What’s going on here?
Aircraft manufacturing giant Boeing has announced plans to cut monthly production of its best-selling 737 aircraft by nearly 20%.
What does this mean?
Following two deadly crashes, in which a total of 346 people lost their lives, a global grounding of 737 Max jets took place (read our report on that here). The exact cause of the crashes was unknown at first. However, preliminary investigations now indicate that unique anti-stall software forced the airplanes into irrecoverable nosedives. In a statement, Mr Muilenburg (CEO of Boeing) acknowledged the responsibility of the software in these fatal accidents.
After halting all deliveries, Boeing has been forced to stockpile finished 737 aircrafts. But, storing them is costly. From mid-April, production of 737 models will be cut from 52 aircraft per month to 42. A new committee is also being established to oversee policies and design processes for the development of the aircraft.
What’s the big picture effect?
Boeing’s shares plunged by 4% after the Bank of America changed its stock rating from ‘Buy’ to ‘Neutral’, following the announcement of its reduced production plan. The decision has also knocked the shares of additional aerospace companies that supply parts for the 737 model. Rolls-Royce, which builds engines for Boeing jets, saw its value drop £200 million as shares fell 1.25 per cent. The companies Meggitt, Melrose and Safran (who all supply components for Boeing) also suffered reductions in share value. However, an analyst from Cowen (an American investment bank) stated that Boeing’s decision to cut production was appropriate and should help to resolve the backlog issue.
Boeing could be forced to pay compensation to existing operators of 737 Max jets for their loss of earnings during the grounding. TUI (a European tour operator) estimates that the grounding of its fleet of fifteen 737 Max jets could cost £260 million if they are unable to resume operation by the end of the summer. This compensation, coupled with incoming lawsuits from relatives of the victims, could be a significant financial blow to Boeing.
Boeing currently has thousands of outstanding orders from airlines for the Max jet. With each plane selling for around £80 million, this represents billions of pounds for Boeing in the coming years. However, Boeing has given no estimation of when we will see a return of the 737 Max jet. All updates to the software and the new training plan for pilots will have to be certified by the F.A.A (the US Federal Aviation Administration) and other aviation regulators before the planes can operate which may take months.
After these tragic incidents, it could be a while before we see Boeing flying high again.
Report written by Erin S.
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