Boeing Co. (BA, Financial) has had a rough year. In March, the crash of an Ethiopian Airlines 737 MAX 8 jet, the second such incident in just a few months, led to the worldwide grounding of the model. Despite the company’s assurances and rosy predictions that the aircraft’s return to the skies is just around the corner, there seems to be no resolution to the problem forthcoming.
Furthermore, the U.S.-China trade war continues to have a significant impact on companies like Boeing - capital-intensive businesses with enormous supply chains and long time frames. As such, the market may not currently be pricing in the risk of both of these situations worsening.
MAX troubles continue
Back in March, Boeing executives hoped to avoid a total global shutdown of the MAX. Since then, unsavory details have come out concerning the tight relationship between Boeing and the Federal Aviation Administration, which over the last few decades has been shifting its regulatory responsibility to the aircraft manufacturer itself. Boeing and its European rival, Airbus (XPAR:AIR, Financial), enjoy a near-duopoly on commercial aircraft - that privilege implies a level of public trust and a responsibility to not abuse that trust. It’s pretty clear now there needs to be an overhaul of how the certification system operates.
Earlier this week, the New York Times reported a senior Boeing engineer had filed an internal ethics complaint alleging that management had vetoed the development of a safety system for the MAX that could have prevented both crashes. The complaint has come to light as a result of an ongoing criminal probe by the Department of Justice into the crashes.
While the complaint acknowledges there is no way to know for certain the system would have prevented the crashes, it does point to management’s refusal to implement it as symptomatic of a broader culture of pursuing profit at the expense of crew and passenger safety. This characterization seems to gel well with accusations that Boeing fast-tracked the approval process of the MAX and provided pilots with minimal training on the new models.
The decision to forgo safety is obviously deplorable from a moral standpoint, but it could also have serious ramifications on Boeing’s share price. Time and time again, the American public has been assured the crashes were freak accidents or unavoidable, and that a fix was just around the corner. My suspicion is we are much further from a resolution than management would like its shareholders to believe, and that at a certain point calls for serious action to be taken will grow so loud it will be difficult for the U.S. government to ignore them.
I have speculated before that there is a limit to how poorly things could go for Boeing, due to its strategic importance to the U.S. It is certainly not in the government’s interest to cede the skies to the Europeans, but the international nature of this grounding means that at a certain point, the U.S. might have to take some sort of punitive action. Even in the best-case scenario for Boeing, where no criminal charges are filed, it is difficult to see a situation where the MAX returns. And airlines do not have infinite patience. Boeing has already felt some pain - in July, Saudi Arabian operator Flyadeal canceled an order for 30 MAX jets, to the tune of $5.9 billion.
The longer the grounding continues, and the more accusations are levelled, the more the bleeding will continue. As Warren Buffett (Trades, Portfolio) likes to say: “There’s never just one cockroach in the kitchen”.
Disclosure: The author owns no stocks mentioned.
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