The saga of Boeing 737 MAX

The saga of Boeing 737 MAX

The crisis has never been so great with Americas largest aircraft manufacturer and defence contractor, The Boeing Company. The company with a long history of successful aircraft development and technological prowess in aerospace industry suddenly finds itself out of wits on how to deal with the situation. The Boeing Crisis, as it is now being called, has severely drawn down the reputation of the company as it has taken far too long to fix a seemingly minor issue with the operating software of one of its highly successful models, the Boeing 737. The crisis which till now has already claimed the head of the CEO also threatens to severely erode the bottom line of the company, if no solution is found out quickly to the problem.

The crisis started with the fatal crash of two of Boeing 737 MAX models -one of them was a Lion Air Flight 610 in October 2018 causing a casualty of 189 while the other was an Ethiopian Airlines Flight 302 in March 2019 which led to 346 deaths. Soon the investigators discovered that the occurrence of both crashes was linked to the new Maneuvering Characteristics Augmentation System (MCAS) installed on the newer generations of this aircraft. The system, it was revealed, repeatedly made the aircraft to nosedive, leaving little room for the crew to take corrective action. Later a study conducted by the Federal Aviation Authority of the United States and the Boeing company revealed that MCAS did indeed pose an unacceptable safety risk to the aircraft. As the news of the flaw in this aircraft’s operating software began to spread, airlines all over the world started to ground their inventory of the Boeing 737 Max. By the end of March 2019 all civil aviation authorities across the world had banned the particular aircraft from taking commercial flights.

The Boeing 737 is the most successful commercial aircraft models of the Boeing company and one of the most successful commercial aircraft models across the world. The aircraft model made its debut in April of 1967 and entered services in February of 1968. Since then the Boeing company has manufactured more than 10,500 of this aircraft model and as of November 2019 still has a backlog of more than 4,500. Over the period of fifty years since it was first introduced the aircraft has gone through four generational evolutions, with the passenger-carrying loads between 85 and 215. Till 15 January 2019, the aircraft has been grounded for ten months and ten days since 10 March 2018, and as on that day the Boeing company had to suffer setbacks in excess of $10 Billion in revenues, in compensation to Airlines and Bereaved families and is facing several lawsuits from pilots and victims’ families on the back of this Crisis. In January 2020 the company announced that it is halting the production of this model while more than 400 hundred aircrafts are lying in its factory in different stages of production. The aircraft manufacturing company which makes nearly $60 billion worth of revenue a year form the sale of commercial aircrafts owes nearly a third of it to this model. The production halt and grounding of this aircraft along with the uncertainty of its future could have considerable impact on the long-term profitability of the Boeing company.

The first earnings release of the Boeing company after the fatal 737 MAX crash was on 24 April 2019. In the release, the company anticipated the cost of the grounding of the aircraft at $1 Billion. It suspended a previously announced stock buyback programme and also announced that the previously released earnings forecast now stood invalid on account of the crashes and the subsequent grounding of the aircraft. The company, in the earnings release, also blamed the incident for a 21 per cent drop in its quarterly profits over the corresponding period profit of 2018. On 18 July 2019, the company announced that it would take a $4.9 billion after-tax charge in the second quarter of 2019 on account of compensation to airlines and potential fines and also stated that its production cost would increase by $1.7 billion on account of lower production volumes. On 24 July 2019, the company came out with its second-quarter results for the financial year 2019. The loss on account of the groundings was sated at $2.9 billion for the quarter, and the total cost of the grounding to the company since 10 March 2019 approached $8 billion till July 2019. In the third-quarter earnings release on 23 October 2019 the company added another $ 900 million in losses for the quarter on account of the groundings taking the total to $9.2 billion of losses till date to the company. Other than the above, it is also estimated that the company would have to bear about $ 5 billion in simulator retraining costs for pilots before the 737 MAX takes to the skies again.

After the second crash of Boeing 737 MAX of the Ethiopian airlines on 10 March 2019, several airlines cancelled their orders for the aircraft leading to a major plunge in the stock price of The Boeing Company. By 14 March 2019 the shares of the company had lost 11 per cent of its value and by 23 March 2019 it had lost 18 per cent, shaving off nearly $40 billion in market capitalisation of the company. Since then, several reputed Investment banks and research houses have downgraded the company on account of the uncertainty over the future of its flagship product. The production loss at Boeing also affected the fortunes of nearly 8,000 suppliers of the company, with General Electric, the American Aero Engine manufacturing giant reporting a loss of $ 1.4 billion on this account. The losses among major airlines and aircraft leasing companies have also been mounting significantly. The grounded aircraft not only means a major loss of revenue for these companies, but they also incur major maintenance cost during this intervening period leave alone the personal cost of staff who are without work during the same.

The Boeing Company, directly and indirectly, employs nearly 1 per cent of the workforce of the United States and the production cut at the company is anticipated to reduce the 2020 GDP growth of the country by 0.5 per cent.

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