The initial grounding of the Boeing 737 Max aircraft in March created significant shifts in business and leisure travel plans, impacting thousands of consumers and costing airlines hundreds of millions of dollars.
This past week, Boeing announced its 2d quarter earnings and the financial impacts to them in this quarter alone are likely to be over $6 Billion, with a direct loss of $3 Billion. To illustrate the effects of this grounding, we have broken down below some of the statistics, as well as actions taken by the airline community.
Identifying New Issues to Resolve
- The initial issue with the two 737 Max airline crashes was the result of a faulty sensor that erroneously reported the airplanes were stalling. This false report triggered an automated system known as the MCAS (Maneuvering Characteristics Augmentation System).
- Both jets that crashed lacked safety features that could have provided crew information, as this was sold by Boeing as an ‘option’.
- In June of this year, during a simulator test, FAA test pilots discovered a separate issue affecting their ability to quickly and easily follow recovery procedures relating to stabilizers.
- FAA is requiring complete fixes to each area prior to the removal of the grounding. The latest timeline is scheduled for end of 2019.
On July 25th, Southwest made two significant announcements:
- Effective November 3, Southwest Airlines announced they will shut down all flights through Newark Liberty Airport. Customers with pre-booked flights scheduled after that date will be given the option to travel through alternative airports.
- Southwest is the first airline to pull out of an airport due to the issues with the 737 Max, which leads to speculation if other carriers may do the same at other locations.
- Southwest also extended its grounding of the aircraft to January 5th.
Cost to Travel Industry
In the 2d quarter earnings report, Boeing stated an impact based upon repayments to airlines, as well as additional costs of production:
- $4.9B to compensate airline customers for delays in getting 737 Max planes back in service.
- $1.7B to produce aircrafts due to changes in production rates.
- Boeing has a backlog of more than 4,600 orders for the 737 Max.
- 737 Max is estimated to make up 33% of Boeing’s total revenue for the next 5 years.
Major airlines are taking various views regarding what to publically share relating to the impact. Here is what we were able to uncover:
- Southwest Airlines was the hardest hit from the grounding, reporting a $150M loss in the 1st quarter, and an overall estimate of $4.9 Billion after-tax charge related to the groundings, with estimated cancellations of 150 flights per day.
- AA estimates impacts of $350 Million in 2019 assuming grounding order would be lifted by August 19th. If another quarter of delay is required, an additional $170M is expected to incur.
- UA has not commented on the impact, but has stated further impact in Q3 as this was the period when they were to receive an undisclosed number of new 737 Max aircrafts.
Despite these setbacks, Boeing’s CEO Dennis Muilenburg announced at the Global Business Travel Association (GBTA) annual conference that the company is focused on rebuilding trust and safety. He states the company is working every day with the Federal Aviation Administration (FAA) on rigorous, comprehensive reviews. Over 500 test flights have taken place so far.