The Big Boeing Shock Win In China (NYSE:BA)

Currently, the Boeing 737 MAX is back on track but Boeing (NYSE:BA) is facing challenges on three ends, namely production, deliveries in China and certification for future MAX models. Despite these challenge, I continue to believe Boeing is a buy based on future demand and improvement in its delivery mix that should aid the company accelerating its balance sheet repair effort. The challenges Boeing is facing are not going to dissolve overnight, but one step at a time Boeing is making progress and while I would like to see things improving fast, I am completely OK with an incremental improvement of the outlooks.

One of the things that has been moving rather slowly is the recertification of the Boeing 737 MAX in China. In September, Boeing sent a strong message to China discussed in my report Boeing Shocks China when it made public that there had not been much progress on the certification effort since February this year and that the company had started remarketing some jets initially built for Chinese airline customers. While some have criticized Boeing for this move, I do believe that it made sense for Boeing to do this because patiently waiting for the Boeing 737 MAX to be certified had no positive effect and the MAX had become a playball of political tension between the US and China. China responded in two ways which I also discussed in a separate report. The first reaction was a knee-jerk reaction putting the CEOs of Raytheon Technologies (RTX) and Boeing Defense, Space & Security on a sanction list of arm sales to Taiwan. The second reaction was more helpful, revealing that the regulator and Boeing representatives had met prior to Boeing increasing pressure on China and some items still needed to be addressed. In a press release, the regulator also said that deliveries could commence soon which was definitely a promising sign.

The most recent development is that a foreign Boeing 737 MAX operator has now executed a flight to China. It is definitely a good sign, but as I discuss in this report, that does not mean that the Boeing 737 MAX is fully back and tomorrow the MAX is fully back in China. It is yet again one step in a sequence of multiple steps required. I will also highlight the timing of the MAX return in Chinese skies as well as the eventual importance for Boeing’s numbers.

Boeing 737 MAX Commercial Flight In China

So, what is so special about Flight OM235? It is the first passenger flight since the Civil Aviation Administration of China banned the MAX from operating in its airspace following the second fatal crash with the MAX 8 in March 2019. The flight was operated from Ulaanbaatar in Mongolia and landed in Guangzhou after 3 hours and 38 minutes. The operating airline was MIAT Mongolian Airlines, which took delivery of its sole Boeing 737 MAX right before the type would be grounded. The aircraft is expected to depart from China later today and is scheduled to operate the Ulaanbaatar-Guangzhou route in a week from now.

MIAT Mongolian Airlines already outlined plans earlier this year to offer its sole Boeing 737 MAX for ACMI (aircraft, crew, maintenance and insurance) operations from Q3 2022. With the MAX banned from China and Russia and no meaningful market in Mongolia, it meant that the airline was expecting the MAX to be certified by for service by Q3 2022 in at least one of the airspaces required to operate the MAX. As turns out now, they have not been wrong in that assessment.

Multiple Steps Required

The flight from MIAT Mongolian Airlines was a scheduled flight and no diversion event. That indicates that the Chinese aviation regulator has silently opened the airspace for the Boeing 737 MAX again. However, apart from that, there is not a lot of information available on what this means for the Boeing 737 MAX fleet in China. We have no indication that the Chinese regulator has signed off on the training material for the MAX for Chinese operators and as a result, we do not know how much of a big deal this actually is for Boeing or China. If opening of the air space is closely followed by recertification of the MAX in China and continued operations among Chinese carriers it is a big deal. However, that does not mean Boeing will get rid of its inventory tomorrow. That inventory reduction has been slow, even though demand for aircraft is high, and we might be seeing that re-introduction in China will be somewhat soft as crews need to be trained and updates on the MAX need to be carried out. Additionally, the Chinese carriers have omitted the Boeing 737 MAX from their fleet delivery plans for the foreseeable future, so recertification does not equal a definite resumption of deliveries even though for Boeing one can only hope it does equate to the same.

Big Step For Boeing If Momentum Persists

Now, if all things do turn out to be positive for Boeing this is a huge step without doubt. In that case, clearance of the MAX in China means that Boeing equates to a return-to-service and a resumption of aircraft deliveries to Chinese customers. By the end of the second quarter, Boeing had 290 aircraft in inventory, up to half of which is estimated to be destined for Chinese airlines. Boeing has started remarketing the jets, but having China back in the delivery mix would be a significant boost to Boeing’s inventory reduction and would boost confidence to hike production despite ongoing supply chain challenges.

I have previously contacted Boeing to get more detailed information on the inventory numbers from the manufacturer but have yet to hear back from the spokesperson and do not anticipate this to occur any time soon due to the quiet period observed prior to earnings release. Modeling the share of the Chinese inventory at half of the full number, the revenue that could be unlocked is $7.6 billion and could equate to over $2 billion in delivery payments.

Serving Chinese Aircraft Industry Interests

It is unlikely that near term demand necessitates the resumption of MAX operations and deliveries in China. During Golden Week, which are the first seven days in October, normally a strong week for spending and traveling in China, things were not looking strong due to COVID-19 measures that remain in place and it is rather unlikely that travel demand will snap back to pre-pandemic levels for the Chinese New Year in January.

Though the consensus had become early in the stages of the MAX grounding that the aircraft would be recertified after a certain milestone was reached and that milestone was not travel recovery in China or any of the travel bumps that we traditionally see in Mainland China. The trigger would be the certification of the COMAC C919, which happened in late September 2022. Keeping the MAX grounded allowed for the C919 to compensate for some of the years-long delays experienced on the program and it creates a different playing field. I do believe that the delay in the MAX certification was directly tied to certification progress for the C919 and the role the MAX can play in maturing required chains and networks for that aircraft. I could provide a case study on the C919 and its national as well as international importance and its relation to the Boeing 737 MAX, but that is a case study that would like span tens of pages which I will spare you for now.

Another reason driving some progress for the MAX in China likely is the fact that Boeing addressed the issue right in the open directly linking the geopolitical tension to certification and sales. Boeing sent a strong message and that message was heard globally. While the CAAC made the right decision by grounding the MAX in 2019, weaponizing an institute that should safeguard safety for geopolitical and trade conflicts is on the end of the spectrum that cannot count on a lot of support. In the same way, the MAX disturbed the credibility of the FAA, the same was bound to happen to CAAC if it continued keeping the MAX hostage of foreign policy and conflict.

Conclusion: BA Stock Might Surge But Uncertainty Remains

While the return of the Boeing 737 MAX is a good thing, I also do want to issue a word of caution. The return of the MAX in China has happened quietly, no word from Boeing or CAAC on the matter and we simply do not know how the road map for operation resumption by Chinese airlines are looking or any plans for deliveries to Chinese airlines. It could be that with the C919 being certified, the MAX will still be held hostage but this time not by CAAC. China could simply say, the MAX is now back in China but we are still not going to be taking deliveries. While it could certainly be the case that operations and deliveries will recommence, we do not know the near-term planning.

For Boeing, in the most positive scenario, there will be a big bump for deliveries going forward as China is added back to the delivery mix which could unlock further upside to production in future years. In the most negative scenario, the MAX is allowed back in service but nothing really changes for the delivery prospects.

So, continued patience is required before we see some concrete steps that pave the road towards deliveries and the flight from MIAT Mongolian Airlines to China is one step. That is the way we should view things, one step at a time in a geopolitical US-China minefield. Overall, I do believe that Boeing took the correct approach by being patient in earlier stages, but later on also flagging the MAX as a part of a wider conflict. In the coming days, I would be watching any signs of MAX test flights in China carried out which could be an indication that operators are planning a return-to-service.