Skip to Content

Boeing Groundings Could Cost Billions

We are not changing our 2019 forecast, but there will be a 1% decrease in our fair value estimate.

Securities In This Article
Boeing Co

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.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

More in Stocks

About the Author

Chris Higgins

Senior Equity Analyst
More from Author

Chris Higgins, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers aerospace and defense companies, airports, and airlines.

Before joining Morningstar in 2015, Higgins spent eight years working for Airbus Group in both the United States and Europe. While at Airbus Group, he held a variety of positions, ranging from corporate development to investor relations.

Higgins began career in strategy consulting, where he consulted leading U.S. and European aerospace and defense prime contractors. During his time in consulting, he led teams that solved business challenges ranging from merger and acquisition decisions to new product launches.

Higgins holds a bachelor’s degree in economics from Rhodes College, where he graduated as a member of Phi Beta Kappa, and a master’s degree in finance from The Henley Business School in the United Kingdom. He also holds the Chartered Financial Analyst® designation.

Sponsor Center