Boeing in Crisis

Boeing’s global fleet of the 737 MAX aircraft has been grounded in response to the Boeing 737 Max crash 8 last Sunday.
The crash, which saw 149 passengers and 8 crew die, follows the Lion Air crash, which involved a Boeing 737 Max 8. Similarly, like LionAir, Ethiopian Airlines had only recently received the aircraft (November 15th). 

Upon taking off at 8:38 am from Addis Ababa, itself a hot and high-altitude airport, the plane climbed almost 1,000 feet due to the thinner air requiring extra effort from the aircraft engines according to aviation experts. 

Shortly after, the plane dipped into descent at several points, causing the pilot to radio to air traffic control to return the plane but lost contact at 8:44 am according to FlightRadar24

Issues with the 737 Max 8 have been ongoing for some time, as Russell Group pointed out last year with much of the focus on Boeing’s use of the Manoeuvring Characteristics Augmentation System (MACS), which was increased to counter the new and larger engine in the 737 Max 8. That larger engine - produced by LEAP 1-B (a joint venture of General Electric and Safran) - created supply chain problems for Boeing and its competitor Airbus. 

By installing this new software, Boeing sought to avoid design changes with the 737 Max 8 that would lead the US Federal Aviation Administration to insist on new training to use the new plane, according to Forbes. Such a move has led to accusations from pilots that it failed to inform them of these new anti-stall controls and how to overcome them despite Boeing claiming that all of this was covered in the pilot manuals.

Once the accident was confirmed, the fallout for Boeing has been severe, with its shares falling by over 11% this week. The $213 billion company also lost £26 billion in market value. This was the biggest fall in Boeing’s stock for nearly two decades.
Immediately in the days following the crash, China and Indonesia (two large markets for Boeing) immediately grounded all their Boeing 737 Max 8’s. Australia, Singapore, UK, Canada and the US regulators followed suit.

The key turning point in the FAA’s decision was the enhanced satellite tracking data combined with the physical evidence on the ground that showed the Ethiopian jet movements to be like that of LionAir.

Many airlines are now wavering about their orders of the 737. Norwegian Airlines has demanded Boeing pay for losses caused by the grounding of its eighteen 737 MAX 8 aircraft, losses which experts estimate stand at $46,000 in lost revenue for every grounded 737 Max per day.

LionAir already has a sour relationship with Boeing, with Boeing blaming human error and maintenance issues for the cause of last year’s crash and are determined to switch their $22 billion order for 201 of the 737 MAX 8 to Airbus.

VietJet Air, despite doubling its order of the aircraft to $25 billion last month, announced it will decide whether to take delivery of these orders, once the investigation has closed. Meanwhile, Kenya Airways is mulling over whether to switch to Airbus’ A320. Likewise, a $5.9 billion order from Saudi Arabian Airlines lies in the balance too.

The 737 model is at the core of Boeing’s operation since the 1960s, representing 70% of its production according to Morgan Stanley. Since January, Boeing has delivered more than 370 of the 737 MAX aircraft to 47 customers (including leasing firms) and has more than 5,011 orders according to The Guardian, which include a MAX 9 variation along with two versions (the MAX 7 and MAX 10) that have not been delivered to the airline customers. 

The plane has become hugely popular among leasing companies and airliners because of its fuel-efficient engines and its single-aisle size. China, which has grounded the plane, will need more than 5,700 of 737 Max 8 over the next twenty years according to Boeing.

Despite Boeing working on an update to the controversial software (which in a statement said that they have been working on since last year’s LionAir crash), the short-term hit is likely to be severe for the company. 

What is more concerning for the company, which is a crucial component of the Dow Jones Industrial Index and therefore key to the growth of the U.S. economy, is whether they can win back the trust of airliners and indeed customers? 

Post Date: 14/03/2019

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