2019 Company Trends: Boeing Suspension Fuels Further Turmoil

Global aviation authorities grounded the Boeing 737 Max aircraft after two crashes — a Lion Air flight in October 2018 and an Ethiopian Airlines flight in March 2019 — killed a total of 346 people within five months. At the time of the grounding on 13 March, 387 of these planes were being operated by 59 airlines.¹ https://www.nytimes.com/2020/01/05/business/boeing-737-max.html

The US company has lost about USD 50bn in market value since the 737 Max crisis began.²https://www.wsj.com/articles/boeing-names-david-l-calhoun-to-replace-dennis-muilenburg-as-ceo-11577110365 Its revenue fell to USD 20bn in Q3 2019 from USD 25bn a year earlier, reflecting fewer 737 Max deliveries of 62 compared to 190 in Q3 2018. 

The situation intensified on 16 December 2019 when Boeing announced that it was suspending 737 Max production due to recertification moving into 2020 and to “prioritise the delivery of stored aircraft”. It said affected employees will either continue working on the 737 Max or be temporarily assigned to other teams. Meanwhile, shares in global suppliers to the company fell sharply in response to the news.³https://www.theguardian.com/business/2019/dec/17/shares-in-boeing-uk-suppliers-fall-after-737-max-production-halted 

On top of the MCAS system concerns, thought to have been the main cause of the crashes, an additional wiring problem has surfaced, suggesting “a pattern of rushed certification when the Max was originally certified”, an expert told Third Bridge Forum this month. There could be additional delays to lifting the grounding as these secondary issues are resolved.

Layoffs are anticipated over the coming weeks as smaller second- and third-tier suppliers struggle to manage the pause in production. Over a million employees are likely to be affected globally. Although suppliers will probably “grit their teeth in support” in the short term, relationships could come under pressure further down the line. They may push for harder terms and conditions, and while Boeing certainly has buying power, there may only be a handful of companies that make certain aircraft components. Switching suppliers is also expensive and time consuming, and at Boeing “schedule is king because you have to get those planes out the door to make money”.

The company is reportedly considering raising more debt — while Moody’s considers downgrades⁴https://www.marketwatch.com/story/boeings-debt-on-review-for-downgrade-by-moodys-2020-01-13 — to bolster its finances as the costs associated with the 737 Max crisis continue to escalate.⁵https://www.marketwatch.com/story/boeing-may-raise-more-debt-to-curb-loses-from-737-max-2020-01-06 Already, the grounding has cost Boeing over USD 9bn, a figure that is expected to swell  in its next earnings release.⁶https://www.theguardian.com/business/2020/jan/13/boeing-new-chief-begins-job-planemaker-737-max-fallout In fact, two other specialists we spoke to in May 2019 put that figure at “double digits of billions of dollars” in the long term. This has already been reflected by orders being cancelled or terminated early, with legal costs “ramped up in that realm as well”.

According to a report by OAG, the global airline industry will have lost USD 4.1bn in revenue for the full-year 2019 because of the grounding, including 41 million lost passenger seats.⁷https://www.forbes.com/sites/tedreed/2019/08/10/new-report-puts-impact-of-boeing-737-max-grounding-at-41-billion/#123587a1fdf9 Meanwhile, earlier this month, American Airlines reportedly became the latest to reach a confidential settlement with Boeing, with compensation to be received over several years. Boeing has also reached deals with Aeroméxico, Southwest Airlines and Turkish Airlines.⁸https://uk.reuters.com/article/us-boeing-737max-factbox/factbox-boeings-737-max-compensation-deals-with-airlines-idUKKBN1Z618O 

The grounding and subsequent suspension have had, and will continue to have, far-reaching implications for investors, Boeing’s employees, its supply chain and the rest of the aviation industry. Boeing certainly has its hands full over the next couple of months to get the 737 Max aircraft off the ground and regain public trust. 

The long-term impact of the suspension remains unknown and will depend on how long the shutdown lasts. While major suppliers such as GE Aviation have the most exposure, they “also have the most resources to weather this storm”. However, given the scale and complexity of the situation, the ramifications could be felt sooner than anticipated. Earlier this month, Spirit AeroSystems said it was cutting 2,800 jobs at its Wichita facility in Kansas amid “ongoing uncertainty” regarding the timing of when production will resume.⁹https://www.spiritaero.com/media/78/spirit-aerosystems-initiates-workforce-actions-due-to-expected-lower-levels-of-737-max-production/ The 737 Max represents over half of the company’s annual revenue. If the suspension extends to as far as this year’s third quarter, our most recently interviewed expert warned there could be significant impacts on the balance sheets of tier-one suppliers. 

And it could take eight months to a year — at this point  — to return to the full production rate Boeing was at before the grounding, they noted. But crucially, there has to be a period in which no more issues come to light before the grounding can be lifted, with the full backing of pilots also paramount. “They’ve got a lot of public trust to regain,” they added. “I think they’re up to the challenge and they’re able to do it, but hopefully, when they come out of this catastrophe, they’ll be a better company for it.” Meanwhile, Boeing’s new CEO who stepped into role last week said he is “confident in the future of Boeing, including the 737 Max”.

Read other articles in the series on Thomas Cook, PG&E, Sealed Air, Babylon and Disney.