Boeing 737 MAX & COVID-19: What’s The Impact?

Filed Under: Advice

Prior to a couple of months ago, arguably the biggest crisis in the airline industry was the the Boeing 737 MAX, which has now been grounded for over a year, following two 737 MAXs crashing.

A Twitter user asks about the Boeing 737 MAX grounding, in light of the coronavirus situation. Who is hurt most by this?

Airlines are now happy the 737 MAX is grounded

Without a doubt, at this point airlines that were previously “suffering” from the grounding of the 737 MAX are very “happy” the plane is grounded (I put “happy” in quotes because I’m sure they’d rather that times were just better, but given the situation…).

Most airlines have grounded at least percentage of their fleet, so they’re probably pleased that the 737 MAX isn’t certified to fly yet, because that would just be more planes that they’d have to ground.

One thing to keep in mind is that up until now some airlines have kept older planes in their fleet while they wait for the 737 MAX to return to service. At this point those airlines have a good opportunity to retire those planes immediately to reduce capacity.

Airlines have largely been negotiating settlements with Boeing over the 737 MAX being grounded. My guess is that for the coming months those settlements will be significantly less in light of planes being grounded. In other words, airlines can’t as easily argue that they’re losing revenue due to the 737 MAX being grounded, when they’re grounding most of their fleets.

Could COVID-19 be worse for Boeing than airlines?

Airlines are obviously in a terrible situation at the moment, though arguably Boeing is in at least as bad of a situation, if not a worse situation. In many ways the good fortunes of Boeing over the past few years have been fully reversed at this point:

  • Boeing has the 737 MAX grounded, which continues to be an uphill battle
  • They have hundreds of 737 MAXs ready to be delivered to airlines, though we’ll see how many of those airlines are in business/able to pay for the planes when this is all over
  • We can expect a huge number of aircraft deferrals for planes that have been ordered but not delivered
  • I would be shocked if Boeing sees any substantial number of aircraft orders in the coming year or so

Not that the stock market ever fully sums up what’s going on at a company, but it’s telling that Boeing’s stock has performed even worse than most airline stocks in the past few weeks.

On February 12, Boeing’s stock was at $347, while now it’s at under $130.

Then again, Boeing’s stock has had an incredible rise the past few years (and in retrospect I think we can make sense of what caused that), so even at ~$130 it’s now back at mid-2016 levels, which was otherwise still a reasonably good time for the company.

Bottom line

In many ways I suspect this will be a turning point once again for the airline industry, just like 9/11. Fortunately airlines are better positioned overall than they were a couple of decades ago, but airlines achieving record profits and then begging for a $50 billion bailout from the government isn’t a good look.

Up until now, many airlines have thought they could do no wrong and would make money no matter what, so I think this situation will at least temporarily reset the approach airlines take towards aircraft orders, etc. The industry on the whole will likely go from a growth stage to a sustainability stage.

To airlines, the 737 MAX being grounded right now is a blessing. But for Boeing it’s very bad news — expect aircraft deferrals, and many of their customers may also go out of business. The company is even asking for a $60 billion bailout from the government.

I think that’s very much reflected in Boeing’s current stock trajectory…

What do you make of Boeing’s situation in light of the coronavirus crisis?

Comments
  1. Considering American Airlines and United used 80-90% (96% overall for US airlines) of their cash reserves from their record profits in the last few years for shares buy back. Meanwhile, adding and raising all kinds of fees, devaluing miles/points, etc…, the sentiment is to let them eat cake. But the government already signaled they will bail them out.

  2. Rather than provide a cash bailout the Government should provide its support by agreeing to underwrite heavily discounted Rights Issues to raise and replace the capital lost through share buy-backs. Shareholders can average down their cost by buying in and to the extent that the Government acquires shares it will at least have something to show for its support. The underwriting fee should be in line with market for a junk bond issue. In time it should be possible to recover the Government investment, possibly at a profit, but more importantly it sends a message to investors of the perils of buying shares in companies that use buy-backs to inflate their compensation and share option plan remuneration.

    Let the market work!

  3. No bailout to Boeing, American Airlines, United Airlines, Southwest, Wells Fargo, and banks. Coronavirus and the slow global economy are having a devastating impact on businesses and already is pretty catastrophic. The customer experience from U.S. airlines is despicable and terrible. Airlines are only interested to use their cash flow and huge profits to buyback stocks so management can enjoy the massive bonuses.
    Former Boeing CEO Dennis Muilenburg was fired by the board in late December 2019, received $2 million in salary, another $2 million in other perks and benefits, plus long-term incentive stock awards that prorated could be worth about $39 million. In addition, Muilenburg walked away with a pension from the Boeing worth $15 million. The total package is about $58 million,
    Kevin McAllister, CEO of the Commercial Airplanes division, who was fired in October, received severance of $14.75 million in addition to the salary of $1.2 million and about $400, 000 in other perks and benefits in 2019.
    Shareholders, employees, and customers are paying a painful price for years to come.

  4. Let’s take this a step further. Do airlines use the guise of COVID-19 to seek a bailout that also helps them with the lost business of the B737 Max? Most people might not read between the lines.

  5. I always thought Boeing would survive the issues of the 737 Max. But now, with COVID19 thrown on them, they are going to suffer for many years.

  6. I’m predicting economic chaos on an unimaginable scale if this continues much past April. Boeing and the airline industry may be but a shadow of itself.

  7. @Robert
    Since Boeing is a component of the Dow 30 and S&P 500 you probably already own Boeing stock if you own a mutual fund or index fund or any retirement account in the U.S.

  8. I’m in favor of using government funds to support and rebuild small businesses, employees who are getting laid off, small restaurants, shops, etc. I say put limits on the size of company that receives any money. All else goes to people. As for UA, let them go away. Their treatment of customers and employees get zero tears from me. I hope AA doesn’t (being my local hub carrier in MIA), but even them – if they go, they go. Give the money to the employees who they are firing. They misused their cash so let them pound sand. Those two in particular.

    Just giving huge sums of money to short-term profit-only-thinking corporations benefits no one other than their top management. Really sickening.

  9. @PTO has a solid case: there’s just so much of the US economy that rides on the back of aviation that to leave the industry to fold and re-form would be a catastrophe (like all those small business specialized engineering shops, the various trades and supplies companies – even kids in school who are committed to aeronautical engineering degrees).
    The Rights issue strategy is about the only way to avoid what happened so much in the GFC – the banks ensuring the privatization of profits and then the socialization of losses. To just provide a check of any denomination to airlines is money down the toilet.

  10. @Andrew

    >I’m predicting economic chaos on an unimaginable scale if this continues much past April. >Boeing and the airline industry may be but a shadow of itself.

    Hey wake up, it will last 4 months AT LEAST.
    Just study what is happening everywhere, the PIKE of infection is not even arrived.

  11. All huge corporations like the airlines and probably some hotel chains will be bailed out. But we need to loo at helping local restaurants, and employees who are not being paid at this time and worried about paying rent. I hope we can all come together as Americans and offer to help those in need.

  12. ITS ABOUT ACCOUNTABILITY ….WHY SHOULD ANY COMPANY BE ABLE TO MAKE COSTLY POOR DECISIONS ….SCRATCH THEIR HEADS AND WONDER WHY…AND EXPECT THE TAXPAYER FOR BAILOUT. WHY IS BOEING STILL LOOKING AT THIS 737 MAXX (DEAD HORSE). THEY HAVE TO REWIRE THE EXISTING PLANES BUILT….CLEAN THE FUEL TANKS FROM DEBRIS DURING MANUFACTURE . IF THEY WOULD HAVE MADE THE RIGHT DECISION UPFRONT THEY WOULD NOT BE ASKING FOR MONEY. ITS AMAZING TO ME THAT A COMPANY LIKE BOEING CAN COVERUP SO MANY CRITICAL FLAWS. AFTER REDESIGN OF THE WINGS TO ACCOMMODATE THE BIGGER ENGINES THE PLANE FAILED THE SIMULATOR TESTING. MCAS WAS DEVELOPED . BOTTOM LINE IS THEY HAVE TO PERSUADE THE FLYING PUBLIC TO GET BACK IN THAT PLANE. IT CAN BE CATASTROPHIC TO THE AIRLINES. WHAT IF ANOTHER ONE FALLS OUT OF THE SKY…

  13. @Creditcrunch

    VERY interesting; thanks for posting this.

    A lot of ‘old school’ Boeing people have long been horrified at the infusion of ‘finance suits’ over ‘engineering coveralls’ in the ranks of management – mostly, since the relocation of Head Office to Chicago, it seems.

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