The Bottom Line

But $40 billion has already been wiped off the value of Boeing stock and losses at its commercial aircraft division are piling up. Assuming the MAX issues are resolved and the aircraft flies again, Boeing stock will likely recover in the longer term but in the meantime, shareholders will be feeling the pain of seeing their holdings plummet.

Compensation claims from airlines that have had their operational plans severely disrupted at high cost will also take time to settle. And then there are various investigations underway in the US involving Congressional committees, the Department of Transportation and the Department of Justice, all or some of which could lead to the imposition of significant penalties. Outside the US there is also the potential of severe penalties from regulators including the European Aviation Safety Agency (EASA) and the Civil Aviation Administration of China (CAAC).

There will also be the cost of upgrading all the MAX jets that have been built with whatever new software and equipment is finally approved by regulators. That won’t be the end of it. Class action suits by the relatives of victims as well as lawsuits by pilots at affected customer airlines will likely take months, or even years, to finalise.

The financial damage will certainly be extensive. The worst crisis in its history has seen the Boeing brand severely damaged and, in an industry which is essentially now a duopoly, there will be significant loss of potential orders and billions of dollars in income to European rival Airbus. Already, major customers such as Southwest have made noises about reviewing orders or jumping ship to Airbus.

Boeing has long relied on the income from its commercial operations, and previous years had been strong. Operating profit at Boeing’s commercial airplane unit in 2018 was up 45 per cent to $7.9 billion. It had forecast an even better 2019, expecting revenue from jet aircraft to be 6 per cent to 8 per cent better than last year, between $64.5 billion and $65.5 billion, a third of that coming from single-aisle sales.

That forecast quickly became redundant and Boeing bit the first bullet in July, announcing a $4.9 billion after-tax accounting charge for the ongoing grounding in its second quarter financials, turning a projected $1.3 billion profit into a loss of around $3.6 billion, the biggest quarterly loss in the company’s history. Given the extended period of the grounding it was inevitable that this was only the first of the bad news. In October it announced third quarter results and revealed they had plummeted by 95% in the first nine months of 2019, down to $299 million from $7 billion a year earlier.

In the third quarter alone net earnings fell 51% and revenue was down 21% compared to the third quarter last year. The company said it had a negative free cash flow of $2.89 billion for the quarter, compared with a positive free cash flow of $US4.1 billion for the same period in 2018, a negative reversal of $6.9 billion. Given developments and the likely delay in getting the MAX back in the air before early next year, it is likely its fourth quarter results will be just as bad. All in all, in the first nine months of the year, the revenue cost to Boeing Commercial has been nearly $12 billion in lost sales and undelivered single-aisle jets.

Overall, the Boeing group has managed to stay in the black with net earnings of $1 billion in the third quarter. But that was only achieved because its Defense, Space & Security and Global Services divisions improved their earnings significantly, offsetting the Commercial Airplanes’ losses: the two divisions earned $755 and $673 million, respectively, while Commercial Airplanes’ net loss equaled only $40 million. Expect this fact to be highlighted in the ongoing trade stoush between the EU, the US, and their commercial planemakers.

Boeing Commercial’s previous largest deficit was in 2009 when it reported a loss of $1.6 billion after writing off the first three flight test 787 Dreamliners and taking a charge for delays on the 747-8 Intercontinental. The only other red ink in the last ten years came in 2016, when it lost $234 million after writing off two later 787 flight test planes, took another charge on the 747-8 and added another write-off for its KC-46 tanker program, based on the 767 platform. These will pale into insignificance compared to the MAX affair.

Boeing has long relied on the income from its commercial operations…

THE CRASHES THEMSELVES LOOK SET TO CAUSE BOEING UNPRECEDENTED LOSSES

As well as the July write-off, Boeing also announced it was pledging $100 million to the families of the victims of the Lion Air Flight 610 and Ethiopian Airlines Flight 302 737 MAX crashes. 189 people were killed on the Lion Air flight, while 157 died on Ethiopian Flight 302. That money was intended to address “family and community needs of those affected” Boeing explained. Because of concerns distribution of this money could take some time, Boeing swiftly upped the sum, explaining that the distribution plan had been altered, with $50 million of the pledged $100 million being dedicated to near-term relief for families.

The families of those killed in the MAX accidents are able to accept payments under the program, without giving up their right to sue Boeing, and indeed such suits were not long in coming. To date, lawsuits have already been filed by families in the US, Kenya, France, Ethiopia and other countries, accusing Boeing of misconduct and alleging the planemaker failed to inform pilots about the systems on board the aircraft.

One French widow alone is suing Boeing for $276 million. Nadege Dubois-Seex, whose husband Jonathan Seex died in the Ethiopian Airlines crash, told reporters the crash was avoidable, and accused Boeing of being “deaf” to the “warning” provided by the earlier Lion Air crash.

While it is clearly unwise to predict the outcome of these lawsuits and Boeing may end up settling many outside court, given the circumstances and the damning evidence it is also difficult to see it escaping extreme penalties that could ultimately amount to billions of dollars.

Compensation will also depend on whether cases are held in US courts or elsewhere. For example, lawyers say that in the United States legal compensation for the crash victims could be between $2 million and $3 million per person while, in Ethiopia, for example, it would only be about $200,000.

Clearly, lawyers will aim to take their class actions into US courts but given a history of dramatically differing compensation judgements it is impossible to say what the final count may be when it comes to the MAX but the compensation bill for victims could easily pass the $1 billion mark.

AIRLINES, LESSORS, AND PILOTS ALSO EXPECT SUBSTANTIAL COMPENSATION

With the grounding continuing and many airlines now removing the MAX from their schedule until at least February next year, almost a year after the aircraft stopped flying, pilots whose careers have been disrupted by the grounding have also joined the queue of litigants.

Flight deck crew at Southwest Airlines, the largest US operator of the MAX, have called in their lawyers. The Southwest Airlines Pilots Association launched a lawsuit alleging Boeing “deliberately misled” the airline about MAX, forcing the cancellation of about 30,000 flights and costing the pilots about $100 million in lost wages.

The airline has said it will share any payment from Boeing over the MAX grounding with employees. The association’s lawsuit, filed in Dallas, alleges that Boeing “abandoned sound design and engineering practices, withheld safety critical information from regulators and deliberately misled its customers, pilots and the public about the true scope of design changes to the 737 MAX”.

On its part, Boeing says the lawsuit is “meritless” and pledged to “vigorously defend against it”. American Airlines pilots are also seeking compensation for lost pay although they have not filed a lawsuit.

Next on the long list of complainants demanding compensation are the airline customers themselves, not only those which have already taken delivery of MAX jets. Boeing will certainly have no choice but to dig deep when it comes to making amends. Compensation for the groundings and ongoing delivery delays is an extremely complex issue.

The absence of the MAX has caused serious disruption for their operators, throwing network planning and growth plans into meltdown. Expected cost savings through operating a more efficient fleet have been lost, probably for at least twelve further months.

That means additional fuel costs as a result of operating older aircraft. While few airlines have put a figure on what it has cost them, some idea can be gleaned from affected US carriers. Southwest chief executive Gary Kelly said as of October the grounding had cost it $435 million in operating income. American Airlines chief executive Doug Parker put its cumulative MAX-related losses at $540 million.

“We feel highly confident that the losses that American Airlines has incurred won’t be incurred by American shareholders, but will be borne by the Boeing shareholders,” Parker said on a call with analysts and reporters.

Some MAX aircraft will have been earmarked for fleet expansion and some to replace older aircraft. Lease contracts on these older aircraft which were scheduled to expire and be replaced have had to be renegotiated or new jets leased to fill the gap.

A 737-800 costs $150,000 to $245,000 a month to lease, depending on age and whether the deal includes scheduled maintenance. Over a year, that amounts to somewhere between $1.8 million to $2.94 million for a single aircraft. If all the grounded planes were replaced with leased capacity for 12 months the cost would be between $696 million and $1.4 billion.

The cost to an airline, however, hardly ends there. There will be staffing issues as expertise specially trained to deal with the MAX has to be redeployed, including maintenance engineers and, of course, pilots. There will be network issues. Airlines that had planned to launch new routes using the aircraft, a costly exercise in itself, will have had to postpone plans and live with the uncertainty of when they might be revived.

There will be additional cost involved when the aircraft does re-enter service, including maintenance checks on planes that have sat on the ground for a year as well as re-training of cockpit crew to deal with the updated software on board.

There is also the question of how much a “new” aircraft devalues as it sits unused on the ground, and this damage doesn’t only apply to airlines which have already taken delivery of the MAX. Carriers scheduled to accept aircraft after the March grounding through the remainder of 2019 and into 2020 will want compensation for the delays. They too will have been forced to drastically adjust their plans.

Airline customers won’t be the only ones lining up at Boeing’s door. Lessors, which have purchased a large number of the jets, will also be demanding the company pays out on late delivery clauses in their purchase contracts. It is normal practice for Boeing and its airline and lessor customers not to divulge details of compensation settlements, but again, for the planemaker, the final bill will be enormous. With the grounded aircraft in service with dozens of airlines the individual claims will vary enormously and few reach the levels of those from major operators Southwest and American. Nevertheless, while it is impossible to give a precise estimate and details of none of these claims will be divulged publicly, it could well exceed $10 billion.

Flight deck crew at Southwest Airlines, the largest US operator of the MAX, have called in their lawyers…

BEYOND REPUTATION, BOEING’S SALES ORGANISATION WILL BE DEVASTATED

As for Boeing itself, the long-term cost on direct sales is incalculable. There may have been relatively few MAX cancelations but the damage is clearly seen in the company’s order book. The rush to sign up for Boeing’s latest 737 version has come to a screaming halt.

At the end of 2018, before the MAX crisis erupted, Boeing had logged a total of 5,008 orders for the plane, which was sold to its first customers in 2011. That year there were orders for only 150 but the demand rose quickly, reaching 908 in 2012, 668 in 2013, 861 in 2014, 409 in 2015, 530 in 2016, 759 in 2017 and 720 in 2018.

Clearly, Boeing would have targeted selling somewhere between 500 and 700 MAX jets in 2019 which would have been worth between $6 billion and $8.5 billion at list prices. Clearly that will not happen and it represents a major sales loss.

The order hiatus will certainly continue through 2020 and recovery will depend on when the plane is back in the air and when potential customers have enough confidence to come back to the negotiating table. Over the next few years Boeing can expect to lose many billions of dollars in income.

Given the circumstances, there have been few actual order cancellations, although there have been a number of threats along these lines from the likes of Lion Air and Garuda Indonesia. In July, Flyadeal, a budget carrier owned by state-run Saudia, did cancel its order for 30 MAX jets (including options on 20 more) worth $5.9 billion at list prices. It announced it will buy 50 Airbus A320neo family aircraft instead.

In August, a Russian aircraft leasing company also began legal action against Boeing for breach of contract in connection with the MAX grounding, the first lawsuit brought by a customer over the safety crisis. Avia Capital Services, a subsidiary of Russian state conglomerate Rostec, claims the two deadly crashes were due to the “negligent actions and decisions of Boeing” not just in designing a plane that was “defective” but also in “withholding critical information” from the US aviation safety regulator
during certification.

The complaint, which was filed in Cook County circuit court in Chicago, claims that Boeing “intentionally” failed to disclose information about the airworthiness of the MAX to its customers, including Avia, in order to induce them to buy the aircraft. Avia ordered 35 MAX 8 jets from Boeing before they were grounded worldwide in March, and now it wants the order cancelled. The company says it gave Boeing a cash deposit of $35 million to secure the order, and is asking for that amount to be returned with interest, along with $75 million in lost profits for a total of $115 million in compensatory damages, plus “several times the amount” in punitive damages.

Avia’s lawyer, Steven Marks of Miami aviation law firm Podhurst Orseck, said in an interview that Boeing had offered compensation but that it was inadequate. He said other Boeing customers had been in touch with him about bringing similar lawsuits. “I think you will see a number of other operators filing suit in coming months. This will be the first of many to come.” He is also representing 30 families of victims of both the Lion Air and the Ethiopian Airlines tragedies.

THE WIDER CONTEXT IS ALSO CRUCIAL FOR BOEING

Having to deal with the MAX issue has also had a serious impact on Boeing’s overall operations and there is clear evidence the crisis is costing it dearly across the product line. Overall, new orders for Boeing jets plunged 71 per cent through the first seven months of this year. In July, it delivered just 19 planes, down from 39 in July 2018 and, not surprisingly, had received no new MAX orders for the fourth straight month.

Airbus, on the other hand, reported 69 deliveries in July, including 52 A320neo and A321neo jets that compete with the MAX. This year through July, Boeing delivered 258 jets, down 38 per cent from a year earlier, and far below Airbus’ 458 deliveries. These numbers put Boeing on course to lose its place as the world’s biggest plane maker, which it had held uninterrupted for seven years.

That trend has continued. In September, Boeing reported total deliveries for the first nine months of 2019 were just half those reported a year ago. Deliveries fell 47 per cent to 302 aircraft in the first nine months of 2019 and deliveries in September totaled 26 aircraft, down from 87 a year earlier.

In fact, in the three months ended 30 September it delivered just 63 aircraft, down from 190 in the same period a year earlier. Having delivered 806 aircraft in 2018, Boeing was targeting 900 aircraft deliveries this year, prior to the MAX grounding. With its net order tally — including cancellations — being a negative 84 for the first nine months of 2019 that goal has totally evaporated.

That figure was also hit by the bankruptcy of India’s Jet Airways, which resulted in Boeing removing 210 aircraft from its order backlog. European rival Airbus, in contrast, has 127 net orders this year and is within reach of its full-year goal of 880 to 890 deliveries.

With single-aisle jets such as the 737 and A320 being the mainstay of aircraft manufacturer’s order books it is expected the gloom will continue for Seattle. New MAX orders — the list price per aircraft is $121.6 million — in any significant numbers are highly unlikely to eventuate for some time to come. Potential customers will be holding off to see when the MAX is cleared to fly again, and even then they will be closely watching its performance after it is back in the air before committing to any purchases.

A further consequence of the crisis is the impact on Boeing’s supply chain. Hundreds of companies around the world contracted to supply parts for the MAX have been hit hard, forced to adjust their production schedules to meet Boeing’s own altered production schedule. In April, following the groundings, it cut the number of 737s it produces monthly from 52 to 42 after halting deliveries.

At one stage there was even talk it might halt production altogether, but this has not come to pass as of time of writing. However, there are already dozens of MAX aircraft parked at various Boeing sites awaiting delivery and if there are any further delays in winning clearance for an ungrounding a halt does remain a possibility. But part of the problem is that suppliers have contracts with Boeing to supply a specific number of parts at a specified rate. Forced to slow down and in some cases even stand workers down, they too will likely have a case to claim compensation.

The impact of the MAX’s problems on Boeing’s overall operations cannot be underestimated. Its sales represent a third of Boeing Commercial revenue annually. Earlier this year Goldman Sachs analyst Noah Poponak estimated a one month slip in MAX deliveries would cost the company $1.8 billion in cash receipts. Another research group, Barclays, put it slightly less, saying the groundings would have a one month cash flow impact of $750 million to $1 billion, including the loss of progress payments on deliveries that were due. That means a 12 month grounding would cost it between $12 billion and somewhere in the region of $21 billion.

For Boeing, the hangover of the MAX affair will be long, painful and financially bloody. Nevertheless, it must be said that there is no suggestion the big American is in danger of disappearing.

In the final count, what does it mean financially for Boeing? Given the uncertainty of many aspects of the cost, from victim to airline customer compensation, lost sales, brand damage and operational disturbance, the answer is necessarily clouded in uncertainty.

But without the hit Boeing shares have taken on the stock exchange, it certainly looks, even on a conservative basis, it could top $40 billion. Boeing may still have an impressive backlog — some 5,900 aircraft worth $419 billion — that will keep its production lines busy but the fallout from MAX will be extensive and it will weigh heavily on Boeing’s bottom line for many years to come.

Having to deal with the MAX issue has also had a serious impact on Boeing’s overall operations…