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Boeing Loses Large 737 MAX Order to Airbus A320

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Flyadeal canceled MAX order

So far, Boeing’s (BA) woes have continued. The company lost a multi-billion order to Airbus. On Sunday, Boeing announced that Flyadeal, the wholly-owned subsidiary of Saudi Arabian Airlines, canceled a provisional order for 30 737 MAX aircraft. The deal, which included additional purchasing options for 20 MAX planes, was considered to be worth $5.9 billion.

Boeing’s statement came after Saudi Arabian Airlines announced a deal with Airbus on Sunday to purchase 30 A320 aircraft with an option for an additional 20 planes. In the statement, the airline revealed that it signed the deal with Airbus during the Paris Air Show in June. According to the agreement, Airbus will start delivering the planes in 2021.

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Saudi Arabian Airlines’ decision to cancel the Boeing order was likely due to concerns about the company’s ability to make deliveries in a timely fashion. On Sunday, a Boeing spokesperson said, “We understand that flyadeal will not finalize its commitment to the 737 MAX at this time given the airline’s schedule requirements,” according to Reuters.

Saudi Arabian Airlines’ decision comes after Boeing’s 737 MAX planes were involved in two deadly crashes—Lion Air in October 2018 and Ethiopian Airlines in March.

MAX crisis hurts deliveries

Boeing’s 737 MAX planes have been facing worldwide grounding since mid-March following Ethiopian Airlines’ crash on March 10. Air carriers have denied taking deliveries of 737 MAX planes until the safety concerns are addressed.

The MAX series planes account for ~80% of Boeing’s total commercial aircraft shipments. The planes generate ~30% of the company’s overall operating profit. Currently, Boeing has over 4,500 unfilled orders for its troubled MAX series jets.

Frozen deliveries have been hurting Boeing’s overall commercial aircraft shipments. In May, the company registered a 56% YoY (year-over-year) decline in its aircraft deliveries to 30 planes from 68 planes in May 2018.

Among the major customers, Southwest Airlines (LUV) placed an order for 280 737 MAX planes. United Airlines (UAL) and American Airlines (AAL) each agreed to buy 100 planes.

Despite fewer shipments, Boeing is building 737 MAX planes at a lower rate. On April 5, Boeing announced that it reduced the monthly production of 737 MAX planes to 42 units from 52 units.

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Financial impact

Delivery cancellations are hurting Boeing’s revenues, earnings, and cash flows. Boeing’s 737 MAX deliveries fell to 89 units in the first quarter from 132 units in the first quarter of 2018. Due to a significant decline in shipments, Boeing reported YoY decreases in its revenues, EPS, and operating income of 2%, 13%, and 21%, respectively.

Last month, George Ferguson of Bloomberg Intelligence, stated that Boeing could face a charge of $1.4 billion from airlines due to canceled flights and a loss of operating profit if the MAX planes remain grounded until the end of September.

For the second quarter, analysts expect Boeing’s revenues to fall 18.6% YoY (year-over-year) to $19.8 billion due to lower commercial aircraft deliveries. The operating profit is estimated to fall 67.9% YoY to $682 million, while the EPS will likely fall 47.3% YoY to $1.76.

The 737 MAX planes’ return to service will likely be delayed due to a new glitch. Previously, the troubled planes were expected to get flying approvals from regulators by October. However, the new issue has lowered the expectations for a quick return. Another delay in receiving regulatory approval will likely have a negative impact on Boeing’s commercial aircraft deliveries.

Over the last three months, various research firms have lowered their forecasts for 737 MAX shipments in 2019. In April, Cowen and Company reduced its delivery projections for the model to 500 jets from 630 jets anticipated earlier. Jefferies trimmed its MAX shipment forecast to ~497 units from the previous estimate of 580 units.

During the results for the fourth quarter of 2018, Boeing expected to ship 895–905 commercial aircraft in 2019, which represents ~12%–13% YoY growth. Looking at the ongoing troubles with the MAX planes, Boeing probably won’t achieve its fiscal 2019 targets.

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Stock performance

Boeing stock was riding high at the beginning of 2019 due to rising orders and commercial aircraft deliveries. Before the Ethiopia Air crash on March 10, the stock’s YTD (year-to-date) return was ~31%.

Since then, the stock has fallen significantly. At the closing price of $355.86 on July 5, the stock’s YTD gain remained at 10.3%. The stock also underperformed major US indexes’ gains including the Dow Jones, the S&P 500, and the NASDAQ, which have risen 15.4%, 19.3%, and 23.9%, respectively, YTD.

Until March 8, Boeing was the top performer among the Dow 30 stock components. However, the massive fall in Boeing’s share prices over the last three months dropped the stock to 20th place.

Boeing has also underperformed the iShares U.S. Aerospace & Defense ETF (ITA) and its top peers. ITA, which consists of companies engaged in manufacturing, assembling, and distributing aerospace and defense equipment, has risen 24.1% during the same period. Lockheed Martin (LMT), General Dynamics (GD), and Northrop Grumman (NOC) shares have gained 41.3%, 15.9%, and 32.8%, respectively, YTD.

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