When on Wednesday, January 8, 2020 flight DS752 crashed near Teheran International Airport, killing all 176 passengers and crew on board, it was not immediately clear what had happened. But what was immediate – and remarkable from an investor’s standpoint – was the punishment dished out to Boeing shares: stocks nose-dived as if yet another Boeing misdeed had materialised.
After the two fatal crashes of its 737 Max 8 models in Ethiopia 2018 and Indonesia 2019, caused by faulty design and engineering shortcuts as I reported in June last year, shareholders were expecting the worst. This notwithstanding the fact that Ukrainian International Airlines flew an entirely different Boeing plane, a 737-800, sold 30,000 times over the last decades – a staple plane in international aviation with proven aerodynamic qualities and an excellent safety record.
Too many lies, denials and cover-ups had dented the reputation of America’s biggest exporter and annihilated the trust of investors and the public, increasinglyfearful of flying Boeing.
It took Iran three days to admit that their Baghdad air defence system, in a hysterical state of alert about the threat of American reprisals, had shot down the Ukrainian passenger jet by mistake. It had taken Boeing more than a year to confess the fatal flaws of its brand-new Max 8, ordered 5,000 times by many airlines all over the world.
The disturbing messages of Boeing employees revealed to the US Ministry of Justice this month and made public 15 months after the first deadly crash in Addis Ababa paint a grim picture of Boeing’s lackadaisical attitude towards regulators, customers and human life: “Would you put your family on a Max simulator-trained aircraft? I wouldn’t.” “This aircraft is designed by clowns who are supervised by monkeys.” “I still haven’t been forgiven by god for the covering up I did last year.”
The saga of Boeing, responsible for five per cent of America’s entire output of goods and services (GDP), is an object lesson about how not to run a company. Challenged by Airbus’ bestselling, novel 320neo, a plane fitted with a new generation of engines which reduced noise and fuel consumption considerably, Boeing’s management decided to shortcut.
Engineers tasked to upgrade the 737 in similar fashion soon found out that they could not easily repeat their competitor’s simple ruses. The 737s was designed with a lower height. To weld more efficient and powerful engines to its wings would impair the once excellent aerodynamics of the bastard plane.
In a manner reminiscent of Volkwagen’s “Dieselgate”, management and engineers thought to compensate for the now dangerous aerodynamics with a computer-driven, angle-correcting programme, which would override any pilot unfamiliar with the worsened flight characteristics of the plane. The HAL-like autopilot would resist any attempt to counter its actions, which proved fatal when the sensors providing essential flight data to the on-board computer malfunctioned.
Voice recording recovered from the debris of the two baneful flights gave account of the pilots’ desperate, hopeless fight. They were not even aware that essential sensors were malfunctioning as Boeing couldn’t be bothered to fit control lights into the cockpit. Feverishly studied manuals gave no sensible explanation either. Boeing’s selling point, “the same plane but better”, was a death sentence for all on board.
Boeing first blamed the dead pilots for ineptitude. As denial no longer worked, and regulators and airlines started to down the Max 8 all over the world, an upgrade to the automated system was offered.
It became apparent that the US Federal Aviation Administration, responsible for certifying the flight safety of the plane and dumbly copied by authorities all over the world, had outsourced verification to Boeing itself, relying in blind fate on the same engineers who were responsible for the flawed design.
The production stops at Boeing…will not only painfully hurt Boeing’s share price and my portfolio; they may also trigger a recession
Boeing’s piecemeal offerings to the authorities, finally waking up to the disaster they had to account for, were dictated by the desire to keep up the sales promises made by Boeing to their customers: we will fix the software, pilots have nothing to fear and to train them on flight simulators was not necessary.
Efforts were not aimed at improving safety but in persuading authorities to let the plane fly again quickly. Production schedules of 52 planes per month were maintained at first then hesitantly reduced to 42 planes per month.
As the hapless plane was already flown by many airlines and many more had signed purchase contracts, it was not desirable to clock up compensation costs to customers. And neither was it to interrupt the fine-tuned clockwork of suppliers and assembly lines. A final breakthrough with safety authorities was promised multiple times and then postponed again. The plane was ready, only red tape was a hindrance.
By the end of last year it became clear that keeping up production at any cost was an expensive enterprise. Suppliers would have to be paid, airlines would have to be compensated and victims were piling up evidence for costly class action lawsuits. To pretend all was good became increasingly implausible.
In December, CEO Dennis Muilenburg was fired. Boeing was burning cash to the tune of $4.4 billion for every quarter the Max was grounded. Stockpiling suppliers were filing their finger nails to demand compensation for their storage costs.
This month, the incoming CEO David Calhoun threw in the sponge: production of the Max 8 was halted until further notice. Boeing suppliers’ share prices tanked. Spirit AeroSystems, one of the Max’s biggest suppliers, announced that 2,800 workers would be made redundant.
Then the big climb-down: Boeing admitted that all pilots flying the luckless plane would have to be retrained on flight simulators. The hubristic sales pitch ‘the same plane but better’, which had crammed order books for years in advance, had to be abandoned.
This will hurt the bottom line even more. Prudent customers like Southwest Airlines have bought their planes under the condition that discounts of $1 million will have to be paid if flight simulator training should become necessary. This may not sound too burdensome for Boeing, a company which is still awash with cash, sporting a sizable defence arm and boasting a $186 billion market valuation.
The glitch is: all airlines which have purchased the Max 8 will now not only claim compensation for grounded planes but for grounded pilots too. Pilots are in high demand, after all. So much so that they can easily afford to take strike action if not paid in excess of £200,000 per year, as happened with British Airways last year.
And simulator training is a bottleneck: there are only 34 flight simulators for the Max worldwide, costing $500 per hour to operate. They are expensive installations, worth $8 million per piece, and it is not clear how long it will take to deliver more of them. Until all pilots are retrained, thousands of them assigned to fly the Max, the plane will not be up in the air – at the cost of further, very expensive delays for Boeing.
In my column last year I compared Boeing and Airbus’s share prices, arguing that all aircraft manufacturers were, contrary to trade rules, unfairly supported by their respective governments with cheap credit and subsidies, making valuations hard.
The sham fights of Boeing and Airbus at World Trade Organisation courts were meaningless, as it was more likely that the US would get away with unfair behaviour than Europe. Boeing therefore would always win out, I guessed.
Order backlogs at Airbus made it moreover impossible for the company to take advantage of Boeing’s loss of reputation. I bought Boeing shares at $352.32 when shares were at their nadir last year. I am now, with a share price of $288.20, already suffering losses of 18 per cent.
What I had not anticipated at the time was the real risk that the Max might never fly again, at an enormous cost to shareholders, US taxpayers and the US economy. It is estimated that every three months the 737 Max 8 stays grounded will cost the US economy 0.5% growth.
This now looks hopelessly optimistic. The production stops at Boeing and the political backlash will not only painfully hurt Boeing’s share price and my portfolio; they may also trigger a recession distressful to many more stocks.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreasweitzer@timesofmalta.com