Boeing’s 737 Max jet found a sweet spot for the company’s growing base of customers around the world: It’s a best-selling workhorse with low costs, minimal upkeep and an ability to cram in more passengers. The airplane would prove perfect for midrange flights that could maximize profits for carriers.
“We aspire to be an enduring global industrial champion,” CEO Dennis Muilenburg told shareholders in a 2017 address commemorating the company’s 100th anniversary, “a top performer in every aspect of our business, delivering superior value to our customers, employees, shareholders, communities and partners.”
But the crash of a 737 Max 8 in Ethiopia on Sunday — the second in less than five months — threatens to undermine Boeing’s reputation around the world for safety and reliability. Already, China — the company’s most important foreign market — has grounded the 737 Max 8. Analysts said Boeing would need to get to the bottom of what caused the crash and soon, or face a backlash from potential customers and investors.
Within hours of China’s decision, smaller airlines followed suit. And regulators in Ethiopia and Indonesia called for closer inspections of the plane.
On Tuesday, Britain joined the list of countries that have barred 737 Max planes from their airspace. The British Civil Aviation Authority announced that “as a precautionary measure,” no “commercial passenger flights from any operator” will be allowed to arrive, depart or overfly British airspace until further notice. It noted that five 737 Max aircraft currently operate in the United Kingdom and a sixth had been scheduled to enter service later this week.
It is not clear why Ethiopian Airlines Flight 302 fell from the skies six minutes after takeoff Sunday on its way to Nairobi. The investigation has just begun. But the crash, which killed all 157 people on board, puts the spotlight on Boeing, which already faced scrutiny for the October crash of a 737 Max 8 in Indonesia and concerns that a software update to the 737 could make it hard for pilots to override a malfunctioning autopilot system when it steers the plane into a nose-dive.
In a statement Monday, Boeing said no new safety guidance is planned as of now: “The investigation is in its early stages, but at this point, based on the information available, we do not have any basis to issue new guidance.”
The Federal Aviation Administration endorsed the Max 8 on Monday, issuing an “airworthiness notification” but saying that it would “continuously assess” the plane’s safety performance.
Boeing said in a statement late Monday evening that it would implement a software update to the 737 Max 8 in the coming weeks designed to “make an already safe aircraft even safer,” with changes to “flight control law, pilot displays, operation manuals and crew training.” The statement came after the FAA said it would mandate “design changes” no later than April.
While investigators descended on the crash site trying to determine what happened, China, Indonesia, Brazil, Singapore and Ethiopia grounded the planes. Australia — a major long-distance travel destination — barred them from its airspace, and Britain announced a similar ban on Tuesday. Investors battered Boeing’s stock, which fell more than 12 percent in early trading Monday before rebounding and finishing the day down 5.4 percent, a sign of investor confidence in the stalwart company.
But analysts at Jefferies investment bank estimated that the worst-case scenario — a software problem causing a full grounding and halt to deliveries of the 737 Max 8 — could cost Boeing about $5.1 billion, or 5 percent of the company’s annual revenue, within two months. The 737 program is expected to generate about $32 billion for Boeing in 2019, Jefferies estimated, making it one of the company’s single-largest sources of business.
“This is clearly a fluid situation and one that may have serious repercussions for Boeing over the short and long terms,” Value Line, an investment research firm, wrote in a note for its clients. “For now, we are leaving our financial estimates unchanged, but there is clearly a large cloud of uncertainty here.”
For Boeing, the largest U.S. manufacturing exporter, there is no foreign market more crucial than China. The 737 is a key part in Boeing’s plans there and beyond. In 2018, Boeing increased 737 production to 52 planes a month. And nearly half of the 580 units it delivered last year were from the Max family version of the plane.
Of the 43,000 new aircraft it plans to sell in the next 20 years, Boeing expects that Chinese airlines will buy nearly 20 percent. To cement what executives hope will be a fruitful relationship for years to come, Boeing recently built a plant where it finishes its planes there.
And in a recent speech Muilenburg reportedly stressed how key China is to its bottom line, saying that while the company “is doing well there,” it remains “important that we have a productive relationship.”
In an earnings call earlier this year, he said the company views “China as a long-term growth market for us.” And he said that the country “needs the airplanes for growth to fuel their economy and to meet their passenger growth and cargo growth needs.”
The decision to ground the planes was an extraordinary one, especially in China, where it created headaches for travelers, disrupted the economy and caused at least a temporary rupture in relations with the American aerospace behemoth.
“China is going to be ticked by having to ground those airplanes,” said Mike Boyd, president of Mike Boyd International, an aviation consulting firm. “That will hurt the Chinese economy. China isn’t exactly rushing off to Wall Street to buy Boeing stock, but they are going to have to do business with Boeing.”
Boeing has nearly 3,000 orders for the Max 8 version of the plane, according to Boyd’s analysis, with China expected to be a significant purchaser. But now “they could lose some of that business,” Boyd said. “Everybody has a lot on the line. Boeing needs China. China needs Boeing, too.”
And it comes in a tumultuous global trade environment, as the Trump administration and Chinese officials go round and round on a long-term trade agreement.
“All of this comes at a delicate time for Boeing because of everything else that’s going on,” said Kevin Michaels, an aerospace analyst with AeroDynamic Advisory, a Michigan-based consultancy. “There were no new orders of 737 last year [in China], and it’s possible that was because of trade issues.”
In October, an Indonesian Lion Air flight plunged into the Java Sea shortly after takeoff from Jakarta, Indonesia, killing all 189 passengers and crew members. Investigators blamed a faulty sensor and automatic feature for pointing its nose down while pilots struggled to lift the plane up.
Criticism against Boeing stirred when the company disclosed after the Lion Air disaster that a new autopilot program known as the Maneuvering Characteristics Augmentation System, or MCAS, could disable a feature that pilots would use to take control of a plane.
The updated software was meant to make the plane safer, by accounting for minor design changes to its engines. But pilots said a Boeing decision not to include the new system in pilot training left them “in the dark” about how to respond in an emergency.
Pilots of the Lion Air 737 battled the computerized control system in an effort to arrest the plane’s dive, but each time the system reasserted itself, and the plane hit the water at 450 miles an hour, according to Indonesia’s initial investigation report. The company faces lawsuits from at least two dozen family members whose loved ones died in the crash.
While Boeing issued a bulletin in November after the crash, the controversy revived an ongoing debate about what degree of automation is safest for airplanes — and how much control human pilots should maintain.
Though the Ethiopia investigation is still in the early stages, the similarities between the two crashes have prompted carriers around the world to take added precautions.
In December, Muilenburg told CNBC that the “airplane is safe. We’re very confident in that.” He touted the aircraft, which he said was designed so that additional training would be kept to a minimum on it.
“What we wanted to accomplish was seamless training and introduction for our customers,” he said. “We purposefully designed the airplane to behave in the same way” as previous models.
The crash comes as Boeing’s commercial business has been surging, even after the October crash. And with a backlog of 5,900 airplane orders, or about seven years of production, that is valued at $412 billion, Boeing predicted continued growth in 2019. One of Muilenburg’s goals for the company has been to better integrate its major business units — commercial jets, defense, space and services — under a strategy he has called “One Boeing.”
Boeing’s defense business has had a good run recently as well. It recently won three major military contracts, totaling more than $18 billion combined to build training jets, replacement helicopters and drones that can refuel fighter jets in midair.
It is also building the next Air Force One, a spacecraft to ferry astronauts to the International Space Station and a monster rocket that NASA says will one day take them to the moon.
In 2016, Boeing celebrated its 100th anniversary, a legacy that marches in lockstep with the history of American aviation, from the dawn of commercial air travel in the years following the Wright Brothers to the bombers that helped to allies win World War II, to the F-18 Hornets and 747s in use today. The Chicago-based aerospace giant has more than $100 billion in revenue and 153,000 employees worldwide.
But now that investigators are probing two crashes that have killed a total of 346 people, the company is facing a crisis involving its core business and a threat to the reputation it has built up after decades.
In the United States, the Federal Aviation Administration said it was “closely monitoring developments” and that it planned to join the National Transportation Safety Board, which was working with Ethiopian authorities investigating the crash. But it did not ground the planes, which are flown by American and Southwest airlines.
The 737 Max 8 has been an important profit driver for Boeing since it was introduced in 2017. It is crucial to Boeing’s broader international ambitions as it competes with Airbus, its European rival in the commercial airline business.
Boeing has delivered 354 of the jets globally and has 2,912 on order, according to market estimates maintained by Boyd Group International. The jet that crashed Sunday was one of five 737 Max 8 planes operated by Ethiopian Airlines, which has 25 more on order.
In the United States, Southwest Airlines and American Airlines have 59 between their two fleets, with 304 on order. American Airlines said it was monitoring the investigation but remained confident in the safety of its aircraft. Southwest said it has been in touch with Boeing and plans to follow the investigation. It had not made any changes to its operations or inspection protocol as of Sunday, the airline said. Customers took to Twitter to press for information, including one who said: “It was the first time i have ever been nervous flying with you in 25 years and hundreds of flights.”
Thomas Heath contributed to this report.
