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So, while production will go up, it will be a paced production step up where not all efficiency gains are unlocked and the current surplus of jets puts a significant damper on market values. Our cancellations monitor shows that at this moment there are 780 Boeing 737 MAX likely to be cancelled, largely due to financial issues with the customer, so around 20% of the backlog is pending cancellation that will undoubtedly make it challenging for Boeing to hike output as the company first needs a clear sight on the production skyline. What also should be kept in mind is that at this point hundreds of Boeing 737 MAX orders are pending cancellation. Hundreds of aircraft are pending cancellation
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What investors should keep in mind is that it takes a burn off in the storage of airlines and Boeing for the Boeing 737 MAX rate to go up significantly again.
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Looking at how Airbus is managing, there definitely are opportunities to get a reasonable outflow going. Some airlines will not make it and that means their aircraft, whether that's a Boeing 737 MAX or another single aisle jet, need to be remarketed, and that puts a lot of pressure on the prospect of a fast recovery for the production line, and the only way in which Boeing can really increase production at a fast pace is when it brings production in line with the outflow rate from the storage.
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So, airlines and Boeing have to put in service and deliver around 835 aircraft or around 1.25 years of production before the surplus is gone and I believe that will be challenging. So, before Boeing can start the Boeing 737 MAX production line at appreciable rates again we first need to see those 385 Boeing 737 MAX being brought back into revenue service and it doesn’t stop there: Boeing has built over 450 Boeing 737 MAX aircraft that are built and in storage with the jet maker. So, we have a pool of 385 aircraft that in years from now are not really supporting anything other than fleet rejuvenation. So the RPK contribution of the 385 grounded Boeing 737 MAX aircraft is not captured in that RPK number. My main concern is that by assessing demand in comparison to 2019 levels, we are actually ignoring that the Boeing 737 MAX was already grounded over nine months. What should be kept in mind is that everybody is continuously assessing demand to be back at levels of 2019 by “Year X,” some say it's 2023 or 2024 and some put it back at least until 2026. What also should be kept in mind is that there might be some economic damage that needs longer to recover, for instance economic growth and job recovery might take a bit longer to come back while there might be some markets that remain somewhat depressed or recover at a slower pace. Obviously, we are hoping that once a vaccine is approved that life will be back to normal but it's unlikely that will be the case because rolling out the vaccine is a complex process. Reality, however, is that it will take some time even with a vaccine in place before the industry will be back at 2019 levels. Without doubt, the airline industry will thrive again. Source: RD Demand: A killjoy for the Boeing 737 MAXįigure 1: RPK trend airline industry (Source: Boeing) At the same time, I do think investors should be aware that significant challenges remain once the Boeing 737 MAX is recertified. We have seen the markets pre-sorting for a Boeing 737 MAX recertification and to some extent I do understand this, because the biggest upside often materializes before the fundamentals reflect significant improvement. In a previous report, I had a look at some positive developments on the timeline that seem to confirm that the Boeing ( NYSE: BA) 737 MAX will be recertified this month with possibilities for the first scheduled flights later this year in the US, and shortly after that we expect other agencies to follow.