- Importance of 737 MAX for Boeing
- Impact of Lion Air and Ethiopian air crashes on the company
- Effect of the global grounding of 737 MAX on airlines
- Can Airbus benefit from the Boeing crises?
The aviation industry has come a long way in the last 30 years. Jumbo jets have rapidly lost their appeal and have been replaced by the next-gen technological aircraft. The likes of Boeing 737s and Airbus 320neo now rule the skies. They offer carriers with smaller, more fuel-efficient aircraft that are capable of flying greater distances. It is no wonder that a majority of passenger flights are globally operated on these small planes from Boeing and Airbus, allowing both these behemoths to continue their duopoly.
The 737 MAX 8 model offers a 14% fuel saving and it is Boeing’s technological response to its competitors the Bombardier and Airbus in the mid-sized plane segment. Hence, counting on the popularity of its latest offering (January 2019), Boeing predicted that 2019 would be a record year for the company, in terms of both profits and deliveries. It credited this boom to its star offering the 737 MAX family of jets, an upgrade from its previously best-selling model (Boeing 737). Boeing’s commercial aircraft account for about 60% of the total sales; the 737s alone account for about 25% of the total company sales. The model is a big part of its free cash flow drivers. While the Boeing 737 MAX costs US$ 121.6 Mn at average list price, it generates about one-third of the company’s profit. Boeing had 4,661 orders of the said model by the end of January, which represents about 80% of the company’s orders. Hence, in order to maximize the momentum, Boeing planned to increase its monthly production pace to 57 aircraft, which was up from 52 and was in line with its delivery of 905 aircraft, up from 895.
2018 brought astounding success to the company, which posted US$12 Bn of profits, an increase of 16% over the previous year. This was in line with revenue, increasing by 8% to US$ 101 Bn and expenses increased by 6.4% to US$81 Bn. The company primarily attributed its profit to the record 806 commercial aircraft that it delivered. However, all the glory came to a sudden halt with a consecutive crash involving 737 MAX last month. The aircraft manufacturer is going through its worst ever crisis, owing to two air crashes involving 737 MAX aircraft in the past five months. These two aircraft mishaps killed everyone on board, triggering several countries and carriers to ban or ground the entire global fleet of approx. 400 Boeing 737 MAX, including India, China, the UK, Indonesia, Singapore and Australia. Although the US allowed its airliners to fly the 737 MAX for a little longer than other countries, it too went ahead with an indefinite grounding of the 737s. The eerie commonality between both the air crashes point towards a possible defect in the aircraft itself, significantly marring the company’s reputation. The FAA (Federal Aviation Administration) is investigating the cause of the latest crash along with the US Department of Transportation, which ordered an audit for the certificate awarded to Boeing’s 737 MAX back in 2017. While Boeing is prepping for a software fix to resolve the issue, the Ethiopian authorities in their preliminary report revealed (4th of April) that the crew followed all the necessary procedures and that the concerned parties should review the system to make it fail proof. This has portrayed both Boeing and the US aviation regulators in a very negative light globally.
Boeing is expected to possibly roll out its software upgrade sometime in May-June, although there is no certainty on this aspect. If the FAA agrees that the software upgrade does resolve the safety concern, they might lift the ban on the aircraft in spite of the fact that the foreign regulatory agencies would have been still pursuing their investigations, this would relieve some steam off the aircraft manufacturer and its suppliers.
Moreover, with the indefinite grounding of 737s, all airlines have had to cancel or reschedule several of their flights with several passengers stranded at the last moment. For example, after cancelling around 90 flights per day in March, American Airlines said it plans to cancel more flights in the month of April as well. All over the world, airlines are scrambling to secure used aircraft in order to replace their fleet of grounded 737s. The financial cost for this is approximately US$250,000, thereby, implying an additional cost on these airlines. However, there are not much parked or used aircraft in the world to replace the entire grounded fleet of 737s, which is rendering several delays, cancellations and rescheduling of flights for passengers. Additionally, airlines are expected to press Boeing for the compensation, while the compensation will depend on how long the aircraft is out of commission. Bloomberg estimates this could be approx. US$100 Mn per month for just reimbursing the airlines. This is apart from the cost Boeing will incur for the software fix and other necessary required modifications. Seth Seifman, an analyst at JP Morgan Chase estimate loss to the tune of approx. $1.5-2.7 Bn for each month during which 737s are grounded. In addition, with the suspension of deliveries, buyer airlines would likely halt their advance payments that go towards covering of Boeing’s manufacturing expenses. However, Moody’s recently affirmed Boeing’s long-term rating at A2 and stated that it believes that the company has significant financial resources ($8.56 Bn of cash as of December 31, 2018) to enable it to weather the effects of the global grounding of its MAX fleet.
Can Boeing’s loss benefit Airbus?
With airlines invariably demanding new and fuel-efficient aircraft, particularly the medium-large narrow-bodied models, the demand for aeroplanes like the MAX 8 is hardly going to die down. Airbus A320neo is the only major competitor to the MAX planes. Furthermore, at the end of February 2019, Airbus reportedly had a backlog of 5,800 orders for its A320neo. Even with its increased production pace planned for 2021, the company will only be able to produce at the most 725 jets a year. At the given pace, Airbus would take around eight years to fulfil all of its existing orders. Airbus is already struggling with the fulfilment of its orders, clearly, the company would take several years to increase its output, which is enough to capture a significant market share. Hence, in the given scenario, it seems highly unlikely that buyers that have placed orders with Boeing would have a reasonable alternative. Though the event is going to hit Boeing financially, mainly due to the global grounding of its entire 737 MAX fleet, it is unlikely to threaten the company’s business or the future. The world now awaits a roll out for a fix from Boeing, a plane that is deemed safe in all aspects of its functioning. In fact, even post-FAAs approval of a new software fix, countries like China, Canada and the EU region have stated that they would also individually certify 737 MAX before allowing the plane to fly in their skies. But Boeing’s struggle is not limited to just that, the company is now at the centre of a financial, legal and political firestorm with its integrity in question. The company has already announced its plan to cut down on the production to 42/month as opposed to its prior plans. While Boeing tries to ride out the storm, the two crashes came across as a sad anomaly to passengers’ safety, especially, in today’s world of advanced technology.