It has been another bad PR week for Boeing (BA, Financial), with two separate negative stories on the company coming out -- concerning the much-maligned 737-MAX and the Dreamliner.
737 Max problems
The first piece of bad news surfaced earlier last week, when the Federal Aviation Administration (FAA) reported that it had identified a what seems to be a new safety risk on the 737-MAX flight simulators. A microprocessor failure, which has not yet been linked to either the Ethiopian Airlines or Lion Air crashes, caused the nose of the simulated plane to push sharply downward. This glitch is not related to the Maneuvering Characteristics Augmentation System (MCAS) that caused the two crashes.
This is a major setback for Boeing, which had hoped to get clearance for the 737-MAX to return to the skies soon. On Thursday it was reported that this new problem would keep the model grounded for two to three months (assuming no further issues surface).
Dreamliner production facilities under investigation
As if that wasn’t enough, the Seattle Times recently reported that the DOJ has expanded its probe of Boeing to include the Dreamliner. I have written previously about the reported problems at the 787 Dreamliner plant in South Carolina, and now it seems that regulators have decided to investigate whether the stories of poor oversight and “shoddy work” have some weight to them.
This follows an announcement by the FAA that a critical fire-fighting system onboard the Dreamliner had been found to have failed in a “small number of cases”. It is unclear whether the probe relates specifically to this, or whether this is part of a large look at Boeing’s manufacturing practices. Regardless, this is hardly the kind of publicity that the company would have wanted.
What does all of this mean?
So far, all of these stories have failed to make a significant dent in Boeing’s valuation, with the stock continuing to trade around the $360/share level, well below its yearly high of $440 per share from before the Ethiopian Airlines crash, but not significantly lower than it has been for the three months since then. Investors seem convinced that Boeing will not face any real consequences from these groundings, and it’s easy to see why - the company is strategically important for the US government, and it is not in the interests of any airline to see Airbus (AIR, Financial) gain the upper hand.
However, I think that there is a chance that regulators overseas take a firmer line with Boeing than the FAA. We saw earlier this year that the US was one of the last countries to ground the 737-MAX, whereas for decades it had been the rest of the world that followed the FAA’s example in these matters. Another potential, although unlikely, development is that Boeing is required to separate its commercial aircraft manufacturing from its military contracts, which would obviously affect the valuation. Only time will tell whether the company manages to walk away from all of this unscathed.
Disclosure: The author owns no stocks mentioned.
