Boeing’s suspension of 737 Max production poses more challenges for Canada’s airlines

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Boeing Co.’s move to stop production of the 737 Max passenger jet prolongs a period of higher costs and uncertainty for Canadian carriers with grounded planes and more on order.

Two fatal crashes within five months caused the global grounding of the model in March, forcing Air Canada, WestJet Airlines and Sunwing to park their 737 Max jets. The two crashes, which killed 346 people in Indonesia and Ethiopia, were linked to the planes’ control systems.

Canadian airlines responded to the lost capacity by cancelling thousands of flights, and extending leases or substituting other planes, moves that drove up costs and prompted the carriers to raise seat prices, Statistics Canada said. Air fares at the end of June of this year were 8 per cent higher than a year earlier, Statscan said, noting that “the upturn in air fares in the second quarter of 2019 was largely related to the reduced operational aircraft capacity caused by the grounding of all Boeing 737 Max aircraft.”

Domestic carriers, in a period of fleet renewal, were big buyers of the 737 Max, billed as fuel-efficient with greater range than the 50-year-old 737 model on which it is based.

Air Canada, which has 24 737 Max planes and another 26 due in 2020, said in October the loss of the model helped drive up operating costs by $105-million in the third quarter, or 2 per cent, from the same period in 2018.

Montreal-based Sunwing has four Max planes, while Calgary-based WestJet has 13 on the ground and four on order. WestJet’s Halifax-to-Paris route is among the flights the airline has scrubbed, dropping the Max from its schedule until early February, and possibly early March.

“Our oldest Max aircraft is only 14 months old,” Ed Sims, WestJet’s chief executive officer, said in an interview last week. “These are beautiful new aircraft sitting, not doing the [service] we bought them for.”

Sunwing said in an e-mail it dropped the Max planes from its winter schedule to ensure customers’ travel plans were not interrupted.

Air Canada did not immediately respond to a request for comment.

The Max grounding has been a factor in this year’s two big takeovers in the Canadian airline industry. Onex Corp., whose $3.5-billion takeover of WestJet became final last week, slashed its offer for the airline due to risks that included the loss of the Max planes.

Analysts said Air Canada’s proposed $720-million purchase of Montreal airline Transat AT Inc. was in part driven by the desirability of Transat’s fleet of Airbus planes. Transat flies 30 Airbus planes and five older non-Max 737s. The carrier this year received two Airbus A321 Neo planes, with another 15 due to arrive by 2022.

Air Canada and Transat’s share prices were little changed on Tuesday.

Shares of Boeing and its global suppliers fell further on Tuesday as analysts began to tally the cost of the U.S. plane maker’s decision to suspend production of 737 Max jets in January, its biggest assembly-line halt in more than two decades.

Analysts estimated Boeing could continue to burn about US$1-billion a month despite the halt in work on what was its best-selling plane, and investors worried layoffs, lost work and logistical costs would ripple through its supply chain. The grounding has cost Boeing more than US$9-billion so far.

“Each supplier will likely be missing about 200 deliveries versus original plans, with about 80 per cent of the shortfall coming in 2020 and the remainder in 2021,” Melius Research analyst Carter Copeland said in a research note.

Heroux-Devtek makes tubes for the 737 Max wings in Laval, Que., but the work accounts for less than 1 per cent of its revenue, said Walter Spracklin, a stock analyst at Royal Bank of Canada.

Britain’s Senior Plc, which makes parts including airframes and engine build-up tubes for the Max, was one of the first suppliers to comment on the suspension, saying it was working closely with the U.S. plane maker to assess the impact of a production shutdown on its 2020 sales.

The fallout extended to carriers, with Southwest Airlines Co extending cancellations of Max flights by another five weeks through April 13, due to the continued uncertainty around the timing of the aircraft’s return to service.

The U.S. plane maker’s shares closed at US$326.90, down 15 US cents, after falling as much as 1 per cent during Tuesday trading, while its top supplier, Spirit AeroSystems Holdings Inc, slumped nearly 3 per cent.

Shares of Senior, whose aerospace unit counts Boeing as its biggest customer with 15 per cent of the division’s sales, fell more than 11 per cent. Those in France’s Safran SA, which makes engines for the Max in a joint venture with General Electric Co, dipped 1.5 per cent.​

With files from Reuters