Just two days before Christmas, Boeing CEO Dennis Muilenburg was ousted from his position at the aerospace and defense firm. This came on the back of a difficult year for the century old firm. Between October 2018 and March 2019, more than 340 people lost their lives in two plane crashes, raising concerns on the jetliner’s air worthiness. Following the findings by Boeing on the jetliner itself, the company grounded the jets since March 2019. Reports show that the cockpit’s electronics behaved erroneously as both pilots struggled to gain control of their stricken aircraft.

The Federal Aviation Authority explained that there could be more than a dozen more crashes over the lifetime of the aircraft if the necessary changes are not carried out. This tarnished the company’s reputation within its industry and a backlash with US regulators and the public at large. Indeed, two weeks ago, Boeing announced that it will halt the production of the 737 Max altogether. The impact of such decision is of a grand scale, as Boeing competes to be the top exporting US company. 

The stoppage in production will have lasting effect on the company’s suppliers. Indeed, Spirit Aero Systems Holdings Inc. ($7.7Bn Market Cap) is a supplier that depends on Boeing’s exclusive demand. The company designs and manufactures aerostructures including fuselages, propulsion systems, and wing systems for commercial and military aircrafts. The company stock got hit during the year as it underperformed the Russell 2000 Index by c. 27%.

Until Boeing Inc. resolves its core problem, such smaller companies will continue to suffer. The perpetrated shocks will have lasting effects on the wider economy given the company’s scale. Indeed, it’s being touted that the US GDP could get hit by at least 0.50% for the first quarter of 2020 given that Boeing Inc. will hold smaller inventory. However, over the year, the impact is deemed to be negligible given that the company is expected to resume production of an improved aircraft. 

Airbus reaped the benefits from Boeing’s mishaps; as by the end of October 2019, Airbus announced that it recorded orders of 15,193 for its A320 jetliners, whilst Boeing Inc. recorded 15,136 for its 737 jetliners. The aircraft industry is dominated by these two players that produce 99% of all aircraft in the sky. A comparative look in stock returns shows that by the beginning of March 2019 (when Boeing grounded its Jetliners) Airbus immediately started to outperform Boeing with year to date returns for Airbus standing at 60.81% (in Eur terms) when compared to Boeing’s 5.62% (in USD terms).

Boeing’s debacle is a stark reminder for investors to continuously monitor company specific risks as it remains a key determinant for the overall total return of any investment. In all probability, Boeing will change its fortunes when it will carry out fundamental changes in the aircraft’s design that re-positions the 737 Max into a safer jetliner that puts people’s mind at rest.

This article was issued by Jesmar Halliday, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.