Boeing (BA) stock fell nearly 3% yesterday following a report that sparked fears of further delays to the 737 MAX’s return to the skies.

Boeing Stock Slid on Fears of Delayed 737 MAX Return

Boeing failed to satisfy regulators on MAX safety

Citing government and pilot union officials, the Wall Street Journal reported on Tuesday morning that multiple regulatory bodies are dissatisfied with Boeing’s briefing on the 737 MAX software update.

The report noted that in August, regulators from the US, Europe, Brazil, and several other countries cut short a briefing from Boeing. They contended that Boeing “failed to provide technical details and answer specific questions about modifications in the operation of MAX flight-control computers.”

According to the Wall Street Journal report, Boeing must resubmit briefing documents with more details about the proposed software fix. The report added that the aircraft manufacturer must obtain approval from the FAA before a follow-up meeting with other global regulators.

Notably, Boeing’s 737 MAX has faced a global flying ban since mid-March following two fatal crashes within five months. The preliminary investigation reports of both accidents pointed to a software glitch in the aircraft’s MCAS (Maneuvering Characteristics Augmentation System) flight control system.

Further delays to Boeing MAX return

Earlier in August, Boeing CEO Dennis Muilenburg had expected the 737 MAX to return to the skies in the fourth quarter. However, the latest report by the Wall Street Journal has diminished the expectations that the 737 MAX would fly again this year.

The new findings require Boeing to file new briefings regarding the software changes with additional explanations. After that, the aircraft manufacturer must reschedule meetings with the FAA and other global regulators. These regulators could take another few weeks for simulations and flight tests, making it doubtful that Boeing could receive regulatory safety approval in October.

Once Boeing receives its safety certification, airlines would need at least six weeks for the required pilot training on the software update. Airlines would also require time to prepare the 737 MAX aircraft to fly, as they’ve been grounded for nearly six months.

Given the schedule, we believe that airlines would not be able to resume MAX services during the busy holiday travel season. In our view, January 2020 looks like the most realistic timeframe for the aircraft’s return.

Among the major US air carriers, Southwest Airlines (LUV) has already canceled additions to its Boeing MAX fleet until next year. On August 27, Southwest announced that it would remove all 737 MAX flights from its schedule until January 5, 2020.

United Airlines (UAL) and American Airlines (AAL) followed in Southwest’s footsteps and extended their respective MAX cancellation periods. United canceled its MAX flights until December 19, and American removed these flights from its schedule until December 3.

The financial impact of the Boeing MAX crisis

The ongoing 737 MAX crisis is hurting Boeing as well as its MAX customers. After the mid-March flying ban in mid-March, the orders and deliveries for 737 MAX have dried up, which significantly dented Boeing’s financials.

Boeing’s total commercial aircraft deliveries fell 54% YoY to 90 units in the second quarter. As a result, its total revenues plunged 35% YoY. The company reported net loss during the quarter—the first time in the previous 12 quarters.

During its Q2 earnings release, Boeing disclosed that the slower monthly production rate for the 737 MAX has cost $1.7 billion since April. Notably, the company reduced its MAX monthly output by 19% to 42 units in April.

Airlines are facing massive flight cancellations due to the grounded Boeing 737 MAX aircraft.  Southwest Airlines, United Airlines, and American Airlines together own 72 Boeing MAX aircraft. Since mid-March, these three companies have faced over 30,000 flight cancellations. During their respective Q2 results, Southwest Airlines and American Airlines both revealed that the MAX grounding had negatively impacted their previous quarter’s pretax income by $175 million.

According to the August 6 OAG report, US-based airlines could lose $4 billion in profit if the Boeing MAX planes remain grounded until October. The report stated that the three major airlines have lost a combined seating capacity of about 6.3 million. Apart from the resulting monetary losses, capacity loss also hampers airlines’ expansion plans.

These three US airlines are engaged in discussions with Boeing for compensation to offset losses resulting from the 737 MAX flight cancellations. According to an August 20 Reuters report, the total estimated cost associated with the Boeing MAX fiasco exceeds $8 billion.

Stock performance

Following the Ethiopian Airlines crash on March 10, Boeing stock has lost 16% of its market value. Until March 8, Boeing had been the top performer among the Dow Jones 30 stock component with a year-to-date return of 31%. However, its YTD gain has eroded to 9.9% and has slipped to 18th place in the Dow 30 component.

The stock has also underperformed the iShares U.S. Aerospace & Defense ETF (ITA), which is up 26.9% YTD. This ETF has exposure in aerospace manufacturers, assemblers, and distributors, as well as defense equipment companies.

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