FAA clears Boeing 737 Max: How will it impact the British aviation stocks?

Summary

  • The FAA has cleared the troubled Boeing 737 Max aircraft to take on the skies after a rigorous redesign process.
  • The aircraft was grounded by many countries following two deadly crashes in 2018.
  • British Airline companies like IAG and Ryanair have a significant exposure to the aircraft variant and a safety clearance could help them up their seat availability

After a rigorous examination and redesigning for almost two years, the Federal Aviation Authority (FAA) has cleared the Boeing 737 Max aircraft to fly again. The aircraft would be flying in the US skies by the end of this year and would require clearance from foreign aviation authorities too. 

The 737 aircraft variant is the most successful aircraft in the Boeing stable. It has more than 10,500 units already manufactured and 4,500 in backlog. The Max variant is an improved version that provides one of the best in-class fuel economy per seat.

A significant number of Max variants are still grounded, following two deadly crashes in 2018 that killed 346 people. The grounding of these aircrafts had impacted the seating availability of these airlines. Nonetheless, they continue to incur a heavy maintenance expenditure on them.

The crashes 

The crisis began with the fatal crash of two Boeing 737 MAX models -- one Lion Air flight 610 in October 2018 and an Ethiopian Airlines flight 302 in March 2019, causing 346 deaths. 

Soon the investigators pinned the cause. It was linked to the new Maneuvering Characteristics Augmentation System (MCAS) installed in the newer generation of the aircraft. 

It was found that the system repeatedly made the aircraft to nosedive, leaving very little room for the crew to take corrective action.   

Later, a joint study conducted by the FAA and Boeing revealed that the MCAS posed a serious safety risk. As the news spread, airlines all over the world started grounding their Boeing 737 max inventory. By the end of March 2019, civil aviation authorities had banned the aircraft from taking commercial flights across the globe.

FAA clearance

The FAA clearance will immediately increase the seating availability in the US aviation market.  With every subsequent aviation authority providing a clearance, the global aviation seating capacity is set to improve.

These aircrafts have now come with improved designs and pilot operating manuals which would give more confidence to the operators as well as the general public of the safety of these aircrafts. The FAA clearance will also see many of the companies which had halted their orders to reaffirm them with the Boeing company.

The availability of this aircraft with the airline companies would bring an immediate respite to the aviation industry which is deeply battered by the impact of the pandemic. The superior fuel economy provided by this aircraft will help the companies to stay competitive even in an extremely price sensitive market.

Ryanair’s exposure

Ryanair Holdings plc had ordered 210 special models of the Boeing 737 MAX 200 aircraft that has eight more seats than a regular variant. It also offers 16 per cent more fuel efficiency.  These aircrafts would put Ryanair on lead in an increasingly price competitive industry. 

Earlier, the aircraft was set to be introduce in the beginning of this year. But now it would only be available after the UK Civil Aviation Authority removes its ban on this model. 

The FAA’s clearance news is likely to have a subdued impact on the company stock prices. 

The company is currently witnessing unusually low bookings on account of pandemic fears. Availability of these aircrafts may not provide any immediate revenue advantage.

Source- Thomson Reuters (five days)

The shares of Ryanair Holdings plc (LON: RYA) were trading at GBX 15.53 per share at the close of trade yesterday after gaining 3.95 percentage points.

IAG’s outlook

IAG has signed a letter of intent with Boeing for the purchasing 737 Max-8 and 10 variants. It was a $24 billion deal. It would make IAG the second largest customer of Boeing in the UK. 

The LOI states that the deliveries would be made between 2023 and 2027. 

The FAA clearance would have a positive impact on the stocks of the company, as many had questioned its leadership when it signed the LOI in 2019 when the crash investigations were still going on.   

Source- Thomson Reuters (five days)

The shares of International Consolidated Airlines Grp SA (LON: IAG) were trading at GBX 158.8 per share at the close of yesterday’s trade after gaining 3.49 per cent.

To sum up, currently the pandemic is the biggest factor governing the global aviation industry. The clearance of Boeing 737 Max aircraft by the FAA would merely have a subdued impact on the airline companies’ fortunes, at least in the short run.

Comment


Disclaimer