It looks like an ugly start to the new year for & # 39; the world's largest aircraft manufacturer, Boeing (NYSE :).
After months of preparation, damage control and intense regulatory testing, the company's flagship 737 MAX aircraft is still on the ground due to two fatal crashes this year. And there is no certainty when that global ban imposed after the March crash will be lifted.
Boeing's stock fell by more than 4% on Monday after The Wall Street Journal reported that the aircraft manufacturer would suspend production of the MAX at its factory with 12,000 employees in Renton, Wash., Until January. The development, later confirmed by Boeing, has added to the flurry of negative news since October about how the company deals with the faulty system of the 737 MAX, putting stock under pressure.
After a dive of about 7% in the past five trading sessions, Boeing shares have lost about one-third of their value since March, when the 737 MAX was confronted with global grounding following the Ethiopian Airlines crash that followed the Lion Air crash in October 2018 The shares made up for some of their losses in yesterday's session and increased by 1.1% to close at $ 330.68.
Boeing weekly price chart
The cessation of 737 MAX production came after the unusual public statement from the regulator who urged Boeing management to use pressure tactics to lift the ban. The US Federal Aviation Authority (FAA) said in a message to the US Congress that it had used a recent meeting to encourage the company to focus on the "quality and timeliness of FAA assessment data transmissions."
In October we noted that the worst is yet to come for Boeing, because the FAA would not want to be seen as hasty approval of the MAX, as it is trying to regain the confidence of passengers and foreign regulators. The latest setback further confirms that the Boeing journey back to normality will be both longer and more difficult than previously anticipated.
A Huge Cash Drain
With MAX jets piling up outside Washington state factories and regulator supervision continues, Boeing will have to suffer more financially, making it more difficult for analysts to reach a bottom in his stock price.
Before Boeing stopped production in January, Boeing announced more than 380 newly built aircraft in storage, according to a count of 737 production blogger Chris Edwards. In the second quarter, Boeing reported $ 5 billion to compensate airline airlines for grounding jets.
Those costs will certainly rise if the regulator does not allow the MAX to fly again early next year. Boeing will also have to pay hundreds of millions more to the families of the victims. Sheila Kahyaoglu, analyst at Jefferies, calculates an additional 6% damage to earnings per share in 2020.
As long as the aircraft stays on the ground, it will be difficult to trace the extent of the damage to the company's reputation and financial prospects. But the stakes are too high for both Boeing and the US economy.
The 737, which first entered service in the late 1960s, is the best-selling model of the aviation industry and the best earner of Boeing. The redesigned MAX version was so successful that it attracted more than 5,000 orders with a value of more than $ 600 billion, including aircraft that have already been delivered.
But the commercial return of Boeing's best-selling aircraft has been repeatedly blocked and is now unlikely before the beginning of 2020. The delays have cost the aircraft manufacturer at least $ 8.4 billion so far, according to Bloomberg.
Bottom Line
From now on we do not think that Boeing can achieve full operational normality in the short term – and the main obstacle in this process is to regain public confidence. Boeing is certainly capable of solving the technical problems that are needed to turn the MAX into a viable revenue generator again, but that process is also closely linked to regaining public confidence.
The rare public warning from the FAA this week indicates that this process will be more complicated and may cost Boeing & # 39; s Chief Executive Officer Dennis Muilenburg his work. We do not think the time is right for investors waiting to buy this largest industrial stock. The risks & # 39; s are more disadvantages.
