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Although the Federal Aviation Administration has stated that the Boeing Max 8 model involved in the deadly Ethiopian Airlines crash is safe to fly, investors have been fleeing the company’s stock.
Boeing shares fell 11 percent in the two days after a Boeing 737 Max 8 passenger jet crashed en route from Addis Ababa to Nairobi, killing all 157 people on board. Boeing stock was priced at $422 last Friday, the last trading day before Sunday's deadly crash, and is currently at around $373.
“We believe investors were pricing in very limited risk to the 737 ramp-up profile, which now has greater risk within the wide range of possible outcomes following these incidents,” said Goldman Sachs analyst Noah Poponak.
On Wednesday, Canada was the latest country to announce it had grounded the Max 8 plane and barred it from the country's airspace, citing "new data" and a "possible similarity" to the fatal Lion Air crash in Jakarta five months ago that killed 189 people.
Boeing also postponed the rollout of its new long-haul 777X jet, which had been scheduled for Wednesday.
As the Max 8 is a newer plane model, there aren’t very many yet in service — about 70 by U.S.-based airlines and a total of 385 worldwide. More than 60 percent of those are currently grounded. But with a backlog of some 4,600, the Max line is a key component of Boeing’s business.
Boeing developed the 737 Max 8 to replace the aging 737-800 — an airline workhorse for short- and medium-haul flights. “There are thousands on order, hundreds in service — it’s their cash cow. It’s a big deal financially. It’s also a big deal reputationally,” said airline industry consultant Robert W. Mann.
Commercial aircraft make up about 60 percent of Boeing’s sales, according to Sheila Kahyaoglu, aerospace and defense analyst at Jefferies, an investment bank based in New York. The 737 line alone is responsible for about 25 percent of total sales, Kahyaoglu told CNBC.
Although investigators announced that they had recovered the flight’s voice recorder and data recorder, the reason behind the crash was still unknown as of Wednesday. On Monday, Boeing issued an announcement regarding updates to software and pilot training for its Maneuvering Characteristics Augmentation System, which it undertook after the October crash of a Lion Air flight operating the same 737 Max 8 model.
Boeing spokesman Chaz Bickers emphasized that the FAA had not mandated any actions regarding the Max. “We have full confidence in the safety of the Max. We understand that regulatory agencies and customers have made decisions that they believe are most appropriate for their home markets,” he said.
Industry experts said it was too early to tell if the reasons behind the two crashes were linked. “It’s going to come down to what the data recorder and cockpit recorder readout tell us, but presumably there are things you could do if you thought that MCAS was a factor in this as well,” Mann said.
“The FAA has already asked for certain changes they hope to see accelerated. … Boeing would have to see how to make that happen expeditiously,” Mann said. “If there’s a similar mode of failure, there would be added impetus to do that on Boeing’s part,” he said, although he emphasized that, as of yet, there was no indication that the MCAS had contributed to the crash.
While implementing these fixes, and compensating airlines for the costs incurred with grounding the Max until that occurred, would be expensive — and detrimental to its stock in the short term — Boeing’s sheer size would help it recover.
“You’re talking about conceivably in the hundreds of millions of dollars,” said Richard Aboulafia, vice president of analysis at Teal Group. That would be enough to cripple many companies, but Boeing’s $212 billion market cap means it will eventually bounce back. “It would sting but it’s hardly what you’d call a threat to the company’s well-being,” he said.
Barclays said that the cost to Boeing could be as high as $1 billion under a worst-case scenario. “This assumes a full stop of deliveries (including progress payments on deliveries due in next year) as well as financial penalties likely due to the airlines that currently operate Max associated with the loss of capacity,” analysts said.
But although worried fliers flooded the social media pages of American and Southwest, the two domestic airlines currently flying the Max 8, calling for them to ground the planes or let them change flights, carriers are unlikely to cancel their orders for the aircraft.
The only comparable plane is the Airbus 320A, and there is a backlog of orders for it, as well. “There are only two single-aisle jets out there you can order,” Aboulafia said.