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Jet Grounding Is Only Boeing's Second: Manufacturer Overcame Costly 2013 Stoppage

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Jet Grounding Is Only Boeing's Second: Manufacturer Overcame Costly 2013 Stoppage

Boeing Corp (NYSE: BA) has been here before, but only once.

January 2013 was the last time the Federal Aviation Administration did something it almost never does: ordering U.S.-based airlines to ground an entire type of aircraft. In that instance, it was Boeing’s new 787 Dreamliner, in which lithium batteries were overheating, causing fires. 

At the time, the agency hadn’t ordered an aircraft grounded in nearly 35 years. The last time had been in 1979, when the McDonnell Douglas DC-10 was grounded following a crash.

Now, a half decade later, Boeing is grounded again, with the United States this week joining most of the rest of the world in an indefinite stoppage of flights by its new 737 Max jets, following the second crash of one of the planes in a matter of months in Ethiopia that killed 157 people

Though the 2013 grounding was a costly ordeal, Boeing recovered quickly. And as it once again faces uncertainty about a major project, Boeing still retains its spot as the world’s largest aircraft manufacturer.

Industry observers are again wondering what ultimately might happen to the company if its best-selling plane is out of service for long.

It’s only the third time a major commercial plane type has been grounded, but the 2013 Dreamliner shutdown may be instructional.

What Happened

In the winter of 2013, the Dreamliner was also a new aircraft and Boeing had only delivered 50. But the company had a bigger problem than the planes airlines were parking at airports: all the Dreamliners that weren’t being delivered amid uncertainty over when they’d be able to fly sat across the street from its Everett, Washington factory and at another plant in Charleston, S.C.

This time around, only one order cancellation has been reported, by Indonesia’s Lion Air, whose October Max 737 crash raised questions about the plane's airworthiness.

In 2013, as some airlines started leasing other planes, others demanded compensation from Boeing and costs mounted. Reuters reported that April that the grounding — and the fact that planes weren’t being delivered — had cost Boeing an estimated $600 million.

Boeing wasn’t worried that the the plane wouldn’t fly again. It continued production through the grounding, the company said in its 2013 annual report. And when the battery problem was fixed, everything started up again.

“During the second quarter, we installed a comprehensive set of battery system improvements on 50 previously delivered 787 airplanes and resumed 787 deliveries to customers,” the company said matter-of-factly in its annual report.

Financial Results

The financials ended up being OK, with a year-over-year increase in deliveries and a 6-percent boost to revenue to a then-record $86 billion. Airlines clearly weren’t spooked.

“Net new orders totaling 1,355 airplanes (the second-highest total in company history) increased our record backlog to 5,080 airplanes,” the company said at the end of that year.

As news accounts made it seem likely the 2013 grounding would end, investors gained confidence. On the day officials announced a battery fix, shares of Boeing gained more than 2 percent — and ultimately its stock was worth more after the grounding.

Latest Problem Just Starting

The new issue with the 737 Max 8 may not be resolved as quickly. Investigators are a long way off from determining a cause of the Ethiopia crash and whether it’s definitively linked to the Indonesia crash.

But the latest problem is affecting Boeing’s book of business.

Bloomberg reported this week that Lion Air was dropping its $22-billion 737 order and switching to competitor Airbus SE (OTC: EADSY).

As in 2013, compensation is an issue. Norwegian Air said recently it will ask Boeing to compensate it for losses.
Nearly 400 737 Max 8s and Max 9s have been delivered to airlines since 2017, and Boeing has orders for about 4,400 more. The plane had been expected to generate about $32 billion in revenue for the $100-billion company.

It's not yet clear how much Boeing's suppliers will be hurt if orders are cancelled. Another question: what does the problem do for Boeing's reputation as it competes with Airbus, which has long nipped at Boeing's heels for the top spot among aircraft manufacturers?

The company never disclosed specifically how much the 2013 grounding ended up costing, though it was likely several hundred million dollars, according to industry analysts.

The Washington Post cited financial analysts this week who estimated that a grounding that keeps the 737 Max 8 out of service for a long period could end up costing Boeing much more: perhaps $5 billion, or 5 percent of its annual revenue.

Boeing shares were down 0.54 percent at $375.09 at the time of publication Thursday. 

Related Links: 

Trump: US Will Ground Boeing 737 Max 8 And Max 9 Jets

Boeing Investors Pull Back As More Countries Ground 737 Max

Photo via Wikimedia

Posted-In: airlines Bloomberg The Washington PostGovernment Travel Media General Best of Benzinga

 

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