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Boeing MAX: What Made Jim Cramer Feel Better?

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Jim Cramer, CNBC’s Mad Money host, said on Tuesday that he now “feel better” about Boeing (BA) stock and the 737 MAX. His remarks came shortly after Boeing’s newly appointed chairman, Dave Calhoun, did an interview with CNBC. Notably, Calhoun took over as Boeing’s new chairman from CEO Dennis Muilenburg last month.

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What to expect from Boeing MAX

During the interview, Calhoun strongly defended Muilenburg and reaffirmed confidence in making the 737 MAX safer to fly. Calhoun’s honest and straightforward remarks impressed Cramer. He said, “A lot of my worries were put to rest.”

A few weeks ago, Cramer criticized Boeing after an internal message leak last month. The message pointed out that the company was aware of the problem with the MCAS (Maneuvering Characteristics Augmentation System). A software glitch in the MCAS system was the leading cause of two deadly accidents that killed 346 people.

However, after hearing Calhoun during the CNBC interview, Cramer regained his faith in Boeing stock. He said, “I am completely rooting for them and I believe they’re going to get past this.” He also said, “If you don’t feel better about Boeing after this interview, I guess you just have it in for Boeing.”

Following Calhoun’s candid interview and Cramer’s positive remarks, Boeing stock rose and closed trade 2% higher on Tuesday.

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Calhoun backs Muilenburg

During his interview with CNBC, Calhoun strongly supported Muilenburg. He said, “Dennis has done everything right,” according to Reuters. Calhoun also said, “He has our confidence,” despite intense criticism from investors and US lawmakers.

Calhoun’s statement came just days after Muilenburg faced resignation pressures from US lawmakers during the Capitol Hill hearings on October 30–31. During the two-day hearing, lawmakers criticized Muilenburg about faults in the troubled Boeing 737 MAX flight-control system. They accused him of compromising people’s safety to drive profit.

During the Capitol Hill hearing, lawmakers also raised questions about Muilenburg’s compensation. They asked Muilenburg if he’s taking a pay cut or working for free to reflect his accountability. Reportedly, he took home approximately $23.4 million in salary and bonuses in 2018.

Calhoun cleared up all of the speculations during his interview on Tuesday. He revealed that Muilenburg has offered to forego his compensation. Muilenburg won’t get any bonuses in 2019. He will also lose consideration for equity grants until 2021.

No production cut for Boeing 737 MAX

During the interview, Calhoun clearly said that the company doesn’t plan to reduce the 737 MAX production. Investors and analysts were concerned that Boeing might reduce or shut down MAX production if the grounding continues. Since the global flying ban in mid-March, the company reduced the MAX’s monthly output by 19% to 42 units.

Notably, the company expected the MAX to comeback in the fourth quarter. However, the expectation doesn’t seem realistic. Regulators haven’t re-certified MAX’s updated MCAS system yet. Most of the MAX customers expect the aircraft to return to service in January or February next year. Southwest Airlines (LUV), which has 34 MAX aircraft, has extended the cancelations until February 8.

American Airlines (AAL) and United Airlines (UAL) have canceled their MAX services until mid-January next year. Together, the two companies own 38 Boeing 737 MAX planes. The European Union Aviation Safety Agency expects Boeing 737 MAX aircraft to fly again in the first quarter of 2020.

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However, Calhoun cautioned that the entire MAX comeback might get delayed until the end of 2020 or early 2021. He denied any change in the plans for the Boeing MAX’s production rate. Last month, Boeing indicated that it would achieve an earlier monthly output rate of 52 units in the first half of 2020. The company expects to increase the production rate by another five units per month by the end of next year.

Boeing’s stock performance

The ongoing MAX crisis is weighing on Boeing stock and its financials. The stock has fallen 15% or lost approximately $36 billion in market capitalization since the Ethiopian Airlines crash on March 10. As of March 8, the stock was one of the top performers of the Dow Jones 30 components with a return of 31% YTD (year-to-date). However, the stock’s YTD gain has fallen to 11%. Boeing stock also fell to the 17th spot in the Dow Jones 30 components.

The cost associated with the ongoing MAX problem has reached $9.2 billion. Among the total, about $3.6 billion relates to increased production costs due to the reduced monthly output of Boeing MAX planes. Also, the company recorded a pre-tax charge of $5.6 billion as an estimated compensation cost to MAX customers.

In the US alone, Southwest, American, and United own 72 Boeing MAX aircraft combined. Due to the grounding of the MAX planes, the three US carriers will likely take a hit of nearly $1 billion combined on their fiscal 2019 pre-tax income. Approximately 370 Boeing MAX planes were in operation before global regulators put a flying ban on the aircraft.

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