Aerospace Analysts See Growing 737 MAX Costs For Boeing
Boeing stakeholders may find out more information about the costs of the 737 MAX fiasco during the company’s Jan. 29 report on 2019 financial results. While Boeing previously identified $5.6 billion in pretax customer compensation for aircraft operators, and added $3.6 billion to the 737’s program accounting block-cost, financial analysts, consultants and others see those figures as just a beginning.
For starters, new costs such as flight simulator training, already are known but have yet to be publicly explained by Boeing. “Simulator training likely will add almost $5 billion to the cost of the grounding, using Southwest [Airlines] as a benchmark for the 4,543 [737 MAXs] in backlog at the third quarter of 2019 and the 385 in existing fleets, all of which were sold before the grounding,” Bloomberg analysts George Ferguson and Francois Duflot said Jan. 9.
Similarly, aviation economist Chris Tarry said in a new report this month that Boeing faced a bill of more than $8 billion in compensation for airlines alone. In December, when Boeing announced the MAX production halt, Jefferies analysts Sheila Kahyaoglu and Greg Konrad surmised that customer concessions alone could reach $11.7 through the end of the first quarter of 2020.
Then there are costs for carrying the inventory of roughly 400 MAXs parked by Boeing, as well as potential further changes to the 3,100-aircraft program accounting block basis. The Jefferies team said the ongoing delay in aircraft certification and change in production cadence could generate another $3.6 billion charge to Boeing’s earnings.
Several industry analysts and consultants also believe Boeing will have to support its supply chain financially to some degree, so providers are able to ramp-up MAX production rates again as efficiently as possible. Moody’s Investors Service analysts said in a Jan. 10 report they expect Boeing to be supportive of suppliers on an individual, as-needed basis. But costs were not quantifiable yet.
“There will be a particular focus on weakly positioned companies and/or those that have sole-sourced products,” Moody’s suggested. “The exact nature of any support arrangements could take multiple forms, including certain suppliers maintaining some level of production (and continuing to get paid), advance payments, more favorable (i.e., quicker) payment terms, inventory assumption and/or the facilitation of access to vendor financing.”
Other costs loom, too, such as final compensation to victims’ families through legal action. Similarly, shareholder lawsuits may emerge that require spending to litigate. Last but not least, there will be additional costs from taking on more debt, which Boeing is expected to do rather than cut shareholder dividends.
Altogether, it could take years before the full costs of the MAX debacle are known. In mid-October 2019—when Boeing still saw a MAX return to service before the end of last year—Bank of America Merrill Lynch analyst Ron Epstein already had expected it would not occur before the first quarter of 2020. He forecast costs for the 737 MAX to total $17.2 billion in 2019-23. On Jan. 16, Epstein told CNBC the total cost of the grounding could reach $20 billion—excluding any settlements from lawsuits from crash victims’ families—if the aircraft return by June or July.