Boeing’s (NYSE: BA) nightmare continues. The crash last week of China Eastern Airlines’ Boeing 737-800 revived painful memories of its problems with the 737 Max aircraft, two of which crashed in Indonesia and Ethiopia in 2018 and 2019 because of a design flaw. The repercussions of those fatal crashes – technical, financial and legal – had only just been worked through. In January, company executives were talking about 2022 as a year of boosting deliveries of the 737 Max, sorting out the problems with the 787 Dreamliner and ultimately also of restoring its balance sheet.
Instead, China Eastern Airlines has grounded 223 of its Boeing 737-800 aircraft for safety inspections, particularly cruel for Boeing as the Chinese authorities had finally allowed the return to service of their 737 Max aircraft. A lot rides on the result of the crash investigation, but it is a fair bet that the 737-800 fleet will remain grounded for a while yet. Already, Boeing’s sales to China have virtually stopped over the past four years, a key source of revenue for any airliner. In 2017-18, more than 20% of Boeing’s deliveries went to China, now it is less than 5%.
Boeing’s catalogue of failures
Whatever the cause of the latest fatal crash, the company management itself is coming increasingly under scrutiny for a catalogue of failures in the way it has handled what has turned into a rolling four-year crisis. The two 737 Max crashes revealed a company beset with problems, including fraud, numerous ‘safety incidents’ and a worrying scarcity of key engineers. In January last year, Boeing agreed to pay $2.5bn for obstructing the US Federal Aviation Administration’s investigation into the 737 Max crashes. This would point to a management malaise that does not augur well for its recovery or for its long-term sales and earnings outlook.
Crash investigations typically take 12-18 months before reaching a conclusion, which means Boeing’s safety record will remain in the spotlight for all the wrong reasons, further damaging the company’s reputation. To add to Boeing’s problems, aircraft sales are used as leverage in geopolitical and trade disputes, particularly difficult now that tensions with Russia and China are high.
Already there is talk among analysts about the possible benefits of Boeing being broken up. Aviation analyst Richard Aboulafia points to the break up of General Electric, announced last November, as an example of how Boeing investors might be persuaded that they would get a better allocation of capital. However, as Aboulafia says, Boeing is not a conglomerate and, regardless of its current problems, it has “sheer critical mass, global presence and buying power as the world’s largest aerospace company”.
In fact, the pandemic aside, its share price seems to have weathered the storms of the past four years. And, over the past month, analysts have overwhelmingly rated the stock as a ‘buy’. Having said that, the stock has declined steadily over the past 12 months, losing some 26%, leaving it only marginally above its level five years ago. If Boeing’s nightmare continues, it won’t be due to the latest crash but because of a weakened management and poor company culture, which could eventually hand market share to its main rival, Airbus.
