The worldwide flying ban on Boeing’s (BA) 737 MAX planes has entered its sixth month. The fiasco has hurt every airline that either owns or has placed orders for the model. However, a few players in the aviation industry are benefiting from the ongoing troubles with the MAX aircraft.
Older Boeing planes in huge demand
Airline leasing companies have been seeing a massive surge in demand for older Boeing jets as the flying uncertainty over its MAX planes continues. According to CNBC, Phil Seymour, CEO of London-based aerospace consulting company International Bureau of Aviation, said last week about Boeing’s 787-800 jets, “Used 800s are like a gold dust at the moment.” According to Seymour, lease rates for older 737s have increased 40% over the last five months to nearly $300,000 per month. His estimates reflect lease rates for 24 months or less.
The rising demand for Boeing’s older planes is benefiting airline leasing companies such as Ireland-based AerCap Holdings (AER). During its second-quarter earnings conference call, the company revealed that almost all of its planes were leased out to airlines. Another Ireland-based aircraft leasing company, Fly Leasing (FLY), expressed similar comments in an email reply to CNBC.
Fly Leasing CEO Colm Barrington revealed that the company had leased out all of its 737-800 planes and didn’t have any more jets to offer. In the email, he wrote, “Based on airline inquires, we are seeing strong demand for B737-800s in particular, which is likely to be reflected in higher re-lease rates for the type this year,” CNBC reported.
Aircraft leasing company Aircastle Limited (AYR) said to CNBC that its clients were extending lease agreements on older Boeing 737 jets. CEO Michael Inglese said that airlines initially thought the MAX problems would be resolved soon. However, the model’s return to service remains uncertain, and air carriers around the world are now trying hard to address the challenge.
Boeing MAX crisis hurting airlines
Boeing’s 737 MAX planes have been facing a flying ban globally since mid-March following two deadly accidents within five months. Initial investigations suggest a software glitch in the flight-control systems of both crashed planes. Boeing is working with aviation regulators to fix the issue and hopes to complete the work by September. The company also expects to get regulatory approval in October, after which airlines will be able to resume MAX services.
However, industry experts believe that air carriers around the world could face MAX groundings through January 2020. Three big US air carriers, Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL), have already removed MAX fleets from their flight schedules through early January next year.
The three airlines own a combined 72 MAX aircraft. The grounding of these aircraft has caused thousands of flight cancellations since mid-March. Southwest has recorded over 20,000 flight cancellations throughout this period. American and United reported over 7,800 and 3,440 flight cancellations, respectively, in the second quarter. As a result of massive flight cancellations, these air carriers have lost billions of dollars in foregone revenue and operating profit. According to the latest OAG estimates, the crisis to will cost US airlines nearly $4 billion if MAX jets remain grounded until October. Boeing recorded a $4.9 billion after-tax charge during the second quarter to compensate airlines for their losses.
As uncertainty over MAX’s return to service looms, airlines across the globe are preparing themselves to counter the situation. Furthermore, they need to gear up to take advantage of rising air travel demand. According to CNBC, the International Air Transport Association predicts that air travel demand increased 5% in the first half of 2019.
Boeing stock has been facing tremendous pressure since the Ethiopian Airlines crash on March 10. The stock’s YTD (year-to-date) gain has eroded to 4.7% as of August 9 from nearly 31% as of March 8. It has also underperformed the Dow Jones and the S&P 500, which are up 12.7% and 16.4%, respectively, YTD.
Boeing stock’s YTD gain is also much lower than the return of the iShares U.S. Aerospace & Defense ETF, which is up 25.2% YTD. The ETF has exposure to companies that assemble, manufacture, and distribute aerospace and defense equipment.