To restore faith in the 737 MAX, Boeing needs to prove its flagship jet is not just airworthy but also a safe investment.
At a gathering in Dublin this week of the titans of the multibillion-dollar aircraft leasing industry, which finances half the world’s fleet, cracks were appearing in that effort.
Boeing said on Tuesday its troubled workhorse – grounded last March after two crashes in which 346 people died – should receive approval by mid-year from U.S regulators, paving the way for hundreds of jets to resume service later this year.
But in scores of high-stakes negotiations in the background, it is trying to convince banks, leasing firms and airlines that the investment case for thousands more of the jets – worth hundreds of billions of dollars – remains intact.
Airplane owners and investors said some lenders were already demanding higher collateral in deals on the MAX. One airline said financing for pre-delivery payments had dried up amid the uncertainty – though the market won’t be fully tested until closer to renewed deliveries.
“Even people who have committed to financing previously are wondering should I extend or should I just pull back to wait to see because they don’t know the real value of their collateral going forward,” said the head of an asset-management firm active in the sector, declining to be named to preserve relations with Boeing.
“Banks I think are getting a bit nervous,” he said.
Boeing already risks losing some smaller customers who are pondering whether to revoke deals with lessors once delays of 12 months provide them with get-out clauses, according to consultant IBA, whose valuations underpin some financing deals.
That in turn could push down lease rates – and the underlying value of the plane they imply.
“Even when we’re back under starter’s orders and we’ve got certification, I still think there will be downward pressure” on MAX lease rates, IBA Chief Executive Phil Seymour said.
A deeper battle for Boeing is to convince its leasing mega-clients, who have orders worth tens of billions of dollars, that the MAX remains a long-term investment.
In that battle, Boeing is fighting on two main fronts, executives said: compensation talks and efforts to convince purchasers that the MAX production cycle will not be cut short, a step that would undermine the value of the plane.
COMPENSATION
Investors in Boeing shares and in MAX planes are watching closely as compensation negotiations determine how much of the financial pain of the crisis each side swallows.
“Markets believe that indeed there is an enormous cost related to the situation,” said Bertrand Grabowski, an aviation banker turned independent adviser. “What isn’t clear is how much, how that will be compensated and to whom.”
While several airlines have said Boeing agreed to compensate for MAX delivery delays, some lessors are arguing that falls in the value of the jet should also form part of the discussions.
AerCap, the world’s largest aircraft lessor, said it was expecting Boeing to compensate it if it were forced to find new lessees for MAX jets dumped due to the delay.
“Boeing will have to compensate me for that because we would be in a cancellation period and if we didn’t get that we would just cancel,” CEO Aengus Kelly said.
The value of the plane will be “part of the whole thing,” he said on the sidelines of Airline Economics and Airfinance Journal conferences.
Kelly noted strains in the market, saying ‘loan-to-value’ – or the share of the MAX’s purchase price that a bank will cover, may be lower than for a competing Airbus. Some lenders may try to “extract some premium” by raising borrowing costs, he added.
He said “right now” banks and lessors were willing to finance the MAX, putting a floor under its value as experts say the aviation sector remains awash with funds seeking returns.
“If the banks were to lose confidence, that would be different,” he added.
LIFE CYCLE
The second crucial concern among those financing MAX jets surrounds whether Boeing could be forced to develop a replacement before the typical 15-20 years of production.
AerCap this week said it would make no sense for Boeing to replace the programme until the next wave of fuel-saving technology is developed in a decade’s time.
Lessors “will focus a lot on when Boeing end up having to announce a replacement – which for us as asset owners would be the key to deciding whether it’s something we want to invest in,” said Paul Sheridan, CEO of lessor AMCK Aviation.
Seeking to allay doubts, Boeing CEO Dave Calhoun said on Wednesday he expected the MAX to be flown for a generation.
But he also ordered a new market study after shelving plans for a slightly larger jet: an exercise that could encompass the market for planes like the MAX, analysts said.
