March 19, 2019, © Leeham News: The impact of the grounding of the 737 MAX to Boeing will hurt, but the effect likely will be short term.
The most recent grounding of an airliner was the 2013 grounding of the 787. This cost Boeing an estimated $500m over the course of the three month grounding. A hardware fix had to be designed to contain battery fires. Installation in the field for 50 aircraft was required. Compensation to operators was necessary.
There are more than 370 MAXes grounded. Norwegian Airlines and Spice Jet already publicly said they will demand compensation. Deliveries are suspended.
This grounding should be much shorter than was the 787.
Boeing began work on a software upgrade to the MCAS stall recovery system shortly after the Lion Air crash pointed toward the system as a likely key contributor to the crash of a MAX 8 in October.
According to some reports, Boeing’s work was proceeding toward a January fix when the US government shut down, following Donald Trump reneging on a budget agreement. The government shut down, including the FAA.
After the Ethiopian Airlines MAX 8 crash this month, reports emerged that the shutdown delayed final development of the upgrade. The FAA denied these reports last week.
An investigation into the Ethiopian crash may clarify this dispute. Regardless, the upgrade may be ready by the end of this month, according to one media report. (Boeing hasn’t confirmed this.) It’s unclear if the FAA certification will be ready at the same time, or this will come in April. A week ago, the FAA said the upgrade will be mandated in April.
Reports indicate it will take an hour for airlines to download the upgrade.
Based on this, LNA sees grounding to be lifted upon the download, per airplane. When this begins remains to be seen, but LNA sees the groundings being up to six weeks at the outside.
The cost to Boeing is already being estimated by analysts.
Ken Herbert of Canaccord Genuity wrote in a note last week:
We see the financial risk for Boeing in three areas: 1) there is the direct expense of implementing the software upgrade that has been discussed; 2) there is the near term risk from delivery delays and progress payments on in-progress aircraft; and 3) there is the potential compensation for airlines and leasing companies for service disruptions. There is a risk around longer-term upside from the 737 MAX both from expected delivery rates above 57/month (potential backlog risk), and order activity (advances and backlog growth). But we do not expect better visibility, if any, on the longer-term impact for several months or even years.
Herbert goes on to write, “We believe the base cost for the software fix is ~$500M. Note that if the cause of the
two accidents is different, this cost could be substantially higher. We then see ~$1B in monthly FCF risk from the delays in deliveries. Specifically, we see about $260M as a result of not delivering the MAX aircraft, based on $8M in FCF per aircraft, and collection of $5M of this at the time of delivery (less advances already paid).
“The bigger potential impact here is if airlines stop paying advances on in-production.”
He sees a 6-8 week grounding.
Another analyst forecast a cost to Boeing of $550m over several years, including costs related to the grounding, lost revenue, compensation and lawsuits.
He also predicts a shift in revenue this year from the first and second quarters to later in the year due to delayed deliveries.