Two fatal accidents involving Boeing 737 MAX jets in the last six months have resulted in their grounding worldwide.
The 737 MAX is a new Boeing model, a heavily re-engineered version of its workhorse 737. Deliveries to customers began only in 2017.
Globally, about 370 are in operation but the Chicago-based plane maker has close to 5,000 on order.
The MAX is a key project for Boeing, with approximately 90% of 2019 estimated 737 programme deliveries coming from the MAX. Fitch Ratings estimates 2019 MAX deliveries at around 590 aircraft will be worth $27bn to $30bn of revenue.
Investigations as to the cause of the crashes are ongoing, along with a frantic search for a technical “fix” that will get all the grounded 737 MAX aircraft flying again.
Under normal circumstances, most travellers rarely bother to look at which model of plane they are flying on.
But two fatal accidents involving the Boeing 737 MAX jets seem to have made passengers pay closer attention to their plane tickets.
In October last year, some 189 people were killed in a Lion Air crash and on March 10, Ethiopian Airlines 737 MAX 8 flight crashed minutes after take-off, killing 157 people on board.
Reports have emerged that the two recent crashes “share similarities”, stoking concerns that a feature meant to make the upgraded MAX safer than earlier planes has actually made it harder to fly.
So what will be the impact, if any, of grounded MAX fleets on airlines and their networks?
Research and consultancy firm Frost & Sullivan estimates that the impact to all airlines adds up to more than $10mn dollars daily. Interestingly, Frost & Sullivan’s estimate was made when only two thirds of the global 737 MAX fleet were grounded.
Authorities in US and Canada were initially reluctant to halt the Boeing 737 MAX jets, expressing confidence in their “airworthiness”.
If the grounding applies to all aircraft, coupled with a deferral of the more than 400 deliveries planned for 2019, the bill will amount to more than $4bn in 2019, Frost & Sullivan says.
Airlines, of course, will seek compensation from Boeing, but the impact on their profitability and operations cannot be underestimated, the researcher says.
The Boeing 737 MAX could be a “concern throughout the aviation credit sector” for much of 2019, Fitch Ratings noted. It is premature to take credit ratings actions at this time, as final conclusions about the Ethiopian Airlines and Lion Air crashes are not yet known, and there are many scenarios that could play out.
According to the ratings agency, the “most concerning would be a harsh scenario” including a systemic issue with the aircraft leading to lengthy groundings, material delivery delays, significant order cancellations and negative public sentiment toward the MAX.
While Fitch said it is not taking any rating actions at this time, it is “watching for several key items” in the near term. A key data point will be the initial findings of the Ethiopian crash investigation. If there is a correlation between the causes of the two recent crashes, it expects the situation to worsen, and lengthy groundings and delivery delays to ensue.
“Similarities between the Lion Air and Ethiopian Airlines accidents would possibly indicate the presence of a design flaw that would need to be addressed. We would monitor the amount of time and resources needed to address such an issue,” Fitch Ratings noted.
The focus would first be on the existing fleet and then the production process. It said it will also watch for the effects on the flying public’s sentiment toward the MAX.
In addition, the ratings agency would assess the ability of airlines to obtain replacement capacity for the MAX and how significant delivery delays would affect business plans.
Boeing’s credit profile is not immediately affected by the two crashes because of the company’s substantial liquidity, financial flexibility, low leverage, market positions and revenue diversification, analysts at the ratings agency said. Boeing has already halted 737 MAX deliveries and some airlines say they will demand compensation while others have signalled they could back away from orders.
But analysts say the long-term impact on the firm will depend on the outcome of the investigation.
Regulatory authorities are waiting for Boeing, the accident investigation teams and the Federal Aviation Authority (FAA) to provide more information and confirm measures to ensure flight safety.
“Until this is done, fleets will remain grounded, which is something reminiscent of the B787 Dreamliner entry into service in 2013,” says Frost & Sullivan.
Back then there was no tragic accident, but numerous incidents with overheating Lithium batteries on the new aircraft.
At that time, the FAA had been proactive and taken the decision to ground all B787 aircraft in the US, prompting aviation authorities around the world to follow suit. In the case of B737 MAX, just the opposite happened. This time round, it was the world that was proactive in grounding the 737 MAX and the FAA had to capitulate later.
While most airlines should be able to adequately deal with the immediate disruption in the coming days, there is potential for the 737 MAX ban to reverberate throughout the industry in future. The aircraft looks set to be grounded for an extended period, Joseph Schwieterman, an aviation expert and professor in transportation at De Paul University in Chicago told CNN.
Although it is premature to dub 737 MAX aircraft unsafe, the public’s perception seems to be that they are not, until proven wrong.
Aviation experts say Boeing 737 has been a safe and stable workhorse of global airlines for more than 50 years. Much of the 737 MAX 8 aircraft and its systems are common to earlier variants.
Following the second of the two airplane crashes in the last few months, Boeing announced that it is updating 737 MAX 8 planes in the immediate future. The company has maintained that the model is indeed safe, but is making a few changes to its software system in the wake of the crashes that killed all passengers on board.
* Pratap John is Business Editor at Gulf Times.
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