Boeing May Lose Billions from 737 MAX Groundings

April 8, 2019
902 Views

Aircraft manufacturer Boeing (NYSE: BA) has been able to curb its stock market losses, but the grounding of its 737 MAX planes could have a significant long-term fiscal impact. News emerged over the weekend that Air Canada would ground 737 MAX flights until at least July 1. Other airlines around the world are expected to make similar moves.

Boeing announced last week that it had identified software problems that contributed to the deadly crashes of Lion Air Flight 610 in October of last year, and Ethiopian Airlines Flight 302 last month.

Three Months to Fix Software Problems on Boeing Jets?

In a statement last week, Boeing said that it could take weeks to address a software issue that contributed to both 737 MAX crashes. Engineers found that the Maneuvering Characteristics Augmentation System (MCAS) was incorrectly activated before both crashes, due to erroneous information collected by onboard sensors and computers.

Even if Boeing can develop a fix in the coming weeks, it will need to be thoroughly tested and approved by aviation authorities before updates can be rolled out globally.

Air Canada Sets a Long Target for 737 MAX Flights

Air Canada has grounded its 737 MAX fleet until at least July 1. The airline has also put orders for new planes on hold. It was set to take delivery of six new aircraft during March and April.

Tui AG, one of the largest airline charter companies in Europe, has grounded its Boeing 737 fleet at a cost of over $252 million.

American Airlines (NASDAQ: AAL), which owns 24 737 MAX jets, has been forced to cancel up to 90 flights per day. A statement from the company on Sunday said that it would be cancelling some flights until at least June 5.

Boeing To Be the Biggest Loser in the Long Term

Airlines will take a very sharp and significant financial hit as they are forced to cancel flights while awaiting a software update. Boeing’s losses could take much longer to determine. The company has slowed production of new 737 MAX jets until it develops a solution to the software issue.

Indonesia Garuda Airline announced that it would cancel an order for 49 737 MAX jets in the wake of the latest controversy. At standard unit cost, the order would be worth almost $6 billion. Lion Air, also based in Indonesia, is reportedly considering dropping a $22 billion order for 737 MAX jets, in favor of a new contract with Airbus. Lion Air is Boeing’s second largest customer.

Boeing will now face an uphill struggle to maintain existing business deals while also delivering a functional software patch to its customer airlines.

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