Why Boeing shares haven’t fallen further after the 737 MAX crashes

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BOEING, the aerospace giant, has been the darling of the American stock market. Over the past three years its stock price has tripled. In 2017 it was the best performing business stock in America. In 2018 it was eighth best. But as a result of the crash of a Boeing 737 MAX jetliner in Ethiopia on March 10 – the second accident of this model in just five months – the aircraft type was established worldwide and put almost a tenth, or about $25bn, off Boeing’s. stock market capitalization.

In the last few days the news from Boeing has been getting worse. On April 4, Ethiopia’s transport ministry released a preliminary report from its accident investigators. They said the pilots followed Boeing’s recommended procedures to prevent the plane from crashing. They suggested that the plane’s flight control system was to blame for the crash, not its crew. Indonesian inspectors also saw this system, which includes software to ensure the plane does not stall – called the Motion Characteristic Augmentation System or MCAS – contributing to the Lion Air 737 MAX crash last October.

Later that day, Boeing CEO Dennis Muilenburg admitted for the first time that his software had played a role in the crashes and reiterated that “We at Boeing are sorry for life who were lost in the recent 737 accidents”. Then it emerged that software that Boeing had said would be available last week to allow the planes to take to the air again would be delayed, as a result found a second problem unrelated to the accidents. Some commentators predicted that it could take several months now to repair the planes and get them flying again.

It would be easy to imagine that this bad news would have a lot to do with Boeing’s share price. In fact it’s up about 2% over the last week. According to Reuters, a news agency, 20 out of 25 analysts who participated in a survey still give the stock “buy” and “outperform” ratings. This is partly because Boeing is seen as “too big to fail”, due to the American Department of Defense’s reliance on their military aircraft. The 737 program generates a third of Boeing’s revenue and up to half of its total profits, according to Andrew Gollan of Berenberg Bank. But some analysts, such as Carter Copeland of Melius Research, believe the total financial damage could be as little as $1bn, so Boeing’s share price may have fallen too far.

Marc Szepan, a former chief executive of Lufthansa, who is now at Oxford University, argues that the company’s executives and their analysts are underestimating the financial risk of along with the accidents. First, airlines have begun to refuse delivery of the new 737 MAX while it is grounded. As Boeing gets paid for each one when it is delivered, this hurts its revenue. And it emerged on April 5 that, as Boeing runs out of space to store the unwanted planes coming off its assembly lines, the company plans to cut production levels from 52 per month to 42, instead of increasing it to 57 later this year. as originally planned. This indicates that Boeing executives believe that a return to business as usual will take longer than they are currently letting on.

But that’s not all. Boeing has begun to be hit with lawsuits from relatives of people who died on the two planes. If the cases turn into a class action suit, the company could end up on the hook for billions of dollars in punitive damages. Mr. Muilenburg’s admission that his software is linked to the crashes is unlikely to help his defense case. And it could pay compensation to existing users of 737 MAX jets for lost earnings for the time they are grounded. TUI, a European travel company, estimates that the set-up could cost it €300m ($337m) if flights on its fleet of 15 737 MAXs do not start by the end of the summer.

The appeal of Boeing shares to many smaller investors is due to a careful assessment of the risks associated with the company, and more of its policy of providing 95% of the proceeds from operations in shares and purchase of shares. “That’s what Wall Street analysts are all about,” warns Scott Hamilton of the Leeham Company, a consultant. One investment app favored by many younger and less sophisticated investors has said its clients have been piling into stocks since the crash.

But the 737 MAX’s long layoff is likely to reduce the amount of cash the company generates, the very thing that has made its shares so attractive to investors in the recent years. For the share price, as for the plane itself, the problems may be far from over.

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