Friday 17 January 2020

Max turbulence: Are Boeing shares in store for rough landing?


An employee walks past a Boeing 737 Max aircraft seen parked at the Renton Municipal Airport in Renton, Washington, U.S. Photo: REUTERS/Lindsey Wasson
An employee walks past a Boeing 737 Max aircraft seen parked at the Renton Municipal Airport in Renton, Washington, U.S. Photo: REUTERS/Lindsey Wasson

John Lynch

If corporate management is on the curriculum in 50 years' time, students in 2070 may still be trying to figure out how the current dilemma at the Boeing aircraft corporation has spun so dangerously out of control.

How could an industrial giant, which many regard as too big to fail, blunder into all the wrong responses?

The 2070 students, of course, will have the advantage of knowing how it all turns out, but nothing about Boeing in the past year inspires great confidence.

The problem at the Chicago-headquartered group is almost 18 months in the making and stems from two plane crashes, in Indonesia and Ethiopia, which killed 346 passengers. The passengers were flying on the newly launched Boeing 737 Max.

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Boeing's handling of the aftermath of the crashes was lamentable. It was overly confident about a relaunch of the Max aircraft, annoying the US Federal Aviation Administration (FAA) in the process. There was, in turn, a chorus of criticism from the US Congress, global regulators, airline customers and other stakeholders.

Its incompetent handling has led to the removal of CEO Dennis Muilenburg - but with an eye-watering redundancy package of $39m.

The problem of the Max is the biggest crisis in Boeing's 103-year history. The crisis has cost the company billions of dollars and also challenged global aviation assumptions.

According to the European director of aviation safety, Boeing performed self assessments, which were taken on board without a quibble by the FAA. A report in October found that the FAA had not exercised enough scrutiny over Boeing during the certification process. It also found that the regulator failed to ground the aircraft even after its own negative analysis.

Since grounding all the Max planes, the company nonetheless has continued to produce 42 planes each month. It now has a stock of 400 Max aircraft. Only recently it announced a halt in production. This rattled its hundreds of global suppliers.

To reduce its stock of Max planes, the group was making statements as to when the plane would fly again. This miffed the regulator, which accused Boeing of pushing the recertification of the Max ahead of the FAA's decisions.

Some politicians accuse the company of prioritising profits over safety. The technical glitch centred on the Max's anti-stall system. This problem was compounded when it was learned that the company lobbied to avoid costly pilot training, arguing that pilots should have been able to handle the new system.

To some, the FAA let Boeing ram through the Max design - based on a certification approved in 1967 for the 737. They chose this rather than face a costlier approval process for a new aircraft.

Boeing leaders have been surprised by the political backlash as they assumed they had political protection given the company's spread of production plants around the US. They also spent handsomely on political donations, even giving $1m for Donald Trump's presidential inauguration.

Boeing will face significant liabilities from victims' families and from airlines that bought the Max. A criminal investigation cannot be ruled out and would be likely to have severe financial consequences.

Boeing's relationships with the FAA will have to change. The regulator will be under scrutiny to do its job and the company must implement a new safety culture. A breakup of the group between civilian and military aircraft divisions could be one consequence.

In a recent bid to reassure regulators, passengers and flight crews, Boeing is recommending that airlines provide pilot simulator training for the Max. This is a stunning reversal of its previous stance.

Boeing shares trade at $330 (€296) against their 12-month low of $292. In spite of Boeing's problems I'm taking a mid-term view that the shares are worth considering.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any share mentioned.

Irish Independent

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