Boeing Stock Gains on Hopes of the 737 MAX’s Early Return

Boeing (BA) stock gained 4.6% on Monday due to hope about the 737 MAX’s early return to commercial service. The company expects its grounded 737 MAX aircraft to resume commercial service in January next year. Boeing also hopes to restart the deliveries of 737 MAX planes to airlines in December this year.

Notably, Boeing’s 737 MAX has faced a global flying ban since mid-March following two deadly crashes within five months. Software glitches in MAX’s flight-control or MCAS (Maneuvering Characteristics Augmentation System) were the main reason for the accidents.

Boeing is trying to fix the issues with the MCAS. The company needs certification from the FAA and other global regulators for its updated software fixes to resume the 737 MAX’s commercial service.

Boeing hopes for early MAX return

On Monday, Boeing said that it “continues to target FAA certification of the MAX flight control software updates during this quarter.” The company also said, “It is possible that the resumption of MAX deliveries to airline customers could begin in December.”

Boeing said that it’s “working towards final validation of the updated training requirements.” Boeing states that validation “must occur before the MAX returns to commercial service, and which we now expect to begin in January.”

Although the news was an additional one-month delay from Boeing’s earlier expectations, it was much early than airlines’ forecasts. On November 8, Southwest Airlines (LUV) and American Airlines (AAL) extended their Boeing MAX flight cancelations until early March.

The airlines’ announcement came just a few days after global regulators pointed out numerous flaws in Boeing’s documentation describing the proposed MAX software fix. According to Reuters, “Boeing’s paperwork had gaps, was substandard and meant regulators could not complete the audit.”

The aircraft manufacturer later confirmed the news and disclosed that regulators asked it to revise the documentation. Although Boeing was told to resubmit the revised documents within few days, industry experts think that it could take weeks. Therefore, yesterday’s announcement by Boeing has raised hopes about the 737 MAX’s early return to service.

A Bloomberg report published on November 8 also supports the feasibility of the MAX’s return early next year. According to the report, the FAA’s multi-agency TAB (Technical Advisory Board) suggested that Boeing’s planned changes to MAX are safe. The TAB was formed in May to review Boeing’s software fixes for MAX’s MCAS.

MAX grounding hurts deliveries

The prolonged grounding of the 737 MAX series planes had a negative impact on Boeing’s commercial aircraft deliveries. Notably, the 737 MAX is the company’s fast-selling airplane. The 737 MAX accounts for nearly 70% of Boeing’s overall aircraft shipments. However, following the flying ban, global air carriers denied taking deliveries of the troubled jet.

The frozen deliveries of the 737 MAX series aircraft have entered the eighth month. As a result, the company has registered a massive YoY (year-over-year) decline in its aircraft deliveries this year. From January to September, Boeing’s overall shipment fell 47% YoY to 302 planes from 568 jets.

Boeing will likely fall short of its fiscal 2019 targets of delivering 895–905 aircraft. Jefferies analyst Sheila Kahyaoglu thinks that the aircraft manufacturer will miss its 2019 targets by over 50%. She projects that the company will deliver 438 planes this year.

Due to ongoing problems with the MAX aircraft, Boeing is lagging way behind Airbus in the delivery race. According to the latest aircraft delivery updates, Airbus shipped 648 planes between January and October. Boeing hasn’t reported its aircraft orders and delivery details for October.

Rising Boeing MAX crisis costs

Boeing is witnessing higher costs due to the prolonged grounding of its 737 MAX aircraft. During the third-quarter results, the company revealed that the costs associated with the MAX crisis reached $9.2 billion.

The costs include an anticipated compensation provision of $5.6 billion for MAX customers. Notably, before the global flying ban, about 390 Boeing MAX planes were in operation. Among the total, three major US carriers—Southwest, American, and United (UAL) Airlines—own 72 Boeing MAX planes.

Together, these three carriers have faced over 50,000 flight cancelations and more than 6 million in seating capacity losses. Southwest and American have lost a combined $700 million in revenues in the previous two quarters. They expect to lose approximately $1 billion in total this year.

Meanwhile, United Airlines hasn’t disclosed the financial impact of the MAX grounding. However, the company warned about rising operating costs due to using more jumbo and lesser fuel-efficient jets across its MAX routes. Therefore, all of these companies are negotiating with Boeing to compensate them for their losses due to the MAX grounding.

Also, Boeing is facing rising production costs due to MAX’s lower monthly output. Following the global grounding, the company reduced its monthly MAX production by 19% to 42 units in April. In the last two quarters, the company recorded $3.6 billion in additional production costs for the 737 MAX.

Boeing stock performance

Boeing stock was hit hard due to rising uncertainty about 737 MAX prospects following the Ethiopian Airlines crash on March 10. Before the mishap, the stock was the top performer of the Dow Jones 30 Component with a YTD (year-to-date) return of 31%. However, the stock’s YTD gain has eroded to 13.8% and slipped to 16th place in the Dow Jones 30 Components.

Analysts became cautious about Boeing stock following the global flying ban on MAX. Before the mishap, nearly 79% of the analysts had a “buy” equivalent rating on the stock. However, the proportion has fallen drastically to 46% as of today.

None of the analysts had a bearish view before the Ethiopian Airlines crash. Now, two prominent analysts have a “sell” equivalent rating on Boeing stock. The average target price on the stock has also fallen by approximately 15% to $379.