Boeing Disappoints FAA, Stock Gets Downgraded

Boeing 737 MAX 8’s concerns don’t seem to stop. On October 18, a transcript of a 2016 conversation between a chief technical pilot for 737 MAX 8 planes and his colleague became public.

Boeing’s issues continue

During the conversation, the duo discussed the 737 MAX 8’s problems. The pilot said, “I basically lied to the regulators (unknowingly).”

However, Boeing (BA) discovered the transcript back in February—a month before the Ethiopian Airlines Flight 302 crash that killed 157 people. The company didn’t tell regulators until October 17. In a statement, the FAA said, “The FAA is also disappointed that Boeing did not bring this document to our attention immediately upon its discovery.”

The stock fell 6.8% on October 18, which caused the Dow Jones to fall 0.95%.

Fighting the fire

On Sunday, the company issued a statement to clarify its stance on the 2016 conversation. The company said that the conversation happened when the Boeing 737 MAX 8 was still in testing. The pilot expressed concerns about a malfunctioning simulator program. The MCAS software, which was at the heart of the Lion Air and Ethiopian Air crashes, was also working fine at low-speed on the day of the conversation, according to Boeing’s release. At the end of the note, the company admitted that the scrutiny was understandable following the news.

Crisis could impact the company’s reputation

The 737 MAX crisis might be the biggest issue in Boeing’s 100+ year history. The company took a $4.9 billion charge in the second quarter related to the grounding of Boeing 737 MAX 8 planes. With the planes still grounded, the company is losing $1 billion a month in penalties to airlines. The families of the deceased are negotiating compensation or preparing for a lawsuit against the company.

However, the company’s reputation has been damaged the most. Pilots can’t trust the company. Airlines are getting restless waiting for Boeing 737 MAX’s return. Earlier this month, Southwest Airlines’ (LUV) Pilot Union sued Boeing for the loss of income and breach of trust. Southwest Airlines has the biggest fleet of 737 MAX 8s in the US. Southwest Airlines has canceled over 30,000 flights due to the grounding. The latest crisis will only make the situation worse for Boeing.

Will Boeing 737 MAX’s comeback get tougher?

With the FAA’s disappointed, the Boeing 737 MAX 8’s comeback might get tougher. The aircraft has been grounded since March. Airline operators in the US don’t expect the plane to be back in the skies in 2019.

Southwest Airlines has pushed back the Boeing 737 MAX 8’s comeback to February 8. United Airlines (UAL), which owns 14 of the planes, doesn’t expect them to be back in service until January 5. By then, United Airlines would have recorded over 10,000 cancelations. American Airlines (AAL) has also extended the grounding until January 16. Notably, American Airlines has 24 Boeing 737 MAX 8s in its fleet. The airline cancels 115 flights a day due to the grounding.

Impact on customers 

Recertification delays for the 737 MAX 8 impact Boeing’s customers more than just cancelations.

The company concentrated most of its resources to get the 737 MAX 8 back in skies, which hampered its other programs. Boeing won’t start working on its New Midmarket Airplane (dubbed 797) unless the 737 MAX 8 is back. More delays in the 737 MAX 8’s return mean delays in the 797 launch.

Customers like India’s SpiceJet and Delta Air Lines (DAL) are waiting for Boeing’s decision on the 797. If there are more delays, customers might have to go with the Airbus A321XLR. Delta Air Lines, which doesn’t have any Boeing 737 MAX 8s in its fleet, benefited from the grounding.

Boeing’s third-quarter earnings

Boeing is scheduled to release its third-quarter earnings on October 23. Analysts aren’t too excited about the results. The company’s deliveries fell sharply between July and September. Analysts expect the company’s revenues to be $19.4 billion for the quarter, which is 23% below $25.1 billion in the third quarter of 2019. The EPS will likely be $2.05—down substantially from $3.58 in the third quarter of 2018. The final numbers could be worse if the company takes a bigger charge related to the 737 MAX 8 grounding.

Analysts downgrade the stock

Meanwhile, Boeing got a massive downgrade from UBS today. UBS cut the rating to “neutral” from “buy” and dropped the target price by almost $100. At 6:37 AM ET, the stock fell 2% in pre-market trading.