The U.S. is expected to clear Boeing’s 737 MAX jets for passenger flights again, helping “resolve the plane maker’s biggest pre-pandemic crisis,” WSJ reports.
The Backstory: The MAX has been grounded since March 2019 after dual crashes took 346 lives. The engineering mistakes and management lapses that caused the situation resulted in a wave of “civil litigation, a criminal investigation and congressional scrutiny.”
What Happened Since: Boeing has spent the last two years “hammering out fixes to the [faulty automated flight-control system], revisiting pilot training and making related changes while responding to the demands from world regulators.” The airplane manufacturer estimated the whole situation cost roughly $20 billion, including financial hits from halting production earlier this year.
What’s Next: It’s a big lift for Boeing to have the MAX available again, but the continuing health crisis has sapped demand. The pandemic has prompted airlines and aircraft-leasing firms to cancel roughly 10% of Boeing’s outstanding MAX orders this year. Boeing said “it believes hundreds more of its remaining 4,102 orders could be in jeopardy.”
- The task of restoring credibility with the public is even more complicated. Airlines are already “conducting their own surveys and laying out plans to rebook any nervous travelers on different aircraft.”
The Takeaway: Boeing’s future, like that of its contemporaries, is tied to quelling the pandemic. Financial strain from Covid-19 resulted in the manufacturer cutting 30,000 jobs, but a widely available vaccine sometime next year could turn around the industry’s fortunes. MAX jets aren’t expected back in use throughout the U.S. until 2021, as carriers plan to phase them in gradually. Foreign regulators will likely take longer.
Boeing ($BA) is trading at 15x 2022 estimated EBITDA, which means the stock price relies on a revenue recovery for 2022, which implies an air travel recovery by 2021. I don’t like the risk reward profile for this stock and would pass on it.
I’m not confident about a 2021 airline recovery, especially for business travel, let alone airlines feeling comfortable enough to fulfill plane orders for 2022. Bill Gates even believes that more than 50% of business travel will disappear post-pandemic.