Boeing Works to Manage a Crisis With Unknown Costs
When Boeing’s Dreamliner was grounded in 2013, it took more than $20 million and three months to fix the problem. The crisis over its 737 Max jet could be even harder to manage, given the incalculable reputational risk after two fatal crashes.
The short-term costs such as a software fix to the plane are likely to be manageable for Boeing, but the bigger financial unknown is whether airlines lose confidence in the Max, the company’s best-selling jet. Some 4,600 planes are on order, accounting for around $550 billion in future revenue.
Since the second crash, in Ethiopia on Sunday, shares of Boeing have dropped nearly 11 percent.
“Reputationally and financially, this is painful,” said Richard Aboulafia, vice president of analysis at Teal Group Corp., a consulting firm.
With all of the Max planes now grounded around the world, Boeing’s first priority is developing a fix. Boeing has been working with American regulators to roll out a software update and new training guidelines in the months since the first crash, off Indonesia in October. The update is expected by April, but a final solution could take more time depending on what investigators determine happened in the Ethiopia disaster.
The longer it takes to find a solution, the higher the price tag. The battery fix for the Dreamliner jets amounted to $465,000 per plane, according to Carter Copeland, an analyst at Melius Research. Based on those costs, he estimates that Boeing could spend nearly $1 billion to resolve issues with the 737 Max fleet.
Airlines, which have 350 of the planes in their fleets, have also begun to demand compensation for their losses during the grounding. It costs an estimated $1 million to lease a replacement jet for three months.
“It’s quite obvious that we will not take the cost related to the new aircraft that we have to park temporarily,” said Bjorn Kjos, the chief executive of Norwegian Air, which had to take 18 of the planes out of service after an order from European regulators on Tuesday. “We will send this bill to those who produce this aircraft.”
[In a big shift, China was among the first to ground the jet.]
Boeing could also face lawsuits from the families of passengers who died in the disasters. The Dreamliner had battery problems but never crashed.
A company the size of Boeing will probably be able to absorb such costs. Boeing, an aerospace giant that builds commercial and military aircraft, makes more than $100 billion in revenue a year.
The bigger challenge for Boeing is how it will handle future orders. If deliveries are delayed because the plane needs to be redesigned, the manufacturer is likely to have to offer discounts to carriers with orders.
There is also a broader risk that, if the passenger backlash to the Max lasts, the manufacturer could lose some corporate customers in the long run. Such a shift would give an advantage to its European rival Airbus, which makes a similar fuel-efficient plane, the A320neo.
[As planes become more automated, some worry pilots are losing flying skills.]
But it’s unlikely that airlines will cancel their Max purchases outright. Carriers typically put down a deposit of around 20 percent for their orders on the $120 million plane, which is paid out over time. It can be difficult to get out of those commitments without solid evidence that there’s a structural problem with the aircraft, airline executives and analysts said.
Even if customers could walk away from their Boeing orders without losing money, they probably wouldn’t. The aircraft manufacturing business is essentially a global duopoly. And Airbus has a yearslong backlog.
“I don’t think anyone will abandon them,” said Jonathan G. Ornstein, the chief executive of Mesa Airlines, who operated a fleet of 737s in his previous role at the helm of Virgin Express, a European airline. Mr. Ornstein called Boeing “customer-centric” and said he expected that the company would bend over backward to maintain its rapport with carriers.
“The manufacturers do not pull up the bridge across the moat when this happens,” Mr. Ornstein said. “It’s much more of a cooperative relationship.”
The most significant fallout may be from the new scrutiny over the manufacturer’s relationship to its regulator, the Federal Aviation Administration.
On Wednesday, top House Democrats with oversight of the agency said that they would begin a thorough review of the process used to determine the airworthiness of the 737 Max.
“There must be a rigorous investigation into why the aircraft, which has critical safety systems that did not exist on prior models, was certified without requiring additional pilot training,” said Representatives Peter DeFazio of Oregon and Rick Larsen of Washington.
“The narrative that’s out there right now is that Boeing might have gotten favorable treatment from the F.A.A.,” said Mr. Aboulafia, the analyst. “That’s not good.”
Through a program established in 2005, Boeing and other aircraft manufacturers have been able to choose employees to help certify their planes for regulatory compliance. The program is meant to help the F.A.A. stretch its limited resources. But critics say that system gives too much authority over the process to Boeing.
“It has become a largely self-certified system,” said Mary Schiavo, the former inspector general of the Transportation Department. Over the last several days, unions representing pilots and flight attendants have been raising the alarm over potential conflicts in the regulatory process that could put their members at risk.
“The F.A.A. has got to stop treating the airlines and manufacturers as their clients, and get back to doing their job with oversight for the American people,” said Sara Nelson, the president of the Association of Flight Attendants.
Dennis Tajer, a spokesman for the American Airlines pilot union and a 737 pilot, said his members had long been concerned about the minimal training required for pilots to become qualified to fly the Max models.
“The F.A.A. certified the aircraft to be flown and sold without a simulator,” said Mr. Tajer. The certification process, he said, has prompted him to ask the F.A.A.: “What is your relationship to Boeing?”