What will happen to Boeing now?

Tim Fernholz
Treasury Secretary Steve Mnuchin, left, and Boeing CEO Dennis Muilenburg, right, listens as President Donald Trump speaks during a roundtable discussion on tax policy at the Boeing Company, Wednesday, March 14, 2018, in St. Louis.

Boeing’s 737 Max is grounded and its engineers are scrambling to get the company’s most-important plane flying again. What happens next?

In the near term, Boeing needs to show customers and governments that its jet is safe to fly. In the long term, the two deadly 737 Max accidents in five months could pop a global bubble in aviation and usher in a season of new turbulence for the world’s leading airplane manufacturer.

On Jan. 30, Boeing’s annual earnings report showed record revenues after the delivery of 806 planes—and 560 of those were 737 Maxes. That gives you a sense of the magnitude of the aircraft model to Boeing’s bottom line. Since the crash of Ethiopian Airlines flight 302 on March 10, the company has lost tens of billions of dollars in market value.

Still, Boeing stock is trading higher than it was at other times this year, reflecting a market consensus that the problems being described by crash investigators—a flawed software solution to an engineering trade-off that was inadequately explained to pilots—can be addressed with retraining and software updates, not a wholesale redesign of the plane.

Bullish investors may be underestimating the challenges Boeing faces once the technical challenges are solved.

The cost of the legal fallout

The US Department of Transportation has announced that its independent inspector general will investigate how the 737 Max was approved by the Federal Aviation Administration. US prosecutors have also opened a rare criminal investigation into the 2012-17 approval process, the Wall Street Journal reports.

Investigators want to know how software designed to keep the plane from stalling became dependent on a single sensor and why pilots were not explicitly trained to use the software and shut it off in the event of a malfunction. They are also curious about how much the process relied on Boeing’s team rather than government engineers.

The results of the crash investigations and inquiries into the regulatory process could expose Boeing to an unusual amount of legal liability.

US judges typically dismiss lawsuits brought by victims of airline crashes in foreign jurisdictions. But if decisions made by Boeing during the design process are relevant, expensive class-action suits may have new leverage.

And airline operators, including Norwegian and India’s SpiceJet, have said they will ask Boeing to cover some of their losses due to the grounding of the 737 Max; others are likely to follow.

The global race to get big

Boeing’s recent troubles can be seen in the context of its massive growth amid competition with European aviation giant Airbus. Both have been in a race to bring low-cost airliners to the global market, with the 737 Max resulting from Boeing’s attempt to quickly match the capability of Airbus’ A320neo.

In recent years, airlines have faced a slew of incentives to purchase as many planes as possible, from low fuel costs to abundant capital. More than 11,000 jetliners have been bought from the two competitors since 2000. Now, aviation journalist Jon Ostrower reports the industry fears a general downturn spurred by the scrutiny that has followed the 737 Max crashes.

Long-term demand for air travel is still expected to rise. But short-term over-capacity, combined with losses from grounded flights and public anxiety over air travel, could lead airlines to halt the flood of new purchases fueling Boeing’s business growth.

Already, airlines are talking about delaying or cancelling deals to buy the 737 Max. Malaysia Airlines, Saudi Arabia’s flyadeal, Lion Air—the type of low-cost, emerging-market operators targeted by Boeing—have all said they will seek to amend or end 737 Max deals.

Future deals, too, will be affected by any perception of problems with the jet. Airbus will be happy to capitalize on any doubts about Boeing in marketing its own planes. Most closely watched will be China—a market that Boeing CEO Dennis Muilenburg sees as his company’s future—where regulators were quick to ground the 737 Max.

Boeing’s had troubles before

The legal and financial costs of the disaster, even if they reach into the billions, could be a smaller threat than concerns about Boeing’s safety culture—or its close relationships with the US government.

Questions about the FAA’s process alongside Muilenburg’s personal calls to president Donald Trump could sour potential customers on the reputation of Boeing, which rests in part on high overall regard for the US aviation system. Much will depend on what investigators reveal about the 737 Max certification process and how Steve Dickson, Trump’s new pick to lead the FAA, handles the cleanup. (It doesn’t help that the Defense Department is launching an independent investigation into whether acting US defense secretary Patrick Shanahan favored his former employer—Boeing.)

It’s easy to forget that just over a decade ago, in 2006, an embattled Boeing paid $615 million in civil and criminal fines. Then, the company was in hot water for hiring a Pentagon official who negotiated a sweetheart deal with Boeing and for corporate espionage against US rival Lockheed Martin. The Air Force official and Boeing’s then-CFO were sentenced to short terms in prison, while the company’s CEO resigned.

The fallout from that scandal was severe but apparently brief. Even prosecutors who negotiated the settlement conceded that Boeing’s importance to the US military and the high-tech economy affected the scales of justice. And it helped that Boeing cleaned house at the top.

Both factors may yet be decisive in protecting the jet giant’s future.

Read more of Quartz’s coverage of the Boeing 737 Max crisis.

 

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