Boeing’s bumpy flight to end soon?
Boeing has been one of the dominant aircraft manufacturers in the world for decades, yet the past few years have seen the company face one disaster after the other. Two fatal crashes of its airplanes were attributed to design errors on Boeing’s part, leading to a global grounding of all Boeing 737 MAX planes. This was followed by the cancellation of hundreds of orders for planes. A global pandemic that impacted air travel to an unprecedented level and the collateral damage Boeing suffered as a result of the US-EU trade war exacerbated an already grim situation. Yet, there is hope on the horizon for Boeing as it seeks to recover to its previous position of strength.
The aircraft manufacturing industry
The US-based Boeing and the EU-based Airbus are the world’s major passenger aircraft manufacturers, dominating the market for supply of aircrafts, and sharing almost exclusive control of the $200bn worldwide market for passenger and commercial planes. These two companies have been the dominant market participants and have entrenched themselves strongly as the market leaders. Smaller competitors are present, yet their operations are mostly limited to regional markets, such as Mitsubishi in Japan, Comac in China, and UAC in Russia. This domination has meant that most airlines are accustomed to using Boeing’s or Airbus’s planes and most pilots are trained to fly the planes of these two companies. Everything was in place for this duopoly to last for a long-time, but then disaster struck.
The Boeing 737 MAX debacle
On the 29th of October 2018, Lion Air Flight 610 crashed in the sea near Indonesia shortly after take-off, killing all 189 passengers and crew. This was followed by the crash of Ethiopian Airlines Flight 302 on the 10th of March 2019, again shortly after take-off and killing all 157 people on board. Both of these tragic flights were using Boeing’s new model, the Boeing 737 MAX. The investigation into the first crash had already discovered that a malfunction in the plane’s design was amongst the causes of the accident. The similarities between the two crashes alerted national aviation authorities around the world. Within a week of the Ethiopian Airlines crash, all 387 of Boeing’s 737 MAX planes were grounded throughout the world due to safety concerns.
The groundings were implemented with immediate effect, meaning that the 8,600 weekly flights operated by the grounded planes were instantly affected. This caused a severe disruption in the aviation sector, with hundreds of flights being cancelled and thousands of passengers facing delays over the first few weeks of the groundings. Delivery of any newly manufactured planes was also suspended as a result of the safety concerns and the need to reinstate regulatory approval for their use. To compensate its clients for the loss caused by the groundings, Boeing paid out $8.6bn to various airlines that had either already taken delivery of the new planes or saw the delivery of their newly constructed planes delayed.
With airlines no longer able to use the planes, Boeing decided to reduce the production of its aircraft and, a few months later, production was halted altogether in an effort to preserve its cash flow and prevent the need for more storage space. Boeing was burning through cash fast, as $6.3bn was spent to redesign the planes and remove the faulty system. The cost of storing the manufactured but undelivered planes alone reached a staggering $600 million.
More significantly, doubts over the safety of the 737 MAX planes saw many airlines cancel their orders. At the time of the groundings, there were more than 5,000 orders for the 737 MAX models. Since then almost 1,000 orders have already been called off, as Boeing has struggled to regain the trust of airlines, pilots, and passengers. With the price of each plane thought to be around $55 million, this represents a $55 billion loss of potential revenue.
Boeing’s reputation suffered, its business declined, and its financial rating deteriorated as a result of the crashes and the groundings. Its financial statements for 2019 reflected the bleak situation Boeing found itself in. Its revenue declined by 25% and wiped out 10 years’ worth of growth. The company made its first loss since it went public, and lost its position as the market leader to Airbus, whose revenue toppled that of Boeing.
Problems, problems and more problems
The production of passenger planes is not Boeing’s sole focus. It has a strong track record of success in the manufacture of military-grade airplanes, rotorcrafts, rockets, satellites, telecommunications equipment, and missiles. This line of business was very profitable for the company, with the US Army being Boeing’s best client. In 2019, Boeing secured a lucrative contract with the US Army through a joint venture with Embraer, a Brazilian competitor of Boeing. Yet, Boeing struggled to respond appropriately due to the drainage of its financial resources brought about by the need to remedy the 737 MAX problem. This caused the joint venture to fall through and Boeing lost this valuable contract.
The onset of the pandemic in the start of 2020 dealt a huge blow to the aviation sector and Boeing was no exception. Boeing had already decided to halt production of its 737 MAX planes, yet more manufacturing suspensions followed as demand for new planes plummeted. With cancellations soaring, the company froze recruitment and laid off 12,000 of its employees, with plans to let go of even more of its workforce in the near future. Boeing’s finances deteriorated to such an extent that it was forced to make use of a $13.8bn loan facility to fund its operations. The company’s difficulties were reflected in its share price, which plunged from around $330 per share in January to as low as $95 on March 20th. The company’s share price later stabilised in the range of $160-$170, but this was still just half of its pre-pandemic value and Boeing's future looked to be in jeopardy.
To make matters worse, the EU announced in November its intentions to impose tariffs worth $4bn on American goods due to Boeing’s receipt of subsidies from the US government. Under the EU's proposals, US aircrafts will face a 15% tariff, making it harder for Boeing to compete against Airbus in the EU market. These tariffs are a result of a long-lasting trade dispute between the US and the EU which has led to an extensive World Trade Organisation legal battle.
Despite all these problems, recent events have given Boeing hope that its fortunes may recover. Its 737 MAX planes were cleared by the US aviation authority to return to service in mid-November following their re-design and the provision of additional training for pilots. The first commercial flight in a 737 MAX plane since March 2019 is scheduled to take-off on the 29th December.
In the same month, Pfizer and BioNTech announced the success of their COVID-19 vaccine candidate in phase 3 trials, with two other potential vaccine candidates also being announced shorty after. This brought an immediate uptake in the aviation industry, as the prospects of a return to the pre-pandemic levels in air travel meant demand for planes picked up. The change in the US’s presidency may also facilitate the settlement of the US-EU trade war, meaning that tariffs may be avoided.
The road to recovery for Boeing is still long, but developments over the past month may have provided Boeing with a way out of its recent predicament.