Boeing share price: where next as 737 Max planes are grounded?

What we know about the plane crash

A Boeing 737 Max 8 aircraft, operated by Ethiopian Airlines and heading to the Kenyan capital of Nairobi, crashed near the Ethiopian capital of Addis Ababa soon after take-off on 10 March. All 157 people on board, including the pilots and crew, were killed.

Ethiopia’s transport minister Dagmawit Moges has said there are 'clear similarities' between the crash and another fatal incident last October involving another 737 Max 8 plane, when 189 people lost their lives after a Lion Air flight plunged into the sea soon after departing from Indonesia. French air safety authorities have analysed the black boxes recovered from both accidents.

A preliminary report released after the crash in Indonesia suggests the aircraft’s anti-stall system malfunctioned and kept believing the plane was about to stall, prompting it to push the nose of the plane down as programmed. This was performed by the Manoeuvring Characteristics Augmentation System (MCAS), which is not installed on older 737 models. It is thought the MCAS was supplied erroneous data from the sensors that supply the information on which it bases its decisions. The MCAS kept forcing the plane’s nose downward, meaning the pilots had to try to manually counteract the system’s movements over 25 times. Initial data from the latest incident in Ethiopia suggests the altitude of the plane was volatile before crashing as it moved higher and lower, possibly amid a battle between the automated plane and its pilots.

There are no firm conclusions on either incident. Ethiopian authorities have said they are aiming to release a preliminary report on the latest incident before April 16.

The worldwide fleet of 737 Max 8s was effectively grounded within three days of the crash. US authorities, who would typically be expected to lead the way and issue guidance to other countries because they are responsible for certifying Boeing’s aircraft, has been heavily criticised after it took three days to ground all Max 8s (and newer Max 9s). China was the first country to ground the aircraft before being followed by others like Europe and Australia.

Read more on how Trump grounds Boeing 737 Max jetliners after days of mounting pressure

How has Boeing responded to the Ethiopian Airlines crash?

'As the facts from the accident become available and we understand the necessary next steps, we’re taking action to fully reassure airlines and their passengers of the 737 Max. We regret the ongoing challenges the grounding has caused for our customers and the flying public. The investigation is moving forward, with work underway to understand the information from the airplane’s cockpit voice and flight data recorders. Our team is on-site with investigators to share technical expertise' – Boeing chairman, president and chief executive Dennis Muilenburg, 19 March 2019.

Boeing’s latest statement on the crash says it is taking actions to 'fully ensure the safety of the 737 MAX' based on facts from the Lion Air Flight 610 accident and emerging data as it becomes available from the Ethiopian Airlines Flight 302 accident.

The first step will be the release of a new software update and new training for pilots for its 737 MAX planes 'that will address concerns discovered in the aftermath of the Lion Air Flight 610 accident'. A lot of attention is being paid to the relationship between the pilots and the automated systems that are increasingly being used in modern-day aircraft. Plane crashes in the past have typically been caused by human error rather than the aircraft itself, which is why any suggestion that the 737 Max 8s automated systems was the root cause of the Ethiopian Airlines crash is so significant.

How will the grounding of 737 Max planes impact Boeing?

The 737 Max 8 is highly important to Boeing. It was launched in May 2017 as an updated version of its 737 family, the first of which was launched back in 1967. While Boeing has sold over 10,000 737’s in its lifetime there are only around 370 Max 8s in operation at present. Although the company does not disclose financial figures for each type of plane, estimates suggest the models could account for around one-third of Boeing’s revenue and profits.

Boeing’s order book could come under threat

Although only a few hundred Max planes have been delivered customers have placed orders for over another 4700 Max’s – representing 80% of Boeing’s entire order book of 5900 aircraft. Although Boeing has a queue of customers waiting for new Max aircraft there are questions over whether customers, which typically pay upon delivery, will accept them as they roll-off the production line and, if they do, at the initially agreed price. It will take time for firm conclusions to be drawn about the specific causes over both incidents and Boeing will have a hard time putting fears over safety to rest until then.

Boeing’s margin could come under further pressure

The Max 8 is one of Boeing’s cheaper models and therefore offers a smaller margin than larger higher-priced aircraft. The Max 8 is priced at around $121 million compared to its most expensive model, the 777-9, costing $442 million – however, those prices don’t take what can be large discounts into account, which are frequently dished out.

While not disclosed by the company, ratings agency Moody’s estimates Boeing only makes $12-$15 million on each Max 8 it sells, suggesting it wouldn’t take much to erase Boeing’s margin altogether. Boeing has improved its overall operating margin over four consecutive years to 2018 (rising from 7.7% in 2015 to 11.9% last year), but that progress will now be under threat. If Boeing has to burden the cost of any compensation or legal claims that spawn from either incident then profitability will be harmed further.

Bad time for Boeing as US-China trade war continues

Although Boeing primarily operates in the US, Canada and Australia the company works under a global supply chain, sourcing key components from the likes of Europe and Japan. It makes more than half of its revenue outside of the US and its second-biggest market is China, where it generated 14% of total revenue in 2018, slightly more than Europe. The trade war between the US and China, which has resulted in hundreds of billions of dollars worth of tit-for-tat tariffs being imposed on one another’s goods, is therefore significant for Boeing.

Both countries have now stopped trade tensions escalating further with a new meeting between US President Donald Trump and his counterpart Xi Jinping pencilled in for April. Boeing, which is effectively backed by the US government, was expected to be a major beneficiary if Trump is successful in getting China to purchase more US-made goods, particularly as there isn’t an airworthy, China-made plane as of yet. However, the fact China was the first to ground Max planes after the latest crash shows they consider the risks to be serious, much more so than the US Federal Aviation Administration that followed three days later.

What could prove to be a bigger threat is the fact that Xi is scheduled to meet French President Emmanuel Macron in Monaco later this month - before he meets Trump. Airbus has already said it hopes to secure more orders and for China, it could be a delicate balancing act between buying more US goods without sacrificing safety.

Boeing’s loss is Airbus’s gain

A loss for Boeing should, in theory, be a gain for its European counterpart and only competitor, Airbus. There is evidence that customers are cancelling their orders for Max planes and switching to Airbus. Unsurprisingly, it is reported Lion Air, which has 14 Max planes in its fleet, has halted its order for another 187 of them and is now looking to shift its $22 billion order to Airbus’s equivalent models in its A320 family.

Although Lion Air has said it has suspended future orders from Boeing it has not confirmed whether it will cancel it altogether, nor that it intends to switch to Airbus. That may be because it wants to wait until more details have emerged from the investigation, with relations already frosty after Boeing suggested insufficient maintenance or the pilot could have been behind the incident despite the findings in the preliminary report regarding the MCAS. It could be because it would face a long wait if it switches to Airbus. The European firm is ramping-up production this year from the 800 planes it made in 2018, but it has another 7600 on order. That is the largest backlog recorded in the industry’s history and, based on last year’s output, would take over nine years to work through.

If customers are unwilling to purchase newer Max models but have Airbus’s backlog in mind then it is likely Boeing will be able to push nervous buyers toward its other models that haven’t encountered any issues, possibly toward older ones that aren’t equipped with the MCAS.

There is another, potentially underestimated, consequence of this. Depending on how long Max planes remain grounded and their ability to source replacements, airlines and operators could be forced to keep hold of older aircraft for longer, possibly postponing their retirement. if airlines are forced to use older, less fuel-efficient planes for more flights then they could see their fragile margins come under pressure.

You can read the history of the Boeing vs Airbus battle here

Boeing shareholders could pay the price if dividend is hit

Boeing has showered shareholders in cash over recent years. The firm spent $9 billion on share buybacks in 2018 and a further $3.9 billion on dividends (having raised it 20% from the year before) – swallowing up 85% of its operating net cashflow of $15.3 billion. The fact Boeing is returning such a large proportion of its cash to investors means it does have plenty of cushion to fall back on should demand slump, but it also means a cut would be more likely if it needs to save money.

Are share buybacks the fruits of labour or the consequence of short-term focus?

Where next for the Boeing share price?

Boeing shares have plunged nearly 12% since the Ethiopian Airlines crash but have found steadier ground over the last few days. The stock is still trading 15% higher than it was at the start of 2019 and over 12% higher than a year ago.

Meanwhile, Airbus shares have rallied 5.8% since the latest incident, gaining half as much as Boeing has lost.

Read how Boeing shares plunge after Ethiopian Airlines’ plane crash

The severe dent made in Boeing’s share price is evidence that investors fear the plane could be at fault for the latest crash. Boeing planes were quickly sent back up into the sky after the Lion Air flight went down last year and Boeing shares didn’t flinch by continuing to head higher. Shares followed a similar upward path after a 40-year old Boeing 737 crashed soon after take-off from Havana in Cuba in May 2018, killing 112 people. When an A321 was brought down by IS in October 2015, Airbus shares were equally undeterred.

The reason investors have not overly reacted to these past events is because the blame has not been placed at the manufacturer’s door until the most recent crash in Ethiopia. The quick reintroduction of Boeing planes after the Lion Air crash installed confidence it wasn’t a manufacturer’s issue. Similarly, investors didn’t punish Airbus for someone else shooting down its plane. Quite simply, the majority of previous plane crashes have been caused by or perceived as being down to human error or action rather than the plane itself, but it is clear many fear that not to be the case this time around.

Stocks to watch as Boeing planes are grounded

There are over 30 companies currently using 737 Max planes, meaning several stocks have suffered as a result of them being grounded. There is an appendix at the bottom of this page that outlines every company that is using or has ordered 737 Max planes, outlining what companies could be impacted over both the short and long term.

TUI, the world’s largest tourism company, has 14 Max’s in use and another 58 on order. Shares initially experienced a minor dip following the crash but has since rebounded. Others have not fared as well. Shares in BOC Aviation, Asia’s largest aircraft leasing company with seven Max planes in use with 78 more on order, have fallen by over 5% since the crash. Air Canada shares have also shed more than 5% since it suspended its 2019 financial guidance for the year after the Max planes were grounded, impacting 23 planes within its fleet. WestJet Airlines did the same and has experienced a similar fall in value. United Airlines shares have lost only 2% after the company said it was too soon to establish the effect on its guidance for the year, promising more details next month.

The Boeing plane crashes raises profound questions

It is important to stress that jumping to conclusions over the cause of the Ethiopian Airlines crash is dangerous, but it is becoming increasingly clear from initial statements and data that there are similarities with the Lion Air crash last October – which draws attention to the common link in both, which is the plane. This has then sparked interest in how the newer Max models differ to their 737 predecessors, which is the MCAS system and the sensors that feed it data.

This opens a much wider debate that goes beyond Boeing and even aviation. The world is becoming increasingly more automated and flight is not the only mode of transport that appears to have hit problems taking control away from humans. The Metro service in the US was designed for automated trains but they have been banned since one collided into the back of another stationary train back in 2009, killing nine people in total. Virtually every company racing to flood our streets with self-driving cars has struggled to prove the ultimate safety of them. Tesla and Uber are just two companies that have seen their partially-automated cars involved in fatalities.

And the phrase ‘partially-automated’ boils down to the crux of the problem with automation. All those companies supporting fully-automated cars claim it will be safer by removing human error. That may be true, but only if you remove it altogether. Right now, the world is operating in a partially-automated world where human and computers operate alongside each other. Ultimately, one or the other needs full control, and many will be wary of both for good reason as humans and robots have both shown their imperfections, and the consequences of them.

While Boeing has rightly refrained from accepting responsibility until proven otherwise its response to release new software and training does show something was wrong – but doesn’t prove it was at fault. Plus, many will fail to take comfort from its promise to provide a software patch to fix the problem – it may be fine for when your smartphone has a bug, but will do little to allay fears over the safety of a vehicle that carries you miles up in the air at hundreds of miles per hour.

For Boeing, overcoming this will be initially more of a hurdle than a wall. Overall demand for new aircraft will continue rising and Airbus is incapable of serving everyone on its own, and if nothing else then Boeing has the US government to fall back on, which accounts for nearly one-third of its revenue. In the short-term, Boeing needs to focus on reinstalling confidence to protect its order book and defend its thin margins that could come under attack by customers seeking reduced prices. The picture over the longer-term is less clear. Reputational damage can last a lifetime and the findings from both Indonesian and Ethiopian authorities will ultimately dictate how much responsibility falls at Boeing’s feet.

Appendix: What companies have ordered 737 MAX planes (as of the end of February 2019).