelled a few of the aircraft type on the wishes of ALC’s airline customers. He acknowledged the challenge Boeing has in delivering its backlog and finding finance for those deliveries but stated lessors can be very helpful with the placement of those aircraft, commenting that “in the good times, the airlines need us for our delivered positions, but in the bad times, they need us for our balance sheets... we can play a vital role in helping the Boeing company place those aircraft going forward”. He added however that this will take time – estimating up to two years to place all those aircraft: “The simple fact is that Boeing has an inventory problem in in a world that needs much less capacity,” commented Plueger. “The economics are obvious… but we can help.”

ALC has recently placed 13 new Boeing 737-9 MAX aircraft on long-term lease placements with Alaska Airlines, which scheduled to deliver between the second half of 2021 through the end of 2022 from ALC’s order book with Boeing.

Commenting on the deal, Steven F. Udvar-Házy, Executive Chairman of ALC, described the Boeing 737-9 aircraft as the “most technologically advanced and environmentally attractive aircraft type”, which will be introduced into Alaska’s network, “just in time as we expect the airline industry will undergo a sustainable recovery starting in 2021”.

The Export-Import Bank of the United States (Eximbank) has also begun to support MAX aircraft and is seeking final authorisation to guarantee a $327 million preliminary loan to Copa Airlines by Citi for the purchase of several 737 MAX 9s. Although export credit guaranteed loans can lower the risk of default for the lending banks, many aviation financing banks are reported to have withdrawn from several aircraft deals and are restricting their support to relationship clients and higher yielding products than ECA deals. But confidence is key here too. One banker said: “The MAX is part of our lending strategy going forward but I don’t want to be the first. I will wait to see that there are no technical issues for the next few months but we will finance the MAX, more likely as part of a portfolio with other aircraft types.”

In such a fragile market, however, Boeing may also need to step up to support the financing challenge until banks and other investors are reassured that the aircraft type is fully operational and safe. In a market update, Peter Sladic, MD Capital Markets & Outreach at Boeing Capital, presented at its virtual conference that Boeing is seeing heightened interest from institutional investors that are searching for yield in a depressed interest rate environment. He also expects more support from ECAs as well as credit enhanced offerings from AFIC and Aviation Capital Group’s AFS product. The problem here is that bank debt is still required, and those banks are demanding a better return for committing the capital they have to offer. Valuing the MAX is also a problem in the depressed environment and following its lengthy grounding. IBA has not adjusted base values for the MAX, however, and believes that there is still enough of a backlog to support a liquid secondary market trading environment and that even though market values have dipped below base, they are holding slightly above soft. 

Although Boeing suffered cancellations for the MAX since its grounding in 2019 and again in 2020, it received a shot in the arm from Ryanair with an order for a further 75 MAX-8200 aircraft. 

Ryanair is a savvy operator and, not only does it believe in the airplane, it will have baked in a significant discount (even though Ryanair described receiving a “modest discount” as compensation for the delayed delivery of its original order). 

Ryanair now has a firm order for 210 MAX-8200 aircraft, with a total value of over $22bn, and it is the launch customer for the high-capacity 737-8 variant, having placed its first order for 100 airplanes and 100 options in late 2014, followed by firm orders of 10 airplanes in 2017 and 25 in 2018. Ryanair expects to take the first deliveries of these new aircraft from early 2021, and the remainder over a four-year period between Spring 2021 and December 2024. Ryanair’s Group CEO Michael O’Leary, expressed his hope that the airline will be able to take delivery of at least 50 aircraft in 2021, “subject to Boeing recovering its manufacturing output to deliver them”. The aircraft will replace some of Ryanair’s older Boeing NG fleet, which will remain grounded until pre-COVID demand returns, said O’Leary. 

Like American and GOL, in a bid to reassure passengers, Ryanair has also pressed home the safety of the aircraft, calling it the “most audited, most regulated [aircraft] in aviation history”. O’Leary says that the airline is working closely with Boeing and its senior pilot professionals to assist the European regulator EASA to certify the aircraft in Europe, and also complete the training of its pilots and crews using its three new Boeing MAX simulators in Dublin and Stansted.

As soon as the COVID-19 virus recedes – and it likely will in 2021 with the rollout of multiple effective vaccines – Ryanair and our partner airports across Europe will – with these environmentally efficient aircraft – rapidly restore flights and schedules, recover lost traffic and help the nations of Europe recover their tourism industries.

Michael O’Leary
Ryanair Group

Importantly, Ryanair describes the aircraft as “fuel efficient and environmentally friendly” – noting the industry remains acutely aware of its need to focus on reducing emissions under ESG pressure from governments and investors. Although the headlines on ESG and aviation have subsided due to the crisis, that pressure remains (see final chapter of this report on sustainability). American and DAE also stressed the environmental advantages of the aircraft type, which are already being considered by lenders when providing secured loans on aircraft as well as other equity investors in aircraft operators. 

Cirium’s Morris also points and the equally important benefit of being more fuel efficient, which is lower costs – which will be essential in the post-COVID recovery period.

“The aircraft will, of course, be around 15% more fuel efficient than the 737-800s that it will be replacing,” says Morris. “Even though fuel prices are low today and utilisation is also reduced over 2019 levels, that fuel saving could still account for something like $750-$1,000 per aircraft per day. For an operator like Southwest or United, that would soon multiply up to savings in excess of $1 million per month which in today’s environment where airlines want to preserve as much cash as possible is very welcome.”

After Ryanair’s order announcement, the market now expects other airlines to work to secure further MAX orders as discounted prices. In the US, Southwest and Delta are mooted to be in discussions on a new order. 

Boeing’s MAX order book was cut by up to 30% due to cancellations and the manufacturer will be keen to get those positions filled with incremental orders from existing customers for the new aircraft type. When demand for the air travel returns, and the aircraft has proven its safety profile over the next six to 12 months, airline orders are expected to return. Building passenger confidence to fly after the COVID-19 crisis and also to fly in a MAX aircraft, is a challenge the entire industry is working hard to solve.

Get in touch

If you have any queries on any topic raised in Aviation Industry Leaders Report 2021: Route to Recovery, please contact Joe O'Mara of our Aviation Finance team. We'd be delighted to hear from you.