What To Make Of Boeing
Two weeks ago, a Boeing 737-8 Max airplane crashed in Ethiopia. The crash killed 156 people and after an investigation it was decided that the entire fleet of the 737-8 Max and 737-9 Max would be grounded. The overwhelming concern was that this Ethiopian crash occurred due to the same reasons the Lion Air flight crashed roughly 6 months ago.
Boeing, like all other companies wants to make money. Yet their number one concern is the safety and overall well-being of their passengers. It is suspected that there was software malfunction during both flights, that derived from the plane’s system that forces the nose of the plane down. This is an automatic system on the 737-8 & 9 Max flights and even a switch to manual from the cockpit does not shut it off. The pilots were supposed to shut the system off separately, but they were likely distracted by having to keep the plane in the air.
So why don’t they just get rid of the faulty software? The issue with shutting off or getting rid of that system entirely is that it’s generally a helpful system when functioning properly. Unfortunately in this case, the system did not function correctly and it became a major cause for concern for future flights.
While my heart goes out to all those impacted by this tragedy, there is also concern for shareholders. What does all this mean and how will it impact the business as a whole? Well the crash dropped the stock 10% to prices unseen since 3 months ago. Many investors likely thought this was a one time blemish and a good time to hop in and buy some more Boeing stock, but the impact might be much larger.
Boeing reports earnings next on April 24th and the thought boggling the minds of investors is how the crash will impact the balance sheet. Unfortunately, the impact may be long awaited and not seen for multiple quarters. No doubt Boeing will be sued from many parties for the incident, but those amounts are trivial compared to the cash Boeing has. While I’m sure Boeing is insured for incidences such as these, the larger concern is the grounding of the fleet. Boeing will have to pay airports to hold the planes that are already in service, and they have suspended the deliveries of all the new MAX 8 & 9 planes.
They will likely be paying airports to hold the planes as a sort of rent based compensation, which won’t be good for Boeing since it is wasted cash considering that those planes could be in service. The part that should really concern shareholders is that Boeing has 4,636 outstanding orders to fill for the 737 Max airplanes and each plane costs more than $120 million. Now these are rough estimations and many of these orders may have been priced differently but that’s about $550 billion in accounts receivable and future revenue that could be at risk. Those numbers don’t even take into account the capital that will be have to be assigned to the much needed software fix.
While it was only one crash, this may end up being much more capital intensive than most expect. So for all investors out there I recommend you proceed with caution and wait to take action. No doubt this will be addressed in the next earnings report and shareholders will have a better sense of where to go from there.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.