One of the top stories this week has been the fallout from the Ethiopian Airlines Boeing 737-MAX crash, the second such event in less than five months. Aviation agencies the world over believe the crashes could be related. In the wake of the tragedy, country after country grounded their 737-MAX fleets, leaving the U.S., which did not initially do so, increasingly isolated. Yesterday, the Federal Aviation Authority announced all 737-MAX flights will be grounded until further notice.
Boeing Co. (BA, Financial) stock has predictably taken a severe beating, losing more than 10% since the crash was reported. The question for investors is - what will the long-term consequences be for the aircraft manufacturer? Is this an issue that will be resolved quickly, with relatively little pain for Boeing, or could this take a heavier toll on the company?
Future orders at risk
Right now, it is impossible to say with any certainty whether the two crashes were linked. That is a question to be answered by the official investigation, which will likely take many months. The leading theory at this time is both crashes may have been caused by a malfunction in the maneuvering characteristics augmentation system (MCAS), which is responsible for keeping the nose of the airplane from pitching up too much.
Airlines, however, could determine there is a problem with the 737-MAX independently of the conclusions reached by investigators. They could decide the risk simply is not worth it and cancel their orders. Lion Air, the Indonesian airline whose 737-MAX crashed last October, has already informed Boeing it is canceling its $22 billion deal with the company. Boeing has more than 5,000 orders for the 737-MAX, totaling $600 billion (including planes already delivered). If the investigation drags on for an extended period of time, or if more evidence comes out that the 737-MAX is indeed unsafe, airlines could switch to Airbus (XPAR:AIR, Financial) models, as Lion Air has already said it will do.
Long-term prospects
That said, when one considers the dynamics of the aircraft market, it is unlikely these tragic incidents will prove to be seriously detrimental to Boeing. Yes, the suspended and canceled orders are going to hit cash flow pretty hard in the short term, and the stock will probably take a while to recover from the brand damage caused by the groundings. Moreover, the investigation may bring to light facts that cause further declines in the stock price.
With all that said, Boeing is still one half of a global duopoly. Passenger aircraft manufacturing has a massively high barrier to entry. Moreover, it is ultimately not in the interest of airlines to allow either Boeing or Airbus to gain a significant upper hand over the other, as this would give the winner of the contest more influence in price negotiations.
Demand for commercial air travel is forecasted to increase over the next several decades, and historically, crashes only temporarily depress demand. While airplane crashes make for visceral and emotionally moving news stories, the reality is air travel now is more safe than it has ever been.
Disclosure: The author owns no stocks mentioned.
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