Boeing Groundings Could Cost Billions

The Federal Aviation Administration has grounded the Boeing BA 737 MAX, which means the entire fleet of MAX 8 and 9 aircraft isn't flying. After assessing the potential costs to the firm, we are placing a $2 billion contingency in our model, but we are not changing our 2019 forecast. However, this results in only a 1% decrease in our fair value estimate, which is now $334 per share.

Assuming initial findings from the Ethiopian Airlines investigation into the March 10 crash point to aircraft issues, we think the groundings will last at least three months, due to the time required to review the accident and roll out a fix on the MCAS software. Boeing faces four costs linked to recent MAX accidents, including one in Indonesia in October: an already ongoing technical fix of the MCAS on all MAX aircraft; airline compensation; suspension of 737 MAX deliveries; and potential order cancellations.

The cost of the MCAS fix is a moving target, since Boeing must still test and certify it and then retrofit existing aircraft. Nonetheless, we think an MCAS update could cost $180 million to $375 million, depending on the cost to retrofit each of the 376 MAXs in service. We estimate that, on average, carriers are losing $75,000 per day in revenue on each grounded MAX. Assuming the groundings last 90 days and continue to affect the entire MAX fleet, airlines might claim $2.5 billion in compensation via cash payments, discounts on aircraft sales, or covering the cost of leased aircraft. The impact from the suspension of MAX deliveries is more of a timing issue. That said, we calculate that Boeing’s first-quarter operating profit could tAake a $133 million hit. We also think Boeing may now delay its planned 737 production rate increase from 52 to 57 aircraft per month. Turning to the backlog, we continue to believe that the vast majority of customers will maintain their orders and that the 4,659 MAX backlog (according to the Airfinance Fleet Tracker database) will convert to revenue.

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