The return of Boeing’s (BA) 737 MAX aircraft might face more delays due to friction between US and European regulators. The two regulators disagree about Boeing’s proposed fixes to MAX’s flight-control systems, according to a Wall Street Journal report on Tuesday.
Regulators disagree about Boeing
Citing anonymous sources, the Wall Street Journal revealed that regulators disagree about “how the MAX’s dual flight-control computers are now intended to operate simultaneously, haven’t been reported before.” The EUSA (European Union Safety Agency) isn’t satisfied with the top FAA (Federal Aviation Administration) officials. According to the Wall Street Journal, the EUSA said that Boeing and the FAA hadn’t “adequately demonstrated the safety of reconfigured MAX flight-control system.”
Notably, the 737 MAX aircraft has been grounded worldwide since mid-March following two deadly accidents within five months. The preliminary investigation reports suggested a fault in MAX’s Maneuvering Characteristics Augmentation System or flight-control system.
Boeing is working to fix the issue with specific software updates. According to a report from The Seattle Times on August 1, the company is changing the flight-control system’s software architecture. With the change, MAX will be able to take input from both of its flight-control computers instead of one. The idea behind using both computers simultaneously is to reduce the risk of a crash in a chip malfunction scenario.
An anonymous source told the Wall Street Journal that the FAA hadn’t shared the test results of dual-computers with the EUSA. The source said that the EUSA will conduct its own tests to examine additional risk scenarios.
Boeing’s MAX return might face delays
Boeing’s CEO, Dennis Muilenburg, expected MAX planes to get regulatory approval in early October. He thought that airlines would be able to resume services by the end of the year. However, the rift between the two regulators could cast a shadow on Boeing’s plan.
Traditionally, global regulatory bodies have relied on each others’ judgments about certifying a plane, according to Reuters. However, the FAA has lost its credibility after several loopholes were found during crash investigations. The American regulatory body even delegated crucial technical MAX evaluations to Boeing. Last month, the Office of Special Counsel revealed that the FAA’s MAX safety inspectors weren’t qualified.
More scrutiny by the EUSA would require Boeing to file new briefings about the safety changes with more explanations. Boring would have to reschedule meetings with the EUSA. The regulator would take another few weeks for final certification. Boeing probably won’t gain safety approval from global regulators in October.
Therefore, there’s only a slight chance of Boeing MAX aircraft returning to the sky this year. After regulatory approval, airlines would need at least six weeks to pursue necessary maintenance work on the grounded MAX planes to make them ready to fly.
Southwest Airlines (LUV), which owns 34 MAX jets, has already removed the fleets from its flying schedule until January 5. United Airlines (UAL) has canceled all of its 14 MAX fleets until December 19. American Airlines (AAL) has also removed its 24 MAX planes from its flying schedule until December 3. Together, the three airlines have faced more than 45,000 flight cancellations due to the MAX grounding since mid-March.
Boeing 737 MAX crisis hurts deliveries
The ongoing troubles with the 737 MAX are hurting Boeing’s overall commercial aircraft deliveries. Notably, MAX accounts for nearly 70% of Boeing’s total airplane shipments. MAX deliveries froze after the Ethiopian Airlines crash on March 10. The ban impacts overall deliveries. The company’s aircraft shipments from January to September fell 53% YoY to 302 units from 568 units during the same period in 2018.
Boeing will likely miss its 2019 aircraft delivery target. During the results for the fourth quarter of 2018, Boeing set a goal to deliver 895–905 aircraft this year. However, the company won’t meet its expectations due to the ban on its fast-selling MAX planes.
On October 1, Jefferies analyst Sheila Kahyaoglu lowered her forecast for Boeing’s overall commercial airplane shipments. She expects Boeing to ship 438 jets this year instead of her previous forecast for 508 planes.
The ban on MAX aircraft has a negative impact on Boeing’s financials. In the second quarter, the company shipped 54% fewer aircraft, which caused a 35% YoY decline in its revenues. Boeing also reported a net loss for the first time in the last 12 quarters. For the third quarter, analysts expect the company’s revenues and EPS to fall 19.7% and 37.4%, respectively, YoY.
The ongoing MAX crisis is also making Boeing’s compensation burden worse. Notably, MAX customers want compensation for their revenue losses and foregone profits due to the grounding. According to an OAG report on August 6, the global airline industry could take a $4 billion hit in its 2019 profit due to the MAX grounding. Together, Southwest, American Airlines, and United Airlines would lose $600 million if the MAX planes remained grounded until October.
Boeing stock has lost 11.5% or $27 billion in market capitalization since the Ethiopian Airlines crash on March 10. As of March 8, the stock was the Dow Jones 30 component’s top performer with a gain of 31% YTD (year-to-date). However, Boeing’s YTD return has fallen to 16%. The stock has fallen to 15th place in Dow Jones 30 component. Boeing stock has underperformed the iShares US Aerospace & Defense ETF (ITA), which has risen 26.2% YTD.