Five things we don't know about the Boeing 737 Max crisis
By Douglas MacMillan and Aaron Gregg
Apr 25, 2019 | 8:30 AM
Boeing's first earnings report since two deadly crashes of its 737 Max jets showed that a worldwide grounding of the company's flagship jet is taking a toll on its business. But it left unanswered many key questions about the crisis.
The Chicago-based aerospace giant said Wednesday that its first-quarter earnings fell 10%, to $3.75 per share, in the first quarter, and its profit slid 13%, to $2.1 billion. Sales fell 2%, to $22.9 billion.
The dismal results were a preview of what's likely to be a long year of setbacks for Boeing, as unsold jets pile up at its production facilities and the company seeks regulator approvals that would allow its planes to fly again. Boeing declined to say how long it expects that approval process to take.
The souring picture for Boeing's business shows how quickly the company's fortunes have reversed since two deadly crashes of the 737 jet in Indonesia and Ethiopia killed 346 people. Boeing has long been prized by investors as a cash-producing machine with huge growth potential; the company has outperformed Wall Street earnings estimates for 11 straight quarters.
Boeing took the unusual step this week of withdrawing its estimates for future financial results, saying it doesn't know how many planes it could sell this year. Boeing had said in January that it expects free cash flow — a measure of how much cash the company generates after taking out the cost of capital expenditures — of $17 billion to $17.5 billion this year. The company now declines to say whether it expects to reach that goal. Analysts at Cowen predict about $12 billion in free cash flow this year.
Here are a few of the biggest unanswered questions about the 737 Max, and what we know so far:
How soon will the 737 Max fly again?
Boeing refuses to publicly commit to a timeline, saying it is working on a software update for the safety problem and is now awaiting approval from regulators. But the company has yet to submit its final package of software fixes to the FAA for approval, something it said it would do by early April. Muilenburg said Wednesday that the company has completed over 135 flights totaling more than 230 hours of airtime on 737 Max jets with the updated software. The company is now working with the FAA to prepare for a formal certification flight, to be conducted by FAA test pilots, that it hopes will pave the way for the grounding to end.
Even if the fix has FAA approval, it's unclear how soon international regulators would follow suit. Boeing may struggle to get approval from China, which was one of the first to ground the 737 Max after the Ethiopia crash and is locked in tense trade negotiations with the United States. Boeing CEO Dennis Muilenburg said Wednesday that there are "different paces and different processes in each country" and that the company is "working with each country to try to align them."
Boeing plans to train pilots on the planes with the updated software. The grounding order has also halted deliveries of new planes all over the world.
American Airlines and Southwest have canceled 737 Max flights through August, suggesting that they are preparing for a grounding that lasts another four months. Analysts have predicted that plane deliveries may not resume until the fourth quarter.
Will the crisis have a lasting impact on Boeing's business?
Seth Seifman, an analyst at JPMorgan, called 2019 a "lost year" for Boeing in terms of financial performance, because sales of the company's biggest cash generator are on hold until the grounding is lifted. With potentially no sales of 737 Max jets in the second quarter, a business that runs on cash flow suddenly has to prepare for the risk of having few funds on hand to make investments in its business or insulate itself against unexpected shocks.
To free up some cash, Boeing said Wednesday that it paused its plan to buy back $18 billion in stock from investors. It said it expects to eventually resume the buyback program.
A bigger concern may be whether the 737 Max triggers a broader crisis of confidence in the safety of its planes. Muilenburg acknowledged that the company has to work "to earn and reearn the trust of our airline customers and the flying public in particular." He added that Boeing will offer airlines tailored training and educational resources designed to help with "brand repair" and "rebuilding the public confidence."
What role did Boeing play in the causes of the two crashes?
Evidence is mounting that Boeing's planes — rather than pilot error — played a central role in both crashes. According to a preliminary report on Ethiopian Airlines Flight 302, pilots performed all the procedures recommended by Boeing to save their 737 Max 8 aircraft but could not pull it out of a flight-system-induced dive.
Asked about what led to the safety flaws in the 737 Max, Muilenburg said Boeing didn't make any mistakes in its design of the planes. "There was no surprise or gap or unknown here or something that somehow slipped through the certification," Muilenburg said. "We know exactly how the airplane was designed, and we know exactly how the airplane was certified."
The CEO said both crashes were caused by a "series of events" that included erroneous sensor data being fed into the maneuvering characteristics augmentation system, or MCAS, an anti-stall system that played a role in both crashes. "There were actions — or actions not taken — that contributed to the final outcome," he said, alluding to the role of the pilots.
The company faces investigations into the 737 Max from the Justice Department's criminal division, the Transportation Department's inspector general and two congressional committees.
Will Boeing make any changes to the way it produces or certifies new planes?
Boeing executives have pushed back on the idea that the two crashes point to any fundamental flaws related to how Boeing designs or certifies aircraft. Even so, a committee of Boeing board members is reviewing its process for aircraft design, development and certification and will recommend improvements "make a safe industry even safer."
Muilenburg said on Wednesday that the company is committed to a thorough review: "Rather than stating upfront what that will be, what we want to do is see what the committee learns, see the outcome of their work, and then we'll decide how to implement that."
How much will Boeing owe to airlines and the families of victims?
Boeing is facing lawsuits from the families of the crashes of Lion Air and Ethiopian Airlines, which are likely to hold the company accountable for significant financial damages. Airlines are incurring millions of dollars in costs as they cancel hundreds of flights a day, which Boeing is likely to repay in the form of future discounts on new planes. Together, analysts say these penalties could cost Boeing billions of dollars — though its insurers are likely to be on the hook for part or all of that.