Crash Landing
On Monday, Dec. 16, Boeing announced that they would suspend the production of the 737 MAX Jet beginning in January. Many questions regarding the safety of the plane have arisen since two devastating crashes took the lives of 346 passengers. Although the 737 MAX was once viewed as the gold standard in commercial aviation, these two events prompted experts to question the overall safety of the plane–ultimately ordering their immediate grounding. Boeing has been the industry leader in the transportation industry for decades, but its failure to produce an updated 737 MAX could compromise both their reputation as well as their profitability.
Founded in 1916 in Seattle, Boeing began as strictly an aircraft manufacturer. But they soon began to expand their reach into a number of industries through acquisitions. In 1960 they bought Vertol Corporation, which was the largest helicopter producer at the time. Boeing saw this purchase as their ticket to diversify their interests, entering industries such as marine craft, energy production and transit systems. In 1995 Boeing led a conglomerate of European companies to form Sea Launch, an avenue to enter the satellite and space travel fields. The continued interest in satellites provided the framework for Boeing’s 2000 acquisition of Hughes Electronics satellite division, which is known today as DirectTV. In 2017, Boeing was the fifth-largest defense contractor. Boeing soon established itself as a main player in a variety of industries.
Despite having a presence in numerous industries, Boeing’s main focus will continue to be in commercial aviation. They have worked tirelessly to win over accounts from airlines worldwide, and have worked equally as hard to retain those relationships. But in 2011, American Airlines presented Boeing with an ultimatum: improve the 737 MAX or lose their account. Opting for a short-cited approach, Boeing scrapped plans for a new passenger plane that would have been ready by 2017. Boeing figured that in order to stay at the top, complying with the customer’s request was essential.
The main cause of this pressure was the resurgence of European rival Airbus. In the last few years Airbus has seen an increase in orders and deliveries of its A320 plane. The grounding and production halt of the 737 MAX have allowed Airbus’s A320 to overtake the 737 MAX as the world's most popular plane – receiving 120 orders for A320 variants following the grounding. Boeing is no longer the market leader, as both the popularity of the A320 and the uncertainty regarding the safety of the 737 MAX have allowed Airbus to narrow that lead.
The constant pressure to win airline accounts created much internal chaos. In order to be efficient, Boeing believed that they had to cut costs and time. They tried their hardest to retain the design of the older planes, and according to a New York Times Article, engineers were pushed to submit sketches of the plane at double the normal pace. Although Boeing executives were confident that the redesigned 737 MAX planes had passed the required internal safety regulations, “The company was trying to avoid costs and trying to contain the level of change. They wanted the minimum change to simplify the training differences, minimum change to reduce costs, and to get it done quickly,” according to veteran Boeing engineer Rick Ludtke. One of the results of neglecting to ensure proper safety protocols was the failure of their MCAS software. The MCAS system was created to counterbalance the plane’s tendency to move it’s nose up. But instead of creating balance, the MCAS system malfunctioned and the pilots were unable to override the system, causing the plane to crash in both incidents.
While the two crashes caused the grounding of the 737 MAX in March, Boeing had yet to halt production. They were still producing an average of 40 planes a month in their Seattle facility with the hope of receiving the green light from regulators. But, in early December, FAA administrator Stephen Dickson rejected the possibility of renewing the 737 MAX operating status before the end of the year. This announcement caused Boeing’s stock price to fall 4% within hours.
The financial impact on Boeing has been significant and will continue to worsen. The 200 already produced planes must all be individually inspected by the FAA –– further delaying their delivery and causing Boeing’s cash shortage to worsen. Additionally, the company has been further leveraged as they prepare to pay high production and compensation fees, allotting $3.6 and $6.1 billion respectively in anticipation –– amounts that may need to be more than doubled in the coming months. As a result of the 737 MAX setback, Luke Tilley, the Chief Economist of Wilmington Trust predicts that the lack of production of the 737 MAX would reduce the quarterly annualized GDP growth rate by 0.3%.
When looking at Boeing’s future, there is still reason for optimism. Despite the large looming losses, Boeing announced that it did not plan to lay off any of its 150,000+ employees. Because of Boeing’s importance to the American economy, the government will likely assist them to return to stability, whether it be in the form of loans or extended deadlines. Boeing must look to capitalize on their other markets, which will allow them to stabilize their revenue stream in the interim. Regardless of their storied history, Boeing will have to compete with Airbus in order to preserve its status as the Aerospace industry leader. The success of Boeing is strongly predicated on its ability to revamp the 737 MAX plane and remind customers worldwide that they are still the gold standard in commercial aviation.
Sources for Graphs:
https://leehamnews.com/2019/01/11/airbus-holds-56-share-of-backlogs-vs-boeing/
Photo Caption: Safety concerns have halted production of Boeing’s 737 MAX Jet
Photo Credit: Pixabay
