After two tragic crashes involving their 737 MAX commercial airliner, Boeing Co. (NYSE: BA) is scrambling to calm panicked investors. More damaging headlines hit the presses early this morning, as President Trump signed an emergency order to ground all 737 MAX jets in the United States – completing the worldwide ban on Boeing’s newest plane.
Their new jetliner, which was created to meet the rising demand for international air travel, also initially helped Boeing assert a dominant position over rival Airbus SE. After making several deals overseas a few months ago, BA quickly became the most valuable stock on the Dow, and the top U.S. exporter in terms of total sales.
In short, the 737 MAX looked like a massive success for the company before the recent crashes and was (up until now) their most popular plane by a wide margin – as evidenced by orders for over 5,000 of the new jets.
But sadly, in the wake of what’s happened, it looks like most of that new revenue could vanish. Only 370 of the planes have actually entered service, and much of the recent optimism from investors came from future business, not the jets that have already been built.
Before the crashes, BA shares were on an absolute tear, driven by the assumption that Boeing’s slew of new orders would eventually be filled.
But now that the President and the FAA won’t let 737 MAXs fly, Boeing could face an even bigger obstacle:
737-caused logjams at Boeing facilities.
Remember, they were trying to fill a massive number of orders, and their efforts to do so will likely hinder the company’s ability to deliver their other planes to customers around the world.
And even though the 737 MAX was supposed to be their new flagship jetliner, it seems some investors forgot that Boeing still builds other planes. The production inefficiencies caused by the FAA’s sanctions could bite into company revenues severely all on their own, independent of the costs associated with fixing the 737 MAX’s safety issues – which, by the way, are estimated to cost $1 million to $2 million per plane.
If customers still want their 5,000 jets after this fiasco, the preventative maintenance alone could cost Boeing $5 billion at best, $10 billion at worst. The company made almost $20 billion last year in profits – which is nothing to scoff at – but if their estimates are correct, then resolving the 737 MAX’s problems could have a huge impact on their financials for 2019.
Fundamentally-inclined investors and Wall Street analysts would likely butcher the company come earnings season unless Dennis Muilenburg, Boeing’s CEO, manages to pull a rabbit out of his hat in the form of some truly inspiring guidance.
And as bad as that scenario sounds, the alternative could be even worse if customers decide to cancel their 737 MAX orders outright.
Customer deposits for the 737 helped push Boeing revenues over $100 billion for 2018, and while repairs on the planes would be expensive, lost revenue from scorned buyers could hurt the company even more.
Thankfully, though, even in the midst of Boeing’s misery, there’s still a silver lining for airline investors looking to shift their funds out of BA while remaining in the sector. Back in December, 2017, Delta Airlines (NYSE: DAL) made the controversial decision to buy 100 Airbus SE jets, turning down Boeing’s 737 MAX offering – which at the time was deemed the “plane of the future”.
And though delays for the 737-carrying airlines will likely delay Delta flights as well, in the end, DAL shares won’t feel nearly as much pain simply because they don’t fly a plane that’s been grounded worldwide.
Will Boeing recover from this mess eventually? It certainly seems possible, if not probable, but until they start making some serious company-wide reforms, it might be worth staying away from BA for the time being.