With hundreds of 737 MAX sitting idle, waiting to be delivered, and the bottom dropping out of the new aircraft market, it seems like a recipe for a major devaluation of Boeing’s flagship narrowbody. Boss of Air Lease Corporation, Steven Udvar-Hazy, believes the value of the MAX will be impacted due to the grounding, but he also thinks it will bounce back strong.
A huge built inventory
Right now, Boeing is facing its biggest built inventory in all of its century of history. While there are some widebodies hanging around in Washington waiting to be delivered, the vast majority of the built aircraft are, unsurprisingly, the 737 MAX.
Since the aircraft was grounded more than 18 months ago, Boeing has continued to build the type, albeit at a lower rate and with a brief production pause earlier this year. This has simply added to the backlog and the mammoth journey the planemaker faces to get all these aircraft delivered to its customers.
Worse than that, the length of time that the aircraft has remained grounded has enabled many of Boeing’s customers to enact a clause in their contracts to cancel orders without penalty. If the manufacturer is unable to deliver the airplane within 12 months of its contracted delivery date, the customer has the right to scrap the order.
This clause has seen a flurry of cancelations enacted this year, something which has undoubtedly been exacerbated by the COVID pandemic. For airlines, anything that can reduce their financial exposure right now is seen as a positive, so pulling out of the deal is often a welcome relief.
Of course, in time, many of these orders may well spring back to life. The MAX is a superb aircraft in terms of capability and efficiency and will make a worthwhile addition to many an airline fleet, particularly in the frugal post-COVID environment. It’s a headache Boeing is going to need to manage exceptionally carefully.
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More planes than customers
The issue for the manufacturer right now is that it has more planes than it has customers. With as many as 1,000 737 MAX removed from Boeing’s order backlog over the course of 2020, it is now in possession of some ‘white tails’ – in other words, aircraft that have been built but not delivered and for which the customer has now pulled out of the contract.
The planemaker has already been rumored to be trying to sell these on, likely at a steep discount for a quick sale. But with future passenger demand uncertain and airlines’ financials against the wall, very few are shopping for new aircraft at the present time.
Which begs the question: has the extended grounding coupled with an unprecedented crisis in aviation combined to create a perfect storm that will, ultimately, devalue the 737 MAX?
ALC boss says yes
Speaking at an Aviation Week webinar, industry veteran and chairman of leasing giant Air Lease Corporation (ALC), Steven Udvar-Hazy, said he believed that the value of the MAX has certainly been dealt a tough blow. He said,
“Boeing has to make some tough decisions, before the end of the year, on how to deal with this. Short-term, yes, it will have an impact on the MAX’s residual values.”
However, it’s not all bleak news because he also said that he believed the aircraft would make a solid comeback. He said,
“I really believe that once the aircraft are back in service, with the growing environmental regulations, the growing need for efficiency and economical operations, I think the MAX will begin to gain favor … So, the 737 will make it back. But it’s suffered, and it’s going to take a while for its values to really reach equilibrium.”
Do you think the value of the MAX has been damaged as a result of the grounding? Will it come back from this blow? Let us know in the comments.