Will Boeing soar once more?

James Penn
January 28, 2020

It is getting on for a year ago that Ethiopian Airlines' Boeing 737 Max aeroplane crashed, with disastrous consequences for those on board.

The accident in March followed an Indonesian Airlines crash in the previous October. It is now known that both crashes were caused by the so-called MCAS software which was introduced as an update to the 'Max', the latest manifestation of an aeroplane - the 737 - that has been around for over 50 years.

The incident has undoubtedly been the worst in the history of Boeing, a company that previously held an exemplary safety record.

Even now, after months of updates, improvements and certifications, it is not entirely certain that the plane will fly again, with Bloomberg asking exactly this question only last week. The company has faced unprecedented press and regulatory scrutiny, has lost its CEO, and has had to borrow billions to prop itself up during a period when it can't sell its best-selling and most profitable product.

So will the 737 actually fly again?

Our view is that it will, and that the matter is bound up with two separate issues. First, is the plane safe to fly? And secondly, can the airline industry, the US, and the world, to some extent, do without Boeing?

Dealing with the safety issue first, it has been noted before in relation to the air industry that the solution to the last problem tends to be the cause of the next problem.

Back in 2009 an Air France Airbus A330 went off autopilot off Brazil. The pilots then made a series of errors, allowing the plane to go into a stall which led to the plane crashing into the sea.

Step forward Boeing with its MCAS software, designed to prevent a plane going into a stall by detecting if the angle of attack (the angle at which the plane approaches the oncoming airflow) is too high, and then forcing the nose down if it is.

On the Ethiopian and Lion Air crashes, the sensor to discern the plane's angle of attack was faulty, leading the software to conclude the plane was in danger of stalling, and then forcing the nose down, leading to the plane diving into the ground.

This MCAS software is now the subject of testing and recertification, with the Federal Air Authority anxious to ensure there are no further mistakes, and that pilots are aware of how the software works and affects the plane.

This revalidation programme, one would believe, should ensure that the interaction between pilot and software improves, and that there won't be similar disasters in future.

So from a customer perspective, the length of time spent in checking should improve safety perceptions of the plane.

There are also, of course, considerations of Boeing's importance to the US economy, and of the 737 programme's importance to Boeing, that need to be factored in.

The 737 is Boeing's narrow body offering to the industry, and narrow body planes are where most of the demand and growth has been over the past 15 years.

Airbus's A320 family has been hugely successful in recent years. The 737 Max is Boeing's response to that. Its increased fuel efficiency has meant bigger engines, which meant more load, which led to an up tilt to the plane's motion, which necessitated MCAS to correct it.

Canning the 737 Max at this stage would leave the airlines with half the capacity they require. It would turn the current duopoly (Airbus and Boeing) into a monopoly.

Boeing is also the US's biggest exporter and one of its biggest contributors to industrial output, as well as a member of the Dow index. Although there have been come cancellations since the two crashes, the plane still has a backlog (or cumulative order book) of 4,500 planes. The plane is expected to dominate Boeing's production schedule over the next five to ten years.

Although it produced less than 60 of the 373 Maxes in 2019, production is supposed to ramp back up to 680 per annum once the green flag is waved, and the plane is approved for sale by the FAA.

This terrible phase in the company's history has taken its toll. The former CEO, Dennis Muilenburg, was fired before Christmas. In January David Calhoun, who had already replaced Muilenburg as Chairman, took over. The cost to Boeing is reckoned to be in the order of $10bn. And of course there are the 346 lives which were taken in the accidents.

A lesser company, and certainly one without Boeing's financial strength and diversification (it still has some $80bn of other revenue not affected by the 737), would surely have fallen at this hurdle.

As it is, Boeing has had to borrow $20bn to keep itself afloat as it continued production for most of last year, with 450 planes sitting idled in a giant car park in Seattle, pending sale. There has been a huge build up of working capital, as money pours into Work In Progress.

The company has even managed to continue paying its dividend at this time, and held onto its investment grade credit rating.

But it's true to say that Boeing can't continue on this track for much more than six months. And, having used up all that balance sheet strength, it could be vulnerable if there was a recession, or a downturn in wider air travel.

Last year was a terrible year for Boeing. This year will be a crucial one.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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