Boeing: Rising Costs, 737 MAX Grounding Continues

Costs are piling up for Boeing (BA) as the 737 MAX aircraft grounding continues for the eighth consecutive month. Notably, MAX has faced a flying ban since mid-March following two fatal crashes within five months.

The ongoing MAX crisis is hurting Boeing’s financial results. The aircraft accounts for nearly 70% of Boeing’s overall commercial aircraft shipments and contributes 30% to its operating profit. However, due to frozen deliveries of MAX jets, the company’s total aircraft shipment fell 67% YoY to 62 units in the third quarter. As a result, Boeing’s third-quarter revenues and earnings fell 21% and 59%, respectively.

Also, the company is facing a higher compensation burden to MAX customers and increased production costs due to lowered output.

Boeing MAX grounding costs rise

During the third-quarter results, Boeing revealed that costs associated with the ongoing MAX grounding reached $9.2 billion. Notably, $5.6 billion reflects the estimated compensation costs to MAX customers. Before the flying ban in mid-March, about 370 Boeing 737 MAX planes were in operation.

In the US, Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL) own 72 MAX planes combined. The three airlines have faced over 50,000 flight cancelations and millions of seating capacity losses due to the MAX grounding. All three airlines are negotiating with Boeing for compensations related to their foregone revenues and operating profit.

OAG estimated that these airlines would face approximately 6.3 million seating capacity losses if the MAX remained grounded until October. The report also stated that the airlines would bear a negative impact of $600 million combined on their respective operating profit.

In the latest quarterly results, Southwest Airlines revealed that its third-quarter pre-tax income suffered a negative impact of $210 million. Similarly, American Airlines reported a $140 million reduction in third-quarter pre-tax income due to the MAX grounding. Southwest and American faced a negative impact of $175 million each from the MAX grounding in the second quarter. The two companies expect a negative impact of $435 million and $540 million on their respective fiscal 2019 operating profit.

Also, Boeing is witnessing rising production costs for 737 MAX aircraft due to lower output. Following the global flying ban, the company didn’t halt MAX’s production. However, Boeing reduced the monthly production by 19% to 42 units. The company recorded $900 million in additional production costs during the third quarter. With the latest charge, the company’s incremental production costs for the 737 MAX reached $3.6 billion.

Stock performance

Boeing stock has fallen 18.3% since the Ethiopian Airlines crash on March 10. Before the crash, the stock was one of the top performers of the Dow Jones 30 component with a YTD (year-to-date) return of 31%. However, the stock’s YTD gain has fallen to 7%. Boeing has slipped to 22nd place in the Dow Jones 30 component.

Analysts are cautious about Boeing stock following the MAX grounding. Before the MAX crisis, approximately 79% of the analysts were bullish on the stock. The proportion has fallen drastically to 46% as of today.

None of the analysts had a bearish stance before the Ethiopian Airlines crash. Now, two prominent analysts have provided a “sell” equivalent rating. The average target price also fell by approximately 15% to $379.