Boeing - Ongoing Challenges and Hits

News There were a number of headlines yesterday related to the MAX. With this being May 1st, perhaps Boeing should issue a mayday call, as the program seems to attract more bad news daily. The thread that weaves through these stories is a loss of trust in the MAX aircraft and Boeing. Boeing sells 3.5B in bonds, gets 1.5B line of credit. The MAX costs are clearly adding up, and Boeing needs to cover negative cash flows Virgin Australia defers MAX deliveries to 2021 Fly Dubai now considering Airbus, Al-Maktoum critical of Boeing transparency Boeing never tested the failure of critical sensor - despite 216 incidents reported to the FAA since 2004 Southwest loses top spot in customer satisfaction - a MAX impact? China’s news coverage of Boeing lawsuits is extensive, with a message implied Analysis It is amazing how many issues on the 737MAX can be raised in a 24 hour period since yesterday. Clearly, Boeing’s addition of $5 billion to cash provides a cushion against the cash flow issues associated with a mounting level of both finished goods and parts inventories. They may need it, after the revelations that Boeing and the FAA never tested the MCAS system under a sensor failure, despite it relying on a single sensor. The report from CNN cited 216 reports of AoA sensor failures since 2004, and that a sensor failure is not that unusual. Someone at Boeing and the FAA failed to carry out their responsibilities. But at the same time, a number of airlines appear to be changing their opinion of the MAX. FlyDubai is now publicly stating that they are considering Airbus, and is Boeing’s largest MAX customer in the Middle East. That would be a significant loss for Boeing - the question being whether Airbus can ramp-up production to meet the additional demand, as its backlog is even larger than Boeing’s. Airbus is still playing catch-up for its own ramp-up with neo, and plans a second-half loaded production rate increase this year. Southwest, perennially number 1 in customer satisfaction, fell to number 3 this year. Some in the industry are speculating that the MAX and safety fears may have had an impact on this ranking. While it is impossible to tell, Southwest, who utilizes the same safety card for the 737-800 and 737MAX8, with both types listed, has been going out of its way to tell passenger that they are NOT flying on a MAX. But what do they do when it comes back, especially if passengers want to deplane? Finally, China’s coverage of Boeing lawsuits in Chicago is much more in depth that local coverage. The web link to the People’s Daily story goes on for 15 pages! Given the nature of the news media in China, this is purposeful and sending a message to Boeing. Insight Taken individually, each of these stories is minor. But taken together, they begin to weave a pattern of no confidence in the 737MAX and no confidence in Boeing management due to a lack of transparency and failures to publicly admit that design and system errors resulted in fatalities. Customers are slowly beginning to back away from the MAX, and the MAX brand may be permanently tarnished. Boeing is going to need an effective campaign to convince not only the traveling public, but also industry experts, that the aircraft is safe to fly. In today’s social media age, that won’t be easy, as every Boeing statement will be challenged and the other side of the coin presented in aviation blogs and the news media. The Wall St. Journal and CNN have broken negative stories about the MAX this week, and Boeing’s lack of transparency has even normally friendly media sources digging for additional information. The FAA has also taken a credibility hit, as the agency enabled Boeing to certify a flawed airplane. The meetings with international regulators that are ongoing to review Boeing’s proposed fix, as well as a meeting without Boeing scheduled for late May, will be critical to maintaining the international system of reciprocity, as trust has been broken. The fundamental issue at play is now trust. Are there other areas of the aircraft that Boeing and the FAA could have also missed that haven’t emerged yet? Who will do the vetting of that process to determine that all of the t’s were crossed and i’s dotted? It is quite clear that the MAX was developed on a shorter than normal schedule. The MCAS system was clearly inadequately designed, implemented, and tested based on the facts that are now well known. While Boeing may not want to admit legal liability, it should have taken a lesson from Johnson and Johnson’s handling of the Tylenol affair some years ago and stepped up to the plate, taken the blame, and immediately provided corrective action. The Tylenol brand was saved - but the jury is still out for the MAX. There is a strong likelihood Boeing will need to rebrand the aircraft. As the Greek’s say, a fish rots from the head down. It may be time for Dennis Muilenburg to step aside.

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