Boeing's Q3 Earnings Release To Be Dominated By 737 MAX Troubles

Boeing Company's stock BA has fallen 32% since documents turned over to Congress and the U.S. Federal Aviation Administration on Oct. 17 revealed that a former Boeing test pilot kept quiet in 2016 about problems he encountered with the 737 MAX's flight control system since blamed in two fatal crashes.

The chief technical pilot for the 737 also convinced the FAA at the time to remove mention of so-called MCAS software from the operating manual and pilot training for the MAX because it rarely would be activated. Lawmakers and the FAA reacted angrily to the late disclosure.

And a panel of international aviation experts recently determined that Boeing withheld key information about the 737 MAX from pilots and that the FAA didn't fully understand its automated flight system.

The new revelations are raising questions about whether the plane will be cleared for commercial flight anytime soon. Although 737 types like the MAX carry modest amounts of cargo, the situation is important for shippers and airline cargo divisions because airlines may have to continue operating with lower-than-expected capacity and the company's overall health is important for other production lines, including for freighters.

On Oct. 22, one day before its earnings call, Boeing made several executive changes and issued an update of technical, organizational and customer-focused steps it has taken to improve its safety culture as it tries to regain the confidence of regulators, customers and the flying public.

Damage Control

The company named Stan Deal to succeed Kevin McAllister as head of Boeing Commercial Airplanes and Ted Colbert to succeed Deal as president of Boeing Global Services, effective immediately. Vishwa Uddanwadiker is replacing Colbert as interim chief information officer. Earlier this month, the board separated the roles of chairman and chief executive officer, a move ostensibly made to give CEO Dennis Muilenburg space to focus on operating the company that also suggests he may be on a shorter leash to complete reforms and stem financial bleeding on the commercial side. 

"Boeing will emerge stronger than ever from its current challenges and the changes we're making throughout Boeing will benefit the flying public well into the future," new Boeing Chairman David Calhoun said in a statement. 

Authorities took the plane out of service in March and Boeing now says it has redesigned the software meant to automatically stabilize the plane during takeoff, but which was fooled by incorrect data about a potential stall. A major criticism of Boeing is that the system only relied on input from a single sensor instead of redundant data sources about wind speed and flight angle. In the Lion Air and Ethiopian Airlines crashes, the system pitched the nose of the planes down too much and pilots, who had not been notified about the automated system, were not able to override the commands.

Boeing is updating MCAS to have three additional layers of protection, including a backup sensor and more gradual pitch correction. It says it has conducted more than 800 tests and production flights with the updated software, totaling more than 1,500 hours. And 445 aviation professionals at airlines and regulatory authorities have participated in simulator sessions to experience the MCAS software update. Last week the manufacturer said it successfully conducted a dry run of a certification flight test.

Meanwhile, the company says it has conducted 20 conferences with more than 1,100 participants from more than 250 organizations to help operators and financiers prepare for return to service. It is holding weekly technical calls with customers to help plan for the return of their fleets to service, including the development of a comprehensive package of training and educational resources. And it is working closely with more than 900 suppliers to ensure supply chain stability.

In the past three weeks, Boeing has moved to tighten internal governance and oversight and consolidate safety management under one roof. In addition to the corporate-level changes, a new product and safety organization, answering to Vice President Beth Pasztor, will review all aspects of safety and maintain oversight of the accident investigation team and safety review boards. Boeing also is realigning its organization so engineers report to one person and taking steps to reinforce how it manages safety across the company and its supply chain, including expanding use of safety review boards and increased investments in enhanced flight simulation and computing capabilities.

Boeing said it also has expanded the use of its anonymous reporting system to encourage employees to bring forward potential safety issues.

Company officials hope the software fixes will be approved next month and the ground order removed, but victims' families suing the manufacturer want the entire plane recertified even though experts say the rest of the plane is perfectly safe. The Wall Street Journal also reports that growing congressional scrutiny raises the possibility that return to service could take longer. Investigators have unearthed information that many employees feel pressured to give safety-related approvals on commercial aircraft, compounding concerns that the FAA delegates too much freedom to self-certify aspects of new planes. The internal Boeing survey meshes with a whistle-blower complaint, first reported by The Seattle Times, that Boeing management chose not to add safety systems that could have avoided the MCAS malfunctions in favor of lower costs and profits. 

Meanwhile, European regulators have made clear that they are working on a separate timeline and won't lift the grounding at the same time as the FAA.

Muilenburg is scheduled to testify Oct. 30 before the House Transportation and Infrastructure Committee about the 737 MAX and Boeing's safety culture.

Adding to Boeing's headaches is the discovery of structural cracks in 38 older 737 next-generation planes following a fleetwide inspection ordered by the FAA. The vast majority of aircraft with cracks were found overseas. The planes that were affected in the U.S. were removed from service pending repair or replacement of the parts, FAA spokeswoman Lynn Lunsford said.

"Boeing is actively working with customers that have airplanes in their fleets with inspection findings to develop a repair plan and to provide parts and technical support as necessary. Boeing regrets the impact this issue is having on our 737NG customers worldwide and we are working around the clock to provide the support needed to return all airplanes to service as soon as possible," spokesman Paul Bergman said.

Boeing has more orders for the 737 MAX than any other plane and the longer customers can't fly it, the more money and potential market share the manufacturer will lose.

Investor news site Seeking Alpha estimates Boeing was scheduled to deliver 590 of the MAX planes this year and another 660 in 2020 and that it received $33.4 billion in predelivery payments. If the plane is grounded indefinitely or customers seek refunds, Boeing would be in a crunch because it already has produced many planes that can't be delivered yet and only has $9.2 billion in cash or equivalents on hand.

Boeing's commercial deliveries for all plane types have plunged by nearly 50% during the first nine months of the year.

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