Ethiopia crash poses huge questions for Boeing

In the wake of the Ethiopian Airlines crash last week and the Lion Air crash five months ago, analysts are beginning to ask if aircraft manufacturer Boeing can survive the economic impact. Boeing’s share price has fallen by more than 10% from a week ago, when it hovered near all-time highs, wiping $25bn off its market capitalisation. It is already facing court action following the Lion Air crash off Indonesia last October and, with 35 nationalities represented on the Ethiopian Airlines crash last week, is expected to face many more lawsuits. The latter, Kenya-bound flight included passengers from Kenya (32), Canada (18), Ethiopia (nine), the US (eight), China (eight), Italy (eight), France (seven), and the UK (seven). Previously, on 29 October 2018, an aircraft owned and operated by Lion Air crashed in Indonesia, killing all 189 passengers and crew. In both crashes, the aircraft was the exact same model – a Boeing 737 Max 8. In November 2018, Boeing was sued by a relative of one of the Lion Air passengers. As Boeing is headquartered in Chicago, the lawsuit was filed in the Circuit Court of Cook County, Illinois. Anna Brattstrom, an analyst with Axco, asked: “Is it a coincidence that two aircraft of the exact same model crashed shortly after take-off in the space of five months?” The ex-inspector general of the US Transport Department, Mary Schiavo, said: “Here we have a brand-new aircraft that’s gone down twice in a year. That rings alarm bells in the aviation industry because that just doesn’t happen.” Ms Brattstrom continued: “Before the Ethiopia crash, there were around 376 Boeing 737 Max 8 planes in operation around the world, with an approximate value of $40bn. Since then, Boeing has grounded its entire global fleet of Boeing 737 Max 8 and 737 Max 9. Boeing has another 5,000 orders for the 737 MAX series, [at] circa seven years’ production, with a value of $412bn.” She reported: “Analysts at Jeffries Investment Bank argued that a worst-case scenario, [such as] a software problem halting future deliveries of 737 Max 8 planes, could cost Boeing more than $5bn within two months.” According to Boeing, the 737 Max series, which was introduced in 2017, is the fastest-selling aeroplane in Boeing history. Last year, Boeing generated revenues of $101.1bn, an 8% growth compared to 2017. Boeing had expected the 737 Max 8 planes to account for 90% of all 737 deliveries in 2019; however, this could now change. Boeing is the world’s largest aerospace company and a leading manufacturer of defence, space and security systems, accounting for more than 12% of the global industry. Financial losses for Boeing could hit the global industry and have a major knock-on effect on suppliers and contractors. Ms Brattstrom wondered: “Perhaps this is an opportunity for other manufacturers who are waiting in the wings to take advantage of the situation? A case of one man’s loss is another man’s gain. “The best-selling 737 Max 8 planes were very attractive to low-cost airlines, particularly in emerging markets, and added billions to Boeing’s company value. China is Boeing’s largest market for the 737 Max planes and the company has its only overseas manufacturing plant in Zhoushan, outside of Shanghai. The majority of future deliveries have been ordered from China. With trade talks already tense between China and the US, this could not come at a worse time for Boeing.” Meanwhile, risk managers were looking at the more immediate challenges to their businesses. Ms Brattstrom said: “The disruption to international travel was noted immediately. For example, a Norwegian Airlines flight from Stockholm bound for Romania was forced to turn back halfway through its flight, following instructions [that] it was being grounded. “Initially, the US officials argued the aircraft models were still safe to fly and were distancing themselves from worldwide decisions to ground the planes. Critics argued that this could have had something to do with the current US administration’s apparent close links to Boeing.” Chubb is the lead underwriter for the Ethiopian Airlines account and early loss estimates have been put at between $50m to $60m for the aircraft itself. Aviation insurance covers both the aircraft, third-party legal liability, crew personal accident and baggage. Life insurance for the passengers could add substantially to the loss figure, particularly if the relatives of passengers decide to take legal action. Ms Brattstrom added: “As eight of the passengers were from the US, this is highly likely. If the plane is proven to be faulty, Boeing’s insurers could also face large losses. “It is still early days, and investigations could go on for many months or even years, but one thing is certain that this has been a big blow for Boeing, the global aviation industry, but above all a catastrophic incident for all the victims and their families.”

Ethiopia crash poses huge questions for Boeing

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