Boeing (BA) had a good day on December 6. The stock gained 2.43% to $354.09. However, right after the market close, Reuters reported that the FAA is seeking a $3.9 billion fine from the company for putting defective parts in Boeing 737 NG planes.
FAA seeks $3.9 billion fine related to Boeing 737 NG fiasco
Boeing stock opened lower today and fell 0.74% at 10:01 AM ET. The company is already losing billions every quarter due to the 737 MAX grounding. Boeing might face more pressure if the fine materializes. The company has a month to respond to the FAA’s allegations.
In a statement, the FAA said that Boeing knowingly certified 133 units of its 737 NG aircraft even though they were installed with faulty parts.
What’s the issue with the Boeing 737 NG?
There are multiple issues with the Boeing 737 NG. The first issues is related to fan blades. A passenger lost his life when the left engine of Southwest Airlines Flight 1380 failed due to a broken fan in April 2018. 737 NG planes are powered by CFM International’s twin CFM56-7B engines. Notably, CFM International is a 50-50 joint venture between General Electric (GE) and France’s Safran Aircraft Engines. The NTSB (National Transportation Safety Board) already ordered Boeing to redesign faulty parts in thousands of 737 NG planes.
The second major issue with Boeing 737 NG is related to hairline cracks found near planes’ wings. The cracks found in the 737 NGs are in the “pickle fork” structure, which binds wings to the aircraft fuselage. Australian carrier Qantas and European Ryanair have already grounded several 737 NG planes due to the issue. Today, Simple Flying said that Qantas might have underestimated the time required to fix the issue. The company might not have the grounded planes back by Christmas.
Which airlines could be impacted?
There are over 7,000 Boeing 737 NG planes flying globally. Southwest Airlines (LUV) accounts for almost a tenth of the planes. United Airlines (UAL) and American Airlines (AAL) have close to 300 planes, Delta Airlines (DAL) has just over 200 planes, and Alaska Air has 138 planes in service.
Interestingly, Southwest Airlines is the biggest operator of the troubled Boeing 737 MAX 8 in the world. The company has 34 737 MAX 8 planes in its fleet. The planes have been grounded since March after Ethiopian Airlines Flight 610 crashed, which killed 157 people. Southwest Airlines could face big issues in the middle of the holiday season if the 737 NG planes also need immediate grounding. American Airlines, which has 24 MAX 8 planes, could also be impacted.
Boeing and the FAA’s deteriorating relationship
The FAA’s relationship with Boeing has changed since the 737 MAX grounding. The relationship has deteriorated in recent weeks. Towards the end of November, the FAA changed its certification process. In the past, the FAA only certified the overall type of the plane. Boeing was responsible for checking every plane. Now, the FAA will check every plane before certification.
In October, a transcript was released of a 2016 chat between a senior technical pilot and his colleague about the 737 MAX 8. They discussed the issues with the 737 MAX 8. The pilot said, “I basically lied to the regulators (unknowingly).” Boeing, which discovered the transcript this February, didn’t report it to FAA immediately, which disappointed the FAA. 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.”
Boeing’s relationship with airlines
The 737 MAX 8 crisis and now the 737 NG issues have also impacted Boeing’s relationship with airlines and pilots. Southwest Airlines Pilot Association is suing Boeing over breach of trust and loss of income. Southwest Airlines has canceled tens of thousands of flights due to the 737 MAX 8 crisis. As a result, pilots have lost their income.
Another issue is the 737’s impact on Boeing’s other programs. The company said that it will make a decision on the 797, its new midmarket airplane, after it resolves the 737 MAX crisis. Several of Boeing’s customers are waiting for the 797. Some customers decided to go with Airbus A321XLR due to the delays. With the Boeing 737 NG presenting new concerns, airlines waiting to replace aging 747 and 757 aircraft might drift more towards Airbus.
Delta has about 200 757 and 767 aircraft that it needs to replace over the next decade. In September, Delta Air Lines’ CEO, Ed Bastian, told Bloomberg that the carrier hopes Boeing will build the 797. He said that Delta could be looking at “200 aircraft over the next decade” while talking about the demand for the 797. Boeing might lose that race to Airbus. United Airlines ordered 50 Airbus A321XLR last week.
More than anything else, Boeing’s reputation has deteriorated due to the 737 MAX 8 crisis. The 737 NG problems add to the risks. The president of Emirates, Tim Clark, discussed the upcoming 777X aircraft. He said, “I want one aircraft to go through hell on Earth, basically to make sure it all works.” Understandably, airlines around the world are more careful about dealing with Boeing.
737 MAX updates
The Boeing 737 NG is a predecessor of the 737 MAX, which is still grounded. The company was upbeat about getting approval before the end of the year. However, Boeing sounds cautious now, which isn’t a good sign for airlines. Airlines expect the plane to be back in service by March. Boeing has even warned of production cutbacks if regulatory approvals are delayed.
Another delay in Boeing’s 737 MAX comeback and issues related to its predecessor could drive some customers away to Airbus. In fact, some Boeing loyalists are already considering Airbus alternatives.