19 Mar

China Might Exclude Boeing’s 737 MAX from the Trade Deal

WRITTEN BY Anirudha Bhagat

China might not buy Boeing’s jets

In another setback for Boeing (BA), China might not buy the company’s 737 MAX jets as part of its trade negotiations with the US, according to Bloomberg. Boeing’s fast-selling 737 MAX aircraft were featured on a draft list of US goods that China might purchase to reduce its over $300 billion of trade surplus with the US.

China Might Exclude Boeing’s 737 MAX from the Trade Deal

Excluding Boeing’s jets might also jeopardize or delay the trade negotiations between the two nations. Boeing’s jets were critical components in the trade negotiations. If China doesn’t purchase Boeing’s jets, the country will have a hard time reducing its trade surplus.

According to previous estimates, Boeing could get 100 jet orders worth $10 billion at list price as part of the trade negotiations between the US and China.

Chinese officials’ move is due to safety concerns related to Boeing’s 737 MAX series aircraft. A variant of the series was operated by Ethiopian Airlines. The plane crashed on March 10 and killed all of the 157 people onboard. The Ethiopian flight was the second fatal Boeing plane crash in five months. A similar model plane operated by Lion Air crashed on October 29 and killed all of the 189 people onboard.

There might be a fault in the anti-stall systems in Boeing’s 737 MAX series aircraft. Investigators have found similarities between the accidents. Both of the crashes occurred soon after takeoff.

Troubles ahead

China’s exclusion of 737 MAX purchases would be a big blow to Boeing. The company’s reputation is already at risk. Following the Ethiopia crash, several countries and air carriers have halted their orders. Some countries and air carriers have already switched to Airbus for narrow-body aircraft. Airline operators (IYT) aren’t taking deliveries of the 737 MAX series until the safety concerns are cleared.

The 737 series planes account for ~80% of the total aircraft orders and contribute to one-third to Boeing’s total operating profit. Cancellations or delays in the deliveries could hurt Boeing’s revenues and cash flows.

Boeing stock has lost 11.9% of its value since last week. Until March 8, Boeing was the best performer among the Dow 30 stocks with a return of 31% YTD (year-to-date). However, with the recent sell-off, the stock’s YTD gain fell to 15.4%. Currently, Cisco (CSCO) is the top Dow performer with a return of 23.5% YTD. IBM (IBM) and Goldman Sachs (GS) are second and third with gains of 23.4% and 21.2%, respectively.

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