More Delays for Boeing
Boeing (NYSE: BA) is facing yet another setback, as buyers of Boeing’s latest jet airliner the 777X feared that the jet will be delivered late. Share performance has continued to decline, closing $341.63/share before the end of the month.
Boeing is a multinational aerospace company based in America, manufacturing commercial jetlines, rockets, satellites and other security systems. Boeing is a major defense contractor for over 150 countries in the world, and is the largest exporter in the U.S. by dollar value. Over 10,000 passenger jetliners are in service today. Recent efforts by Boeing are focused on the development of the Boeing 787-10 Dreamliner, 737 MAX and the 777X models.
Trouble begins with the 737 MAX
Boeing’s 737 MAX is the fourth generation of the 737 series, and is meant to succeed the earlier 737 Next Gen model. The jetliner was launched back in 2017 with much fanfare, and was meant to be much more technologically advanced and fuel efficient. By March 2019, over 300 of the 737 MAX jetliners were delivered to major airliners such as Air China, Ethiopian Airlines, and American Airlines among others. Over 5000 orders were reportedly in queue, after the new model was found to be over 15% more efficient than the previous models.
First signs of trouble began in October 2018 when Lion Air Flight 610, a flight from Soekarno-Hatta to Jakarta, crashed into the sea mere minutes after takeoff. All of the 189 passengers and crew on board were killed, making it one of the deadliest air incidents in recent history. An investigation later found that erroneous data in angle of attack and issues with MCAS contributed to the crash. While one such incident could be passed off as a coincidence, the crash of Ethiopian Airlines Flight 302 in March 2019 truly spooked the aviation industry. The crash bore many similarities to the Lion Air crash, with the crash occurring six minutes after takeoff and killing all 157 on board. Experts again pointed to the MCAS as the fault for the crash.
Ethiopian Airlines immediately grounded its fleet of 737 MAX until further notice, an action that the Chinese Aviation authority also ordered soon after. On March 12, more countries followed suit despite Boeing’s assurances of the aircraft’s airworthiness. The Federal Aviation Administration (FAA) reversed its earlier decision only a day later, in effect grounding the global fleet indefinitely. The implications for Boeing extended to financial losses stemming from compensation to airliners and order cancellations, as well as damages to its brand reputation. Boeing’s losses from the grounding of all 737 MAX planes are estimated to be over $USD 1 billion. Boeing stocks lost up to 20% of their value in the weeks thereafter, with Barclays and Bank of America both downgrading the stocks. Boeing has updated its MCAS software and the planes will remain grounded until August at the earliest.
New model 777X to be delayed
The Boeing 777X is a new model from the twin engine 777 series, and features a greater cabin width and seating capacity. Design of the jetliner began in 2010, but delivery still has not occurred, even after years of development. Major customers including Emirates Airline and Deutsche Lufthansa AG are reportedly drawing up contingency plans in case the aircrafts’ cannot be delivered. President of Emirates Airlines Tim Clark said that the airline may need to keep some of its older 770 models operational for longer if the 777X’s are not ready in time. Lufthansa is also considering keeping its older 747 models on its fleet for longer. Older models are typically more costly to operate due to their lower fuel efficiency.
Industry standard contracts may see Boeing being liable to cover the costs of operation due to their failure to deliver on time. The fallout from the 737 MAX could also delay approval by the FAA – a review of the safety approval process is already under way. The first test flight is scheduled for the 26th of June.
The future outlook remains bleak for Boeing in the short term. There is no guarantee that the fleet of 737 MAX jetliners will be operational by August. Furthermore, the delay of the 777X series jetliners denies Boeing of the revenue streams it desperately needs right now. Profit guidance for the whole airline industry was revised downwards, following the intensification of the trade war between the US and China. The International Air Transport Association cut its forecast of industry-wide revenue down by 7% to USD$28 billion, stemming from a decline in projected cargo business and passenger traffic. While the trade-wars will have a negative impact on the airline industry, Boeing will be hit comparatively harder than its major competitor Airbus. European-based Airbus holds an advantage in the current climate, as China may preferentially award contracts to Airbus over Boeing. Which could be yet another blow to Boeing’s operations and profitability.
By Oliver Ju
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