The Boeing 737 MAX Is Back In China (NYSE:BA)

Following the second crash of the Boeing (NYSE:BA) 737 MAX in March 2019, the Chinese aviation regulator was the first to ground the type citing patterns similar to the first crash with the Boeing 737 MAX. The action from the Chinese regulator came at a moment when tensions between China and the US were high as President Trump had engaged in a trade war which impacted US aerospace products. While the call from the Civil Aviation Administration of China was the correct one, it was clear that the Boeing 737 MAX had become an issue with Sino-American tensions.

Today, it is Friday the 13^th which is not a lucky day for superstitious people but for Boeing it’s actually a good day as nearly three years after grounding the Boeing 737 MAX China has operated a flight with the Boeing 737 MAX again. In this report, I will lay out why the timing of the return makes a lot of sense.

COMAC C919: The Answer To The Airbus-Boeing Duopoly

As the Boeing 737 MAX crisis lingered on, it became more and more clear that the return of the Boeing 737 MAX in China would not happen any time soon. For some time, there were hopes that normalizing the relation between China and the US would pave the way for the Boeing 737 MAX to return to commercial service in China as President Biden took office. However, President Biden did nothing to normalize ties even with Boeing expressing its desire for the two superpowers to normalize the relation.

Absent of normalization, the running theory once again became that certification of the Boeing 737 MAX would ultimately be tied to the certification of the COMAC C919, which is China’s attempt to gain market share on the Chinese market, and that’s exactly what happened and I did point this out various times including more recently in October:

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.

By the end of September 2022, the C919 was certified and in December 2022 a production certificate was obtained allowing for duplicates to be produced paving the way for line production of the aircraft without further showing. Days later Chine Eastern Airlines took delivery of the first aircraft. With the Boeing 737 MAX return with Chinese operators expected to be tied to the COMAC C919 certification, it also meant that the Boeing 737 MAX return came a step closer. China had basically stalled return of the Boeing 737 MAX to make up for the years of delay its suffered on the development of its own jet.

Boeing Increase Pressure On China

Boeing must have known that the C919 would obtain its airworthiness certificate when it increased pressure on China in September 2022 stating that it was no longer counting on China and would be remarketing portions of its inventory that initially was destined for China.

Back then I did point out that going the patient route had not worked with China, so making a clear statement to China was the best Boeing could do and in some way that did help because just days later China responded:

On September 14, the Civil Aviation Administration of China and Boeing held a special meeting on 737MAX aircraft operation review (i.e. AEG review) in Zhoushan, Zhejiang, aiming to review the improved overall model training specifications of the 737 series. It’s reported that after the questions raised at the meeting are resolved, the Civil Aviation Administration of China will release the second revision of the “Boeing 737 Series Aircraft Review Report,” marking that China’s civil aviation industry will soon complete the entire process of resuming the introduction of new 737MAX aircraft.

The full-time AEG reviewers from the Flight Standards Department of the Civil Aviation Administration and the Aircraft Review Center of the Academy of Aviation Science participated in the review. The meeting also invited flight and maintenance technical experts from some airlines, as well as the chief operation inspectors and chief maintenance inspectors of regional administrations. Some personnel from Boeing China and Boeing Zhoushan Completion and Delivery Center provided offline support for the meeting, and the Boeing 737 project and technical team provided online support in Seattle.

On the second day of the special meeting, the delegates also visited the Boeing Zhoushan Completion and Delivery Center.

A month later, there was an even bigger milestone with MIAT Mongolian Airlines operating the first flight to China using a Boeing 737 MAX. It was one of the many steps that would pave the way for the market reopening for the Boeing 737 MAX in China.

Demand Necessitates Boeing 737 MAX Return

One major reason why China was able to strongarm Boeing for so long is because demand for air travel collapsed completely due to the pandemic. With no demand for air travel, it was easier for China to refuse the Boeing 737 MAX a market re-entry. However, after protests in China the country has accelerated re-opening the country which would reflect positively on demand for air travel. With the market re-opening demand for aircraft also is increasing to do this in a fuel and cost efficient manner. And while the China has its own jet now, they certainly don’t have the production capacity for the foreseeable future to cater the replacement and demand needs while a huge pool of pilots trained for the Boeing 737 don’t make a switch to either Airbus or COMAC any easier. So, the next checkbox that needed to be checked was demand revival in mainland China which also happened recently.

Furthermore, with demand reviving China does not want to lose access to Boeing or the jets that have already been built. China is in a multi-step process of returning the MAX and the most recent flight with the MAX is just one step as China might elect to put already delivered MAX aircraft in service before taking delivery of new aircraft. However, signs that Air India would be buying some jets initially destined for China might also have put Chinese airlines on alert as demand revival was imminent while Boeing seemed to be close to selling the planes that China would like to have after all. So, from demand perspective return of the Boeing 737 MAX in China was a must.

Conclusion: Boeing Stock Jumped 63%

Since Boeing increased pressure on China, its stock prices surged over 60% driven by comment on remarketing jets built for China and positive cash flow projections. I would say that things have worked out as expected with regard to Boeing’s share price performance but more importantly with regard to China. It already expected that service re-entry would occur after the COMAC C919 would be certified and demand revival would necessitate a return of the Boeing 737 MAX. Remarketing comments from Boeing and a potential sale of aircraft once destined for China to Air India further increased pressure on China to no longer stall the return of the Boeing 737 MAX. The fact that the Air India order has not been announced might also be related to Boeing knowing that the MAX service re-entry was close. What still holds is that while the Chinese regulator was vocal on grounding the MAX, allowing it back in its airspace and eventually back in service with Chinese airlines, the regulator has been rather mute. With the Boeing 737 MAX back in China, we await comments from Boeing during its Q4 2022 earnings call as we hope to have some clarity on any delivery plans to China.