Boeing’s top brass said what investors didn’t want to hear: that the estimated cost of the 737 Max crisis could change
Firm said what investors didn’t want to hear: Cost of the 737 Max crisis could change
Boeing has finally given investors some idea of how big the bill for the 737 MAX fiasco could be. Until regulators break their silence on when the plane is likely to fly, however, numbers can only provide so much clarity.
The hit from the world-wide grounding of the MAX after two deadly crashes was bound to be historic, and Boeing on Wednesday reported its biggest ever quarterly loss.
The plane maker already warned last week that it would take a $5.6 billion pretax charge to account for the multiyear cost of compensating airlines. Investors like clarity, and Boeing’s stock rose.
By contrast, the shares fell by almost 3% after Wednesday’s results.
In a call with analysts, Boeing’s top brass said what investors didn’t want to hear: that these numbers all could change.
When the MAX was grounded in March, $5 billion was the upper end of the total cost estimates because analysts believed that the plane would fly again by the summer. Yet every extra month that the plane is on the ground comes at an extra cost. Boeing now assumes it will have a fix ready in September and service will resume in the fourth quarter. But many industry insiders think the grounding could run into 2020.
On top of the headline charge, the plane maker said last week that it would add $1.7 billion in extra expenses to its accounting of the MAX program, which is now producing 42 jets per month instead of the 57 projected before the grounding. The program cost could rise further if the grounding does go beyond the fourth quarter and the production rate is trimmed a second time.
And there are other expenses, such as compensation to the crash victims or the generous discounts that Boeing will likely need to protect its order backlog.
At the Paris Air Show last month, for example, British Airways owner International Consolidated Airlines Group announced a letter of intent to purchase 200 MAX planes. While IAG Chief Executive Willie Walsh has denied being motivated by bargain prices, it is unlikely that he delivered a massive public-relations victory to Boeing without getting an advantageous deal.
To be sure, the total bill still seems likely to undershoot the $30 billion in market value Boeing has lost since March—even as the S&P 500 has risen 10%. Wednesday’s results also served as a reminder that the rest of Boeing’s business is doing well: The 787 Dreamliner program is reaping the benefits of higher production rates, while the defense division is strong.
Investors who have the luxury of a multiyear view should remain optimistic.
Crashes have historically not been life-changing for plane manufacturers, and if Boeing takes the right lessons from the MAX crisis it should be able to capitalize on a world-beating catalog.
Meanwhile, though, regulators have shown their willingness to keep the MAX grounded for far longer than previously considered likely.
There is no figure Boeing can provide that will make this a smooth flight for investors.