(Rewrites, adds detail on software issue)
By David Shepardson, Eric M. Johnson and Tracy Rucinski
June 27 (Reuters) - Boeing Co will take until at least September to fix a newly identified problem on its grounded 737 MAX, a company official told Reuters, meaning the workhorse jet's return to service will be delayed until October at the earliest, significantly longer than most airlines had expected.
Boeing shares closed 3% lower on Thursday, after the Chicago-based company told air carriers that it would complete the latest software update for the 737 MAX by September after a new issue arose last week during a simulator test.
That is later than most airlines had expected: American Airlines Chief Executive Doug Parker said on June 12 it was "highly likely" flights would resume by mid-August. Most airlines have taken the MAX off their schedules until early September.
Once Boeing completes the update, the U.S. Federal Aviation Administration must review the fix and the results of a certification test flight that will not be scheduled until at least September, a process that will take at least two to three weeks. The new timeline means the plane is not likely to resume flying commercially until at least October, leading to thousands more flight cancellations.
Southwest Airlines Co has said it will need 30 days after the FAA grants approval before it can resume flights.
The FAA declined to comment Thursday on the timeline but said on Wednesday it is "following a thorough process, not a prescribed timeline, for returning the Boeing 737 MAX to passenger service. The FAA will lift the aircraft’s prohibition order when we deem it is safe to do so."
Boeing is grappling with the fallout of two crashes of its 737 MAX jet within five months, killing a combined 346 people and prompting a worldwide grounding in March and a slew of litigation.
Boeing has been working on an upgrade for a stall-prevention system known as MCAS since the first 737 MAX crash on a Lion Air flight in Indonesia in October, when pilots were believed to have lost a tug of war with software that repeatedly pushed the nose down.
A new problem with MAX software emerged last week when FAA test pilots were reviewing potential failure scenarios of the flight control computer in a MAX simulator, a Boeing official told Reuters.
Under one scenario where a specific fault in a microprocessor caused an uncommanded movement of the plane's horizontal tail, it took pilots too long to recognize a loss of control known as runaway stabilizer, the Boeing official said.
Southwest, the world’s largest MAX operator with 34 jets and dozens more on order, said on Thursday it was extending 737 MAX cancellations until early October.
American Airlines and United Airlines, which also operate the MAX in the United States, have pulled the planes from their schedules into early September and said they had no further comment on Thursday.
Air Canada, another large MAX operator, said it was "still reviewing" whether to extend its flight cancellations beyond September.
Meanwhile on Thursday, Boeing lawyers said they were negotiating settlements with the families of dozens of Lion Air crash victims, meaning the planemaker can avoid prolonged and potentially costly court litigation.
However, the families of some victims of the second 737 MAX crash on Ethiopian Airlines on March 10 are not ready to settle, their lawyers told a Chicago judge on Thursday.
"There are families who insist on knowing what Boeing knew, when they knew it, what they did about it and what they're going to do about it to prevent events like this in the future," attorney Robert Clifford, who represents families of several Ethiopian Airline victims, said at a court hearing.
A judge granted a request by Clifford and other plaintiff lawyers for discovery over objections by Boeing, meaning the planemaker must turn over documents about the MAX.
A status hearing on the Ethiopian litigation is scheduled for Sept. 17.
Boeing has said it estimates over $1 billion in costs just from its 737 MAX production slowdown as deliveries of its top-selling jet remain frozen. The estimate does not include potential compensation to victims and airlines. (Reporting by Tracy Rucinski in Chicago, David Shepardson in Washington and Eric M. Johnson in Seattle; additional reporting by Allison Lampert in Montreal and Ankit Ajmera in Bengaluru; editing by Marguerita Choy and Bill Rigby)