How Boeing (BA) Regulatory Challenges Might Affect Shareholders
Boeing Company’s (BA) best-selling MAX 737 aircraft experienced yet another setback last Friday as an Alaska Airlines-operated flight was forced to make an emergency landing. With 177 passengers onboard, the incident took place shortly after departed from Portland, Oregon. A cabin panel in the newly-minted 737 MAX 9 aircraft unexpectedly detached, resulting in a wide opening in the airplane’s side. Despite the distressing circumstances, no serious injuries or fatalities were recorded. Digital clips documenting the alarming mishap made their rounds online.
The 737 MAX 9 is one of four variants of the renowned aircraft model; many of its kind were subsequently grounded in response to the incident. This move was triggered by an earlier ordered inspection that had unveiled missing components in two variants.
In 2023, the U.S. aircraft manufacturer had an impressive run as it delivered 528 aircraft and booked 1,314 net new orders after allowing for cancellations, up from 480 deliveries and 774 net new orders in 2022, which was its third-best year.
When it came to dispatching the narrow-bodied 737 jets, BA met its revised target by delivering 396 units – accomplishing its adjusted objective of at least 375 single-aisle planes. However, it fell slightly short of its initial target of delivering between 400 to 450 jet units.
So far, the U.S. is the top recipient of 737 MAX, with most orders still to be fulfilled. Given the U.S.’s significant reliance on these planes, particularly the 737 MAX 9 variant, the fallout from this recent event is expected to affect the region severely.
Amid increasing scrutiny, regulators from the Federal Aviation Administration (FAA) have ordered a temporary grounding of most 737 MAX 9 planes awaiting an investigation into the incident. The directive, which primarily affects around 171 airplanes, resulted in scores of flight cancellations, notably from domestic U.S. operators Alaska Airlines and United Airlines.
Both carriers have discovered “loose bolts” on the doors of the MAX 9 models following a global inspection organized by BA in December. With each having a sizeable fleet of the same – Alaska Airlines owns 65, and United Airlines owns 78 – they have since halted all aircraft flights.
On the issue, BA’s CEO, Dave Calhoun, admitted to a “quality escape,” whereby the compromised plane somehow managed to pass all checks and validations. Despite the possible origins being traced back to aviation supplier Spirit Aerosystems, Mr. Calhoun segregated no details stating that the issue arose under BA’s purview, too; he maintained a collective responsibility toward rectifying this lapse.
Further emphasizing the seriousness of this quality lapse, Jennifer Homendy, the Chairwoman for the National Transportation Safety Board (NTSB), firmly recommended withholding these aircraft from service until the root cause is ascertained completely. This, she stated, would dictate the necessary inspections and repairs to prevent any such mishap from reoccurring.
It is not the first time BA’s MAX 737 aircraft encountered issues…
Over the past five years, BA has been contending with persistent quality and safety challenges, resulting in the prolonged grounding of certain aircraft and the suspension of deliveries.
Before the pandemic, catastrophic airplane crashes ripped the cover off a scandalous situation within the company. The 737 Max design was involved in two tragic accidents. The first took place in Indonesia in late 2018, and the second occurred in Ethiopia in March 2019. These combined incidents resulted in the loss of 346 passengers and crew members across both flights, which consequently led to a 20-month suspension of the company’s best-selling jets, costing BA upwards of $21 billion.
This chain of events sparked one of the most expensive corporate scandals in history, as subsequent investigations and publications, such as ‘Flying Blind: The 737 Max Tragedy and the Fall of Boeing’, laid bare BA’s close ties with the FAA.
Late last month, BA urged airlines to carry out inspections on 737 Max fleets due to a potentially loose bolt found in the rudder system, discovered after potential issues with a key aircraft part were raised by an airline.
However, BA’s issues extend beyond the troubled 737. The company found it necessary to suspend deliveries of its 787 Dreamliner twice: once for about a year starting in 2021 and again in 2023, attributed to concerns regarding quality as identified by the FAA.
Adding salt to the wound was the forced grounding of BA’s 777 jet following an engine failure during a United flight, resulting in debris from the engine raining onto residential areas and the ground below.
The Impact…
The aerospace titan continues to command a valuation of over $134 billion, which, albeit impressive, signifies a decline of over $100 billion since its all-time high valuation of $248 billion in 2019, a stark consequence of the fatal scenarios before the pandemic.
BA’s stock fell victim to the recent issues and wiped out over $9 billion in market value.
CEO Dave Calhoun is striving to execute a plan to make a strong comeback by 2024, fighting the tide of reputational damage that ensued from the Max scandal. The Alaska Airlines incident poses another significant threat to BA’s reputation, further straining relationships with airlines. However, it is crucial to note that BA shares a duopoly with Airbus in the marketplace worldwide, which would likely act as a buffer for the enterprise.
Bank of America analysts led by Ronald Epstein expressed their concern about what they describe as a “worrying start to the new year.” They anticipate that the recent incident will likely chip away at the precarious confidence surrounding the 737 Max. However, they predict that the impact on BA’s performance this year won’t be significant, given the duopoly held by BA and its European counterpart, Airbus SE, in commercial aircraft.
BA and Airbus SE have cornered about 90% of the total global commercial aircraft market share and occupy similar roles in both American and European economies. This situation leaves airlines, notably those in America, with limited alternatives to BA’s aircraft, with Airbus already operating at full capacity. Industry experts are confident that the recent Alaska incident will not drastically impact 737 Max orders due to the duopolistic structure of the industry.
BA, though currently in short supply, is making gradual yet consistent progress in addressing the internal shortcomings that contributed to its present state.
The recent Alaska mishap presents a formidable risk of disrupting the delivery of Max 9 to China and influencing the certification process of BA’s newest Max 7 and Max 10 aircraft. This incident could trigger reduced demand and further cancellations for BA’s 737 MAX planes as airlines and consumers question their safety and reliability.
Beyond tarnishing BA’s reputation and credibility, the Alaska flight debacle could also prompt lawsuits and inquests from passengers, airlines, regulatory bodies, and shareholders alike. Consequently, the company may come under increased scrutiny, escalating the pressure to ensure the safety and superior quality of its fleet.
Investors are advised to take note of two crucial military contracts recently landed by Boeing, which predict a prosperous outlook for the company. On November 28, the United States Air Force (USAF) commissioned an order for 15 Boeing KC-46A Pegasus Tankers — modeled on the Boeing 767 — with the contract valued at approximately $2.3 billion.
Adding to this, BA has been presented with a Foreign Military Sales Letter of Offer and Acceptance from the Canadian government for an undisclosed number of Boeing P-8A Poseidons. These aircraft are based on the next-generation Boeing 737-800 model. Though BA did not disclose the cost of the contract, the Canadian government estimates it to lie around CAD10.4 billion ($7.7 billion).
This acquisition, as spotlighted by BA, is projected to stimulate benefits amounting to almost 3,000 jobs and $358 million per annum in economic output for Canada, following an independent study conducted by the Ottawa-based Doyletech Corporation in 2023.
Bottom Line
The subsequent impact of the Alaska Airlines incident on the delivery of BA’s 737 Max 9 aircraft largely hinges on the outcome of ongoing investigations by the FAA, the NTSB, and international regulatory bodies.
The predicament poses a potential reputational threat for BA, emphasizing a need for caution and prudence in its actions. If the 737 Max series continues to face complications, this could trigger a loss of faith among aviation customers, adversely affecting sales.
Aircraft manufacturing, being a capital-intensive sector necessitating specialized technical expertise, possesses strategic importance for the U.S. government. The commercial sector is expected to grow at a pace surpassing global GDP, as per BA. Leading manufacturing entities, BA and Airbus, enjoy booked manufacturing capacities spanning several years. Their customer base displays a reluctance to alter preferences due to potential waits for newer models and the additional operational expenses arising from handling a diverse fleet.
Indeed, despite grappling with issues, BA continues to experience robust demand for its aircraft. Additionally, it sustains a thriving space and defense enterprise. The recent groundings might not inflict extensive damage, given that BA and its supplier Spirit AeroSystems may be able to confirm that these incidents don’t signal broader systemic problems.
Furthermore, BA has a backlog of over 5,100 planes, valued at $469 billion, at the third quarter’s end, with MAXs constituting a major portion of these undelivered aircraft.
Still, crises have detrimentally impacted BA’s standing. Although revenues are on an upswing, analysts forecast that the firm’s top line for fiscal 2023 and 2024 of $76.69 billion and $91.08 billion, respectively, will fall short of 2018’s remarkable $101.1 billion. Similarly, loss per share is projected at $6.21 for the fiscal year 2023, while EPS for the fiscal year ending December 2024 is anticipated to hit $4.06.
The company’s shares have experienced a downturn, with investors losing over 14% year-to-date and about 37% on their investment over the past five years. Moreover, the company’s debt as of September 30, 2023, exceeded $47 billion, nearly 4.7 times higher than five years back. This drags BA into an unfavorable paradox where it stands to gain largely yet continues a downward trajectory.
Under these circumstances, investors are advised to wait for a better entry point in the stock.
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