A crisis of confidence
Two tragic air disasters may not down Boeing
Reputational damage, together with protectionism and rising debt, herald troubled times for America’s aerospace giant
BOEING WAS hoping for good headlines on March 13th, the day on which it planned the glitzy unveiling of its new long-haul 777X jetliner at its factory outside Seattle. Instead, tragic events three days earlier in Ethiopia prompted it to cancel the event. On March 10th a Boeing 737 MAX 8 crashed near the capital, Addis Ababa, killing all 157 people aboard. The apparent similarities between this crash and one five months ago involving a MAX 8 operated by Lion Air in Indonesia raised concerns among aviation authorities around the world. By March 13th virtually all the world’s fleet of MAX 8s had been grounded by airlines or regulators. The tragedy has also frightened Boeing’s investors. Within days its share price fell by more than 10%, wiping nearly $30bn off its market value.
Accidents, even tragic ones, do not usually have such a chilling effect on planemakers’ shareholders. The crash last month off the coast of Texas of a Boeing 767 carrying cargo had virtually no impact on its maker’s share price, despite claiming three lives. As Howard Wheeldon, an aerospace analyst, explains, this is because most crashes are caused by human error. Airlines who hired those humans therefore get most of the blame.
This time is different. It is the second crash in less than a year involving a brand-new MAX 8. As in Indonesia, the Ethiopian airliner crashed within minutes of take-off. Both appeared to stall, nosedived and hit the ground at speed. A preliminary report into the earlier disaster, which killed 189 passengers and crew, said that pilots struggled to maintain control following an equipment malfunction (see article). Tewolde GebreMariam, the chief executive of Ethiopian Airlines, has claimed that something similar happened in the moments before the latest accident. If investigators prove him right, that could mean not humans were at fault, but the jet itself.
No definitive conclusions can yet be drawn about the causes of either crash. Investigators are still at work in Indonesia. In Ethiopia, they have barely begun. Yet the accidents in both places look so alike that authorities are not taking any chances. China’s regulator was the first to act, instructing its domestic airlines on March 11th to ground all 737 MAX aircraft, not just version 8. Authorities in Australia, Britain, France and Germany banned the jets from their airspace the next day, as did Europe’s aviation-safety regulator. On March 13th President Donald Trump announced that the Federal Aviation Administration (FAA) would halt all flights of MAX 8s and newer MAX 9s over America.
This came as a blow to Boeing. The FAA had resisted the global moves to ground the MAX, given uncertainty over the causes of the latest tragedy. After the crash on March 11th it reaffirmed its airworthiness. If the model remains grounded for a prolonged period, airlines may not accept deliveries of new planes. Boeing gets paid for each one on delivery, so this would hurt its bottom line.
The 737 is Boeing’s most important plane, generating 30% of the company’s revenues and 35% of its profits, according to George Ferguson of Bloomberg Intelligence, a research firm. It first took to the sky in 1967. A year ago Boeing delivered its 10,000th 737. The MAX 8 is the latest, re-engined version of the aeroplane, which entered service into May 2017. Airlines have already purchased over 5,000 of them, accounting for around 80% of Boeing’s entire order book of civil aircraft. Mr Trump said that the FAA and Boeing were “in agreement” with his decision to ground the aircraft temporarily. On March 13th the company reiterated it had “full confidence in the safety of the 737 MAX”.
The long-term damage to Boeing will not be clear until investigators complete their work. Carter Copeland of Melius Research estimates that the direct cost of the crash in terms of compensation and fixing faulty planes could be as little as $1bn. If a software problem caused the crash, it should be easy to fix. Boeing has promised to update the code suspected of having contributed to the Lion Air crash by next month. Whether this reassures airlines and passengers remains to be seen.
A hardware problem would be costlier to fix—and demands for reassurance, louder. Boeing’s boosters believe that even then the long-term damage could be contained. Mr Copeland points out that the grounding of Boeing’s 787 wide-body airliner for three months in 2013, because its lithium-ion batteries kept catching fire, did little to hurt demand for the aircraft.
Yet even spectacular battery failures are not the same as two deadly crashes. A stronger hint that Boeing may recover comes from the reaction of investors in its European arch-rival, Airbus. Between them, the two companies account for all large commercial aircraft sold around the world. If the crash were to do lasting damage to Boeing, Airbus should benefit commensurately. Its share price has gained half as much as Boeing’s has lost.
That understates the long-term costs for Boeing, argues Marc Szepan, a former executive at Lufthansa, now at Oxford University. Airbus has little to gain in the short term from airlines switching orders from the 737 MAX to its A320neo aircraft because its production lines for the model are already fully booked until at least 2025. Boeing stands to lose if airlines bargain down prices of the MAX 8, pointing to the poor public perception of its safety.
A change in consumer attitudes towards plane models makes that likely. Today many passengers, not just aviation geeks, take note of what planes they board. This week carriers have fielded questions from nervous customers about their scheduled aircraft, asking to change their itinerary should it involve a MAX. Shares in airlines that have made large orders for the planes have been hit; those in BOC Aviation, a big aircraft-leasing firm, dipped nearly 5%. Some airlines, including Lion Air, want to switch away from the MAX 8 model for fear of losing customers.
Analysts whisper that the issues with the MAX may be only the start of bad news for Boeing. Before the latest rout, its share price had tripled in three years. In 2017 it was America’s best-performing industrial stock. In 2018 it was the eighth-best. But this, industry watchers caution, has more to do with its generous dividends and share buy-backs, which return 95% of the cash it generates to investors, than with a careful assessment of the risks associated with the company. If the MAX or another issue stopped the flow of cash, investors could be in for a rude shock.
Boeing’s current strategy increases the risk of that, thinks Richard Aboulafia of Teal Group, an aviation consultancy in Virginia. The company wants to grab its suppliers’ fat margins by making more components in house. But this exposes it to losses if margins turn negative in a downturn. The company is vulnerable to Mr Trump’s trade wars, and the protectionism they stoke abroad: 85% of its civil aircraft sales come from outside America. Lastly, Boeing cannot increase the amount of money it returns to shareholders indefinitely. Its net debt is rising, albeit from low levels.
It is possible that Boeing will be exonerated from blame for the latest crash. Some threats to its business may not materialise. No one has died in accidents involving the previous five aircraft types that Airbus and Boeing have developed. This happy streak has now come to a solemn end. The damage to Boeing’s prospects may not be irreparable. But they have been battered.
This article appeared in the Business section of the print edition under the headline "A crisis of confidence"(Mar 14th 2019)
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