A Near Disaster For Boeing's 737 Max: Has Cutting Corners Come Back To Bite Boeing Again?

It's A Miracle No One Died This Time

On Friday, a hole opened up in the fuselage of a brand new Alaska Air Boeing 737 Max.

Video of the Alaska Airlines Boeing 737 Max making an emergency landing in Portland after part of the aircraft blew out. The plane had just taken off and had reached 16,000 feet before returning to the airport. The aircraft was new, having just been delivered in October. pic.twitter.com/FUNKlyDli9
— Yashar Ali 🐘 (@yashar) January 6, 2024

Fortunately, no one was sitting in the seat where the hole opened up, and everyone survived the ensuing emergency landing. As readers may recall, previous 737 Max passengers weren't so lucky.

A History Of Cutting Corners

After the crashes of Boeing 737 Maxes (Lion Air Flight 610 and Ethiopian Airlines Flight 302), disturbing details emerged from internal emails at Boeing. Investigations into the development of the 737 Max following the fatal crashes in Indonesia in October of 2018 and in Ethiopia in March of 2018 suggested the company increasingly cut corners to save money in ways that may have sacrificed safety.

One example of that cost-cutting is the 737 Max itself. As the Financial Times detailed at the time (paywalled here), rather than take the time to build an all-new plane designed to handle the larger, more fuel-efficient engines, Boeing retrofitted 737s to hold the new engines in position that caused the nose of the airplane to tend to rotate upward, risking stalls. Boeing then added a software fix, the MCAS (Maneuvering Characteristics Augmentation System), to push the plane's nose down to avoid stalls. The FT went on to suggest in that article that regulatory capture may have been behind the FAA's somewhat lax oversight of this:

The MCAS system was certified as a new element, but the 737 Max fleet was classified as a derivative of earlier models, meaning it did not require the same amount of certification. [...]

Boeing has long been one of the most politically well-connected companies in the U.S.

Another example of Boeing's cost-cutting was it moving manufacturing to South Carolina (via the intercession of former South Carolina Governor and later Boeing director, Nikki Haley), which doesn't have Washington State's tradition of aerospace manufacturing but does have a reputation for cheap labor. As the New York Times reported after the 737 Max crashes, the South Carolina factory received a number of customer complaints about manufacturing quality, which led to increased federal oversight.

A third example of Boeing putting cost-cutting ahead of safety was its decision to outsource some of the development of the 737 Max's MCAS software to contractors earning as little as $9 per hour:

Increasingly, the iconic American planemaker and its subcontractors have relied on temporary workers making as little as $9 an hour to develop and test software, often from countries lacking a deep background in aerospace — notably India.

In offices across from Seattle’s Boeing Field, recent college graduates employed by the Indian software developer HCL Technologies Ltd. occupied several rows of desks, said Mark Rabin, a former Boeing software engineer who worked in a flight-test group that supported the Max.

The coders from HCL were typically designing to specifications set by Boeing. Still, “it was controversial because it was far less efficient than Boeing engineers just writing the code,” Rabin said. Frequently, he recalled, “it took many rounds going back and forth because the code was not done correctly.”

As that article went on to note, Boeing's hiring of an Indian software firm was motivated not just by the prospect of cost savings, but also by the prospect of selling more planes to Indian firms (offsetting some aspects of production to a particular country to sweeten a large aircraft deal is an old practice, but in other cases it was aspects of aircraft interiors offset, not mission-critical software).

As JavaScript inventor Brendan Eich speculated on X, the latest 737 Max incident may have been the result of another cost-saving Boeing hack.

737 MAX hacked bigger engines higher+forward from 737 engines, requiring “Maneuvering Characteristics Augmentation System” MCAS to compensate for extra pitch up, didn’t tell pilots how to disable => 346 dead. Looks like Boeing did another cheap hack to squeeze $$ from old design. https://t.co/OSIxtfCGjs
— BrendanEich (@BrendanEich) January 6, 2024

If You Own Boeing Shares Now

You might be wondering if it's too late to hedge. We'll have to see what Mondays' price action looks like, but for reference, here's a look, as of Friday's close, at hedging Boeing against a >15% decline over the next two months.

It will be interesting to see what the cost of similar protection will be on Monday.

Another thing to keep an eye out for on Monday is the continuation of Q4 earnings season.

We'll be doing some analysis over the weekend to see if there are any attractive earnings trades for next week. If you'd like a heads up if we find any, feel free to subscribe to our trading Substack/occasional email list below.

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This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.

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