Mon, 25 Mar 2019

Concerns about new plane ground Boeing stock rise

News24
15 Mar 2019, 13:37 GMT+10

Boeing soared early in 2019 and lifted the Dow Jones Industrial Average with it. Now concerns about the safety of the newest version of its flagship airplane have halted the momentum.

Shares rose 36% in January and February thanks to steady orders for Boeing jetliners, including its popular 737. Then came Sunday's deadly crash of a 737 Max 8 in Ethiopia, just months after the crash of a Lion Air Max 8 in the Java Sea.

Now, aviation authorities from the US to Britain to China have ordered the planes grounded, with US regulators saying new information showed some similarities between the two incidents.

Boeing agrees to defer delivery of second Comair 737 MAX 8

Boeing shares were down More than 11% this week through Thursday, and had lost about $29bn in market value. The shares still have outpaced the market in 2019, and account for 14% of the Dow's increase so far.

The immediate question for Boeing investors is whether the grounding of the planes and crash investigations will have just a short-term effect on Boeing shares and finances, or have a longer-term impact.

"We think an investment in Boeing stock should take into account its long history of safe flight, a strong book of business and strong demand dynamics," said Jim Corridore, an equity analyst at CFRA.

Canaccord Genuity analyst Ken Herbert said Boeing has likely been working on a software fix for the new 737s since the Lion Air crash last year and much of the cost has already been factored into its guidance for the year. But other risks remain. Plane delivery delays are now a concern along with costs for compensating airlines for service disruptions.

"We still see some uncertainty around the timing of the grounding and risk around the root cause analysis," he said.

Record deliveries

The Max 8 is the latest version of the single-aisle 737, which is the world's most common passenger jet. Boeing has taken orders for more than 5 000 of the Max planes from scores of airlines and delivered 376 of them.

The company set a record for commercial plane deliveries in 2018 while increasing its margins. It expects to set another record this year, but the crashes could put a dent in orders and deliveries.

"The airlines are the customers of Boeing. If they stop buying the planes, if they start canceling orders, that would have a cascading domino effect," said Paul Hudson, president of flyersrights.org, a group representing passengers. "They're on thin ice when they've had two crashes," he said. "I think one more strike and you're out. Boeing cannot afford another crash like this in the near-term."

Rival Airbus gave Boeing a boost in February when it announced it would stop making the iconic A380 plane, which is a competitor to Boeing's 747. Boeing is rolling out the new 737 models also with rival Airbus' A320 model in mind.

"We continue to feel very strong about the marketplace," said CEO Dennix A. Muilenburg at a recent investor's conference. "We see a world that needs about 43 000 new airplanes over the next 20 years. We're seeing continued healthy passenger volume growth around the world."

Commercial airplanes are by far the biggest contributor to Boeing's bottom line. Revenue from that unit jumped 5% to $60.72bn in 2018. The company's defense and security business saw revenue rise 13% to $23.2bn last year.

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