The 737MAX has been discussed thoroughly in recent weeks and during Boeing’s 2019 First Quarter earnings call yesterday. While some interesting comments emerged from the call, there remain a number of questions that are unanswered. Those questions include:
• When will the MAX be certified to fly again?
• What role did Boeing play in the two crashes?
• What will be the financial impact on Boeing from airlines and victims?
• Will Boeing or the FAA change certification processes?
• Has the MAX crisis impacted development of NMA?
• Will there be lasting impacts for Boeing?

In today’s piece, we will examine what we do and do not know about these questions, and provide preliminary insights based on current observations.

When will the MAX be certified to fly again?

The next major milestone for the MAX are Boeing’s review of the proposed fix to with international regulators starting April 29th and a meeting of the joint committee of airworthiness authorities scheduled for May 23rd that excludes Boeing. It is expected that at that meeting regulators will discuss proposed changes to the aircraft and training to decide whether a joint agreement can be reached. Of course, agreement of all the regulators present is not a given, as each country can approve or not approve the modifications as appropriate.

We suspect that the FAA will accept the revisions to the software and approve the aircraft to resume flying in the US after a suitable time to review the documentation and flight test results of the system changes, which could lead to return to flying by July. Canada has already stated that additional pilot training will likely be required, and those training materials will need to be fully developed and ready to implement before a resumption in flights by Air Canada and Westjet. It may take until August or September to implement the new training, pushing back re-entry into service in Canada. Europe and China are the wild cards in the regulatory mix, and we would expect re-entry into service by August for those countries.

Of course, each agency has the opportunity to demand additional testing, as required, and there could be political impacts if trade disputes between the US continue with Europe and China. We hope politics stays out of the world of aviation, but with President Trump rather than the head of the FAA announcing the grounding of the airplane, politics has already, and inappropriately, crept in.

What role did Boeing play in the two crashes?

It is quite clear that the MCAS system designed by Boeing did not work as originally specified or intended. When erroneous inputs from a failed sensor were detected, the system initiated, as it was supposed to do, but provided excessive trim pressure and re-booted itself for further adjustments rather than provide a single application. The minimal mention of this system during transition training for pilots by Boeing also appears to have been a contributing factor in the first accident.

In any air accident, a number of things need to go wrong to bring down an aircraft. It is difficult to fly an airplane when events occur that aren’t supposed to happen, and from personal experience on a small airplane with a runaway electric trim, I can tell you that reviewing a checklist is the last thing on your mind when you are a single pilot trying to regain control of an aircraft. Could the crashes been avoided with a perfect response from the cockpit? The answer is likely yes. Were the pilots trained well enough to be prepared with that response? Not knowing the system and that its behavior differed from plan, the answer is no?

The system was apparently certified with flawed software. Does this indicate a hole in the FAA’s certification procedures that needs to be tightened, and is the FAA equally to blame for not catching the errors prior to certification?

While attorneys and insurers will argue and come to a legal conclusion regarding culpability, the general consensus in the industry is that Boeing flaws contributed significantly to problems, and that those flaws are serious enough to need to be fixed before the plane flies again.

Interestingly, Boeing’s Chairman and CEO seems to have backed off of earlier statements accepting responsibility, and stated during the earning call that Boeing didn’t make any mistakes in its design of the airplanes and that “there was no surprise or gap or unknown here or something that somehow slipped through the certification. We know exactly how the airplane was designed, and we know exactly how the airplane was certified.” But nonetheless, the MCAS design was flawed, particularly in relying on a single sensor when industry standards for redundancy are commonplace.

What will be the financial impact on Boeing from airlines and victims?

In their earnings call, Boeing indicated that they have added an additional $1 billion to the 737MAX program costs. But overall, the costs are likely to be substantially more than that. Several analysts have examined the program in detail and estimate an impact of $1.2 billion per month that the aircraft is grounded. With one month already in, and the aircraft unlikely to resume flight for another 3-4 months, the financial impact will likely reach $5 billion in additional costs after everything settles out.

Some of the cash flow impact of maintaining production at 42 aircraft per month will be recovered as those aircraft are redelivered next autumn, so we expect Boeing’s second quarter to be substantially impacted, the third quarter weak but recovering, and the fourth back to positive.

Airlines will likely receive compensation in the form of discounts on future aircraft orders rather than cash, and Boeing can thereby defer some of the short-term impacts. They have already restructured an order that Garuda Airlines was looking to cancel, changing the mix of aircraft and delivery schedules.

Compensation for victims will take some time to occur, as lawsuits of this magnitude are never fast and expensive to litigate. We expect that Boeing’s insurance policies will kick in and pay for much of the compensation to families of victims.

Overall, we are expecting about a $5 billion impact from the two crashes and redesign and recertification of the aircraft.

Will Boeing or the FAA change certification processes?

The current certification process that the FAA uses, which includes Designated Engineering Representatives and Designated Airworthiness Representatives, that are often Boeing employees seconded to the FAA in a certification role, has worked quite well over the years. This instance, of software not performing as intended, raises some new questions on whether the traditional form of oversight during certification is adequate.

Independent testing of software for aircraft is both an art and science. The art is knowing how deep to go in the review process – as a line by line review of code would be infeasible. Having an appropriate test plan and reviewing results against that plan is critical to success, and likely where the failure to detect the performance of the MCAS system occurred.

We believe new standards at the FAA will be introduced for the testing of software that include test flights that evaluate the software under all conditions, and compare the behavior of the software to its specified functionality. In this case, we believe the specific multi-national review will closely analyze the proposed system changes, results from test flights under varying circumstances, including sensor failure, and ensure that the new system works as intended.

The FAA certification process works a bit differently that the process in Europe. In the US system, the government pays for and schedules certification. In the European model, the airframe manufacturer pays for certification services, and has an option for expediting the process if needed. While the FAA is unlikely to change its business model in the short-term, the lack of funding to maintain specific expertise in new technologies in house is a concern as we move to the next generation of aircraft circa 2030 with new materials, hybrid engine technology, and unique designs.

Has the MAX crisis impacted the development of NMA?

The NMA was briefly discussed during the earnings call, and it sounds as if the NMA hasn’t been impacted. Many have expected an Authority to Offer to be approved by Boeing’s Board before the Paris Air Show, with an official launch by the Farnborough Air Show in 2020. Boeing’s current priority is clearly the MAX, which is unlikely to be flying by the Paris Air Show. As a result, we might see a short deferral of any AOA for the NMA until late in the year, perhaps by the Dubai Air Show, but nothing that would prevent an entry into service by 2025.

Will there be lasting impacts for Boeing?

Initial reaction from passenger surveys indicate that there is a negative connotation with the MAX, and a large number of fliers who don’t want to fly on one – 53% in one recent survey. While early models of an aircraft have crashed before, including the Boeing 727 and Douglas DC-10, those events took place before the advent of social media, and before on-line booking where passengers can easily see the aircraft type they are scheduled to fly on.

Southwest Airlines, which utilizes the same air safety card for the 737-800 and 737MAX8, was assuring passengers through an announcement that they were not on a MAX aircraft. Once the aircraft returns to service, that won’t be possible, and could potentially backfire if passenger don’t want to fly on the MAX.

It is likely that Boeing will need to rebrand the 737 MAX8 as the 737-8, to eliminate the negative stigma associated with the MAX name. While that may help some airlines in calming fears and demonstrating that they are flying the “fixed” aircraft, it may or may not be a solution in this era of social media.

Boeing has to regain the confidence of its airline customers, which it will do as it normally does. But in today’s social media driven world, it will need to also regain the confidence of customers, some of who are afraid to get on a relatively new aircraft that has seen two fatal crashes. A focused campaign will likely be needed to inform and educate airline passengers, something Boeing has little experience with and hasn’t previously needed. Convincing the public that the MAX is safe will be a new and major challenge.

With more than 5,000 orders, Boeing could produce at full rate through 2026 and not miss a beat, so they will be fine in the long-term. It is the short-term that is of concern, particularly if passengers don’t want to fly on the aircraft. We believe a name change will be necessary, and that Boeing will need advertising that talks about a taboo subject – safety.

The Future

From our perspective today, these thoughts represent our best guess at the future. But as more facts emerge, we reserve the right to change our opinions.

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