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Is Boeing Getting FAA Inspectors into Trouble?

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The US FAA (Federal Aviation Administration) is in fresh trouble due to ongoing problems with Boeing’s (BA) 737 MAX planes. The US Office of Special Counsel has made serious allegations about the FAA’s 737 MAX certification process, Bloomberg reported on September 24.

In a letter to President Donald Trump, the agency alleged that the FAA’s MAX safety inspectors weren’t qualified, according to Bloomberg. The federal investigative agency also says the FAA is misleading Congress, which is a big concern.

The agency has been conducting an independent investigation after a whistleblower alleged loopholes in 737 MAX certification processes. Senator Roger Wicker made the allegations public by issuing a press release in April, according to Bloomberg.

The agency stated that “16 of the 22 FAA pilots conducting safety reviews” had “lacked proper training and accreditation,” Bloomberg reported. The Special Counsel further disclosed that some of these pilots were also involved in the 737 MAX certifications. In the letter, it wrote that the two MAX crashes were “closely linked with crew training resources and familiarity with operational procedures.”

FAA loses credibility

The US aviation regulatory body is facing severe criticism following two 737 MAX plane crashes within five months of each other. The preliminary investigative reports of both crashes pointed out several loopholes related to the FAA’s certification process. The agency faced criticism for delegating essential technical evaluations of the troubled aircraft to Boeing.

Indonesian investigators are also planning to blame design and regulatory flaws for the Lion Air crash, according to a September 22 report by the Wall Street Journal. The investigative report is still in the draft phase. According to the report, investigators also identified “pilot errors and maintenance mistakes” as other reasons.

The problem with Boeing’s 737 MAX jets has put a question mark on the FAA’s reliability. Several global regulators, including European and Indian agencies, have already announced that they will conduct independent reviews. This change stands in contrast to previous events, when world regulators relied on each other’s judgment, according to Reuters. Alexandre de Juniac, the International Air Transport Association chief, thinks the rift among regulators could affect future aircraft certification.

Boeing 737 MAX crisis

The ongoing 737 MAX crisis is hurting Boeing’s financials. Following the Ethiopian Airlines crash on March 10, global air carriers have denied taking deliveries. The 737 MAX accounts for approximately 70% of Boeing’s overall aircraft shipments and contributes 30% to its total operating profit.

However, due to MAX’s frozen deliveries, Boeing’s overall commercial aircraft deliveries fell 43% YoY in the first eight months of the year. Declining aircraft shipments are severely affecting Boeing’s financials. In the second quarter, the aircraft manufacturer’s revenue plunged 35% YoY. It also posted a net loss in the second quarter for the first time in the last 12 quarters.

The grounding of MAX jets is also increasing the compensation burden on Boeing. According to a Reuters estimate, the overall cost associated with the MAX crisis has reached over $8 billion. The aircraft manufacturer took an after-tax charge of $4.9 billion as an estimated compensation cost for MAX customers.

In the US alone, Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL) own a combined 72 MAX planes. These airlines have suffered over 40,000 flight cancellations since the flying ban on MAX was implemented in mid-March. Southwest and American both revealed that the MAX grounding impacted their respective second-quarter pretax incomes by $175 million each. All three companies are in talks with Boeing about their losses.

Boeing stock has underperformed the iShares U.S. Aerospace & Defense ETF (ITA) this year. The stock has gained 19.6% year-to-date, while the ETF has returned 31.2%.

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