Boeing (BA - Get Report) shares traded sharply lower Monday after the world's biggest planemaker said it would slow production of its flaghship 737 MAX aircraft following two fatal accidents that have raised serious concerns for the aircraft's safety.
The decision, announced late Friday, will see Boeing cut 737 production by 20% to 42 units per month, starting around the middle of April. The pare down followed Boeing's first acknowledgement last week that its software system played a role in two recent 737 MAX 8 accidents, which killed 346 people in tragedies in Ethiopia and Indonesia.
More than 300 of Boeing's flagship MAX aircraft have been grounded by regulators around the world since the March 10 Ethiopian Airlines disaster, and safety and investigative questions have pressured shares amid concerns for a 5,000 unit MAX aircraft backlog worth around $600 billion. The South China Morning Post reported Monday that China has temporarily suspended it order for 100 737 MAX 8 jets.
"We now know that the recent Lion Air Flight 610 and Ethiopian Airlines Flight 302 accidents were caused by a chain of events, with a common chain link being erroneous activation of the aircraft's MCAS function," CEO Dennis Muilenburg said in a statement. "We have the responsibility to eliminate this risk, and we know how to do it. As part of this effort, we're making progress on the 737 MAX software update that will prevent accidents like these from ever happening again."
"As we continue to work through these steps, we're adjusting the 737 production system temporarily to accommodate the pause in MAX deliveries, allowing us to prioritize additional resources to focus on software certification and returning the MAX to flight," he added. "We have decided to temporarily move from a production rate of 52 airplanes per month to 42 airplanes per month starting in mid-April."
Boeing shares fell 4.1% in trading Monday to change hands at $375.69.
Boeing said last week that the preliminary report into the cause of Ethiopian Airlines Flight 302's fatal crash, as well as the Lion Air 610 disaster in Indonesia in early October were caused by activation of the Maneuvering Characteristics Augmentation System, or MCAS, in response to "erroneous angle of attack information" from a broken sensor. Boeing vowed to correct the cause of the tragic incidents while recognizing the "devastation of the families and friends of the loved ones who perished."
Ethiopia's Transport Ministry stopped short of blaming Boeing's MCAS system, which similar probes in Indonesia have identified as the potential cause of the Lion Air crash, but said the planemaker should review and confirm its safety before MAX 8 planes return to normal service.
"In light of our commitment to continuous improvement and our determination to always make a safe industry even safer, I've asked the Boeing Board of Directors to establish a committee to review our company-wide policies and processes for the design and development of the airplanes we build," Muilenburg said in the Friday statement. "The committee will confirm the effectiveness of our policies and processes for assuring the highest level of safety on the 737-MAX program, as well as our other airplane programs, and recommend improvements to our policies and procedures."
The Federal Aviation Administration also said last week that it would conduct a "comprehensive review" of the MCAS system on MAX 8 and MAX 9 aircraft with a formal Joint Authorities Technical Review process.
The FAA said it would ""evaluate aspects of the 737 MAX automated flight control system, including its design and pilots' interaction with the system, to determine its compliance with all applicable regulations and to identify future enhancements that might be needed."
The U.S. Transportation Department is looking into the FAA's certification of the 737 MAX, and reports have suggested the Justice Department is also investigation the Administration's oversight of both Boeing and aircraft certification processes.