Boeing鈥檚 reputation has taken a big hit from the grounding of its 737 Max planes, but analysts think the company can absorb the financial damage.
The planemaker鈥檚 shares have fallen 12 percent since a fatal Ethiopian Airlines crash on March 8. That鈥檚 often enough of a decline to trigger a bargain-hunting instinct, but not this time.
鈥淭his is a unique situation, and this event is something that really is going to be scrutinized,鈥 says Jeff Windau, an Edward Jones analyst who lowered his rating on Boeing last week from 鈥渂uy鈥 to 鈥渉old.鈥
鈥淲hen will the planes get back in the air, and will there be any changes in the order book?鈥 Windau added. 鈥淭hese are all questions that need to be answered.鈥
Crash investigators appear to be focusing on similarities between the Ethiopian crash and one in Indonesia last October. Ken Herbert, an analyst at Canaccord Genuity Capital Markets, says that in a best-case scenario Boeing could get the planes back in the air in six to eight weeks.
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That would require the Federal Aviation Administration to approve a software fix Boeing began working on after the Indonesia crash, but the FAA probably won鈥檛 act until it sees more data on the Ethiopian crash.
Herbert estimates that the software fix, plus additional pilot training, will cost $500 million, and that Boeing will have to pay airlines about $1 billion for each month they can鈥檛 fly their planes.
The company will also lose about $1 billion in monthly cash flow from delaying 737 Max deliveries, but that would be recovered once deliveries resume. Herbert鈥檚 estimates assume that payments to crash victims will be covered by insurance.
The costs look manageable for Boeing, which listed $8.5 billion of cash and short-term investments in December. 鈥淭hey unquestionably have the balance sheet strength and they have the cash generation ability,鈥 Windau said. 鈥淲e believe they will be able to weather this.鈥
Analysts also aren鈥檛 too worried about erosion of Boeing鈥檚 4,636 orders for the 737 Max. Airbus has an even bigger backlog for its competing A320. 鈥淚f you want an Airbus solution, you are moving to the back of a five- to seven-year queue,鈥 Herbert said.
If they stick with older jets, airlines would forgo the fuel savings the 737 Max delivers. 鈥淭here鈥檚 too much burden associated with switching orders,鈥 says Richard Aboulafia, an aerospace analyst at Teal Group. 鈥淲hile you鈥檙e waiting, your competitors will be beating you on price and profitability.鈥
The biggest risk, the analysts say, comes if authorities find deeper problems with the 737 Max. 鈥淭he worst-case scenario is if it鈥檚 more than a software fix, if there needs to be a redesign or significant changes to the aircraft,鈥 Herbert said.
So far, he doesn鈥檛 see any reason to think that worst-case scenario will come to pass. The more likely risk is delay: Boeing鈥檚 costs will mount if crash investigators are slow to release their findings or if the FAA and other nations are slow to certify the software fix and let the planes fly again.
When the Boeing 787 was grounded in 2013 because of battery fires, regulators and the company took about three months to agree on a fix. That episode, however, didn鈥檛 involve fatalities.
Even if Boeing鈥檚 other businesses continue to do well, the 737 Max crashes will dominate other company news for several weeks. 鈥淚t鈥檚 going to be hard for people to get really bullish while you have this hanging out there,鈥 Herbert says.
