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A pair of deadly plane crashes over the past five months has spun the Chicago-based aerospace giant Boeing into a full-blown crisis: The company faces lawsuits from surviving family members of at least two dozen crash victims, the worldwide grounding of two versions of its most profitable jet and harsh criticism from pilots.
Still, analysts say the crisis is unlikely to be financially ruinous for Boeing in the long term. Even though some estimate an extended grounding of the Boeing 737 Max 8 could cost the company hundreds of millions of dollars, analysts said it would be hard for airlines to readily replace Boeing’s jets with a competitor’s. And the crisis comes on the heels of a banner year for Boeing’s business, with revenue topping $100 billion in 2018, an all-time high.
A Boeing spokesman said the company’s 737 production rate has not been changed even though the company has halted new deliveries for the duration of the grounding.
“We have paused delivery of 737 Max airplanes due to the temporary grounding,” a Boeing spokesman said. “We continue to build 737 Max airplanes while assessing how the situation, including potential capacity constraints, will impact our production system.”
Teal Group aerospace analyst Richard L. Aboulafia said he expects the company will readily absorb the financial impact of the 737 Max 8 grounding.
“It might sting. It might be painful,” Aboulafia said, noting that the cost of keeping the aircraft grounded could balloon into the hundreds of millions of dollars. “But in terms of a basic threat to their business and future, it is not a threat at all.”
Other analysts estimate those costs could climb to $1 billion or higher, depending on how long the plane is grounded and whether regulators determine that flawed equipment contributed to either of the two crashes.
Sheila Kahyaoglu of Jefferies said in an analyst’s note that a scenario that includes a two-month pause in deliveries could reduce 2019 revenue by $5.1 billion, or 5 percent.
Analyst Chris Higgins of Morningstar said halting the delivery of the 737, which accounts for about a third of the company’s operating profit, could affect quarterly revenue because the planes are not being delivered. The company could be required to cover lease costs. He said the backup is unlikely to negatively affect long-term revenue, however, “because you will eventually deliver those aircraft.”
In the short term, Boeing analysts see four main financial threats stemming from the crisis: the cost of fixing software for the whole fleet that is suspected of contributing to the crashes, potential compensation to airlines to replace the 350 grounded 737 Max planes around the world, the cost of a delay in Boeing’s delivery of new Max jets, and the possibility of airline cancellations.
Most analysts agree the biggest cost could come from compensation to airlines, which must find another jet to replace the Max. In that case, Boeing could be required to cover the lease costs of a new jet and pay for the difference in the fuel costs for planes that are less efficient than the Max.
The worst-case scenario, analysts said, would be for investigators to uncover a design flaw in the jet that requires a full redesign for the entire fleet.
The 737 grounding comes after a long stretch of positive news for Boeing. The company remains financially healthy after a banner year in 2018, with around $8 billion in cash and a profit of $10 billion.
The company soared past the $100 billion annual revenue mark for the first time. The success came from growing international sales and its new business focused on repairing and maintaining older aircraft.
Boeing led a broader market rally throughout 2017, and its stock price spiked in the first two months of 2019. Even after this week’s wild stock price gyrations, the company’s stock value is up more than 170 percent from the beginning of 2017.
The company also has experienced a stunning reinvention of its military sales division under its new president and chief executive, Leanne Caret, beating out its rival Lockheed Martin for three key U.S. military programs. First it won an $805 million contract to build aerial-refueling drones for the Navy. Then in September it won the primary seat on a $4.1 billion program to supply helicopters for the Air Force, and it won a $9.2 billion contract to build the Air Force’s next training jet. The three opportunities together total more than $18 billion.
Analysts said order cancellations are highly unlikely and not a big financial threat for Boeing.
”There are two people making jetliners, and if you lose your place in this line, you have to get into the back of the other line,” said Aboulafia. “Going to the back of the line in the other guy’s plane — and in the meantime, you are burning more fuel from a less-efficient jet. You are cutting off your nose to spite your face.”