Why Boeing 737 MAX May Not Fly Again This Year

It seems Boeing (BA) 737 MAX planes may not fly again this year, as the troubled jet just hit another snag. On October 11, an international safety panel slammed the company and the FAA (Federal Aviation Administration) for the faulty certification process for the Boeing 737 MAX aircraft. The JATR (Joint Authorities Technical Review) panel included several US agencies and global aviation regulators from nine countries.

The panel was investigating the US regulator’s certification process for MAX’s safety-control system. The FAA’s certification process is in question following two Boeing 737 MAX crashes within five months of one another. The preliminary investigation reports suggest software glitches in MAX’s MCAS (Maneuvering Characteristics Augmentation System) or flight-control system.

According to Reuters, the panel stated in its report, “The JATR team found that the MCAS was not evaluated as a complete and integrated function in the certification documents that were submitted to the FAA.” The report also blamed the FAA for lacking expertise in understanding the automated flight-control system embedded in Boeing 737 MAX planes.

The panel report states, “The lack of a unified top-down development and evaluation of the system function and its safety analyses, combined with the extensive and fragmented documentation, made it difficult to assess whether compliance was fully demonstrated.”

Additionally, the JATR also criticized Boeing for its faulty MAX design and hiding crucial safety information from pilots and regulators. The panel said Boeing submitted “an inadequate technical description” about MAX’s MCAS to the FAA, according to The Seattle Times. Boeing’s report lacked “full details of when the system activated and the extent of its power to push an airplane nose down.”

Boeing 737 MAX return might delay further

The company had anticipated getting regulatory approval this year. However, in our view, considering the current scenario, the Boeing 737 MAX’s 2019 return doesn’t seem feasible. The JATR’s latest report has raised serious questions regarding Boeing 737 MAX airworthiness as well as the FAA’s credibility.

Therefore, various aviation regulatory bodies have signaled that they’ll conduct independent safety reviews of the Boeing 737 MAX. A rift between regulators could further delay the return of Boeing 737 MAX planes to service.

According to Reuters, traditionally, world regulators have relied on each other’s judgment for certifying a plane. Reliance on each other’s opinions usually saves the time and efforts of regulators as well as airplane manufacturers. However, after the certification process found loopholes during two MAX crash investigations, the FAA has lost some of its credibility.

We believe that CEO Dennis Muilenburg’s fears of receiving regulatory approvals in phases might hold water right now. During last month’s investor conference, Muilenburg said that the timetable of the MAX’s return could be different in every country. That means Boeing might get safety approval from the FAA this year, but other countries may keep MAX grounded until early next year.

Despite getting certification from US regulators, US airlines wouldn’t be able to resume MAX services this year. The carriers would need approximately six weeks for necessary maintenance work and pilot training to make MAX fly again.

Therefore, citing uncertainty over its return, the majority of carriers have extended the Boeing 737 MAX grounding until early next year. Southwest Airlines (LUV), which owns 34 MAX planes, canceled the flights until January 5. American Airlines (AAL) and United Airlines (UAL) have decided to keep MAX grounded until January 16 and January 6, respectively. The two companies together own 38 Boeing 737 MAX aircraft.

Return is crucial for Boeing growth

Boeing’s growth prospect is intact, with 737 MAX returns to service. The model accounts for approximately 80% of its overall commercial jet deliveries and contributes 30% to total operating profit. However, since the flying ban in mid-March, shipments for its fast-selling aircraft have frozen completely.

In the third quarter, its total airplane shipments plunged 67% YoY (year-over-year), more than the 54% decline it registered during the second quarter. That means the company’s third-quarter results are likely to be worse than its second-quarter results. In the second quarter, the company recorded a 35% YoY decline in total revenue. Moreover, it booked a net loss for the first time in the previous 12 quarters.

Therefore, the return of MAX is of the utmost necessity for Boeing to resume deliveries and boost its cash flows, revenues, and earnings.

Since the Ethiopian Airlines crash, Boeing stock has lost 11.3%, or $26 billion, worth of its market cap. Before the crash, it was a top performer in the Dow Jones 30 component with a YTD (year-to-date) return of 31% as of March 8. However, its YTD gain has now eroded to 16.3%, and it’s slipped to the 16th position in the Dow Jones 30 component.

Boeing stock has also underperformed the iShares U.S. Aerospace & Defense ETF (ITA), which has risen 28.7%. The ETF invests in companies engaged in the manufacturing, assembling, and distributing of aerospace and defense equipment.