Turbulence Ahead: Do Boeing’s 737 MAX Problems Suggest a Larger Industry-wide Problem?

Over the past two years, one airplane has dominated the headlines of commercial aircraft manufacturing – the Boeing 737 Max. The 737 Max is The Boeing Company’s best-selling airplane, but has been grounded since March 2019. Worldwide regulators concluded after investigation that Boeing did not properly analyze the safety of the jet prior to authorizing technology design changes. Those design changes resulted in the death of 346 innocent passengers and crew members after two 737 Max jets crashed within the span of five months in late 2018 and early 2019.

In January, Boeing announced it had halted production of the 737 Max. Following the global grounding of the plane, Boeing continued production of the troubled product, producing an average of 40 planes a month at its plant near Seattle. The production halt will help Boeing stop burning through cash while it figures out the plane’s safety issues. Boeing also announced in January a net loss of $636 million, largely due to high costs relating to the 737 Max’s issues. The company also announced no new orders in January. Despite this, Boeing’s (NYSE: BA) stock price has still risen year-to-date. Boeing hopes to get the plane back in the air by mid-2020.

Boeing seems to be doing its best to correct its mistake, but it is impossible to ignore the impact the 737 Max’s grounding and subsequent production halt has had on the US economy. Chicago-based Boeing is America’s largest exporter and one of the nation’s top employers. At the 737 Max assembly plant outside of Seattle, Boeing employs around 12,000 workers. Thousands of others work for companies that supply parts to Boeing. The company has announced no layoffs and instead plans to temporarily relocate workers. Despite this, economists expect a dent in US gross domestic product in the first half of 2020. The price for Boeing’s top-seller is $55 million, and the company has sales forecasts of over 600 this year. Economist Joel Prakken of IHS Markit says the shutdown could reduce output by $9 billion in the first quarter and $13 billion in the second, resulting in a half percentage point hit on the US GDP.

While the US economy will likely take a hit due to the 737 Max, the plane will likely resume flying by the end of the year. The largest problem of all could be the declining trust of commercial aircraft manufacturers. Prior to the grounding of the 737 Max, airlines had trusted Boeing for decades as one of two leading global firms committed to selling commercial aircraft on a large scale. The other dominant player in the industry is Airbus. The two have operated in a virtual duopoly over the last few decades, with 91% of the global commercial aircraft fleet consisting of planes made by Boeing or Airbus. While Boeing announced no new orders last month, Airbus announced net new orders of 274 jets with 31 deliveries.

boeing 2
Boeing and Airbus planes make up over 90% of the global airplane fleet. This Airbus A380-800 is operated by Lufthansa.

While airlines may think of choosing rival Airbus over Boeing, the ride isn’t always smoother on the other side. In early February, Airbus settled a $4 billion deal with US, UK, and French prosecutors over alleged bribery and export-control violations against the company. It was the largest international settlement over bribery in history.

The management malpractices of both aircraft giants reveals a concerning trend in an industry that was once very well-trusted. Perhaps management prioritizes profit over other metrics, such as safety. In an industry where two firms compete so fiercely over aircraft contracts, they have proven to do anything to beat their competitors. A Boeing safety engineer had raised concerns about the 737 Max prior to both fatal crashes, and then-CEO Dennis Muilenberg had discussed the concerns, yet no changes were made.

Luckily for Boeing, and perhaps Airbus, the missteps are not beyond recovery, and both companies will look to regain public trust as quickly as possible. Boeing and Muilenberg agreed to mutually part ways in January, and new CEO David Calhoun has committed to more transparency moving forward in 2020. The 737 Max issues could benefit Boeing in the long run, as it now has the opportunity to change its practices and improve moving forward, as Calhoun has suggested. Should Boeing do this, its clients – and the public – may be willing to forgive and forget the company’s past errors.

Despite the recent issues of both firms, the industry outlook is still positive. Airline travel continues to grow each year, and with it demand for planes is only rising. International demand for commercial aircraft, driven by emerging markets, is expected to rise by 3.1% over the next five years. If both manufacturers – especially Boeing – can return to form with well-performing, safe airplanes, I believe the public will be willing to forgive.

 

Sources:

https://www.wsj.com/articles/boeings-woes-create-headwinds-for-u-s-economy-11580655600?mod=searchresults&page=1&pos=19

https://www.wsj.com/articles/airbus-bribery-charges-unveiled-after-4-billion-settlement-11580480153?mod=searchresults&page=1&pos=20

https://www.wsj.com/articles/boeing-books-no-new-jetliner-orders-in-january-11581436800?mod=searchresults&page=1&pos=2

https://www.cnn.com/2019/12/04/perspectives/boeing-trust-muilenburg/index.html

https://www.wsj.com/articles/boeing-to-suspend-737-max-production-in-january-11576532032?mod=article_inline

https://clients1.ibisworld.com/reports/gl/industry/industryoutlook.aspx?entid=1050

 

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