Boeing faces dual crises after crash and grounding

Boeing has two tough problems to solve.

A tragic crash of an Ethiopian Airlines jet that killed 157 people Sunday led to the worldwide grounding of its 737 Max jets, the company’s most crucial plane.

Now Boeing has to figure out how to fix the jets, and how to repair its reputation.

“This is a huge material issue, not only for its revenue flow … but for its reputation,” Jim Corridore, director of industrial equity research for CFRA Research, told First Move with Julia Chatterley. “It needs to be rectified sooner rather than later.”

The 737 Max jets are by far the most important product for the company. It has orders for nearly 5,000 of the jets, enough to keep production lines operating for years to come. But none of the 371 planes delivered so far can fly until aviation authorities around the world determine they are safe.

Boeing (BA) spent three days after the crash insisting the plane was safe before conceding that the jets should be grounded out of “an abundance of caution and in order to reassure the flying public of the aircraft’s safety.”

A search for crash causes

The cause of the Ethiopian Airlines crash is still unclear. But it was similar to another fatal accident involving the 737 Max in late October, when a Lion Air flight out of Indonesia crashed, killing all on board.

A preliminary investigation found that the Lion Air pilots were fighting to take control of the plane. An automatic safety measure forced the plane’s nose down because it wrongly thought the plane was in danger of going into a stall. The FAA said Wednesday that the grounding became justified when new data showed that the track of the Ethiopian Airlines flight behaved very similarly to the Lion Air flight.

Boeing and the FAA had been insisting that with proper training the pilots could overcome any problems with the safety systems, and that the planes could keep flying while a software upgrade was completed. That upgrade is expected to be available next month.

But as other aviation authorities around the globe grounded the jets from Sunday through Wednesday morning, the pressure built on the FAA and Boeing to act more quickly. That delay is what caused the greatest damage to its reputation, according to Paul Charles, former director of communications for Virgin Atlantic who now runs an agency doing crisis management for airlines.

“For some reason, Boeing and the FAA did not sense the mood gripping the rest of the world,” said Charles. “Boeing should have moved faster to assure people. It remains to be seen if the damage is longer term.”

How to fix the planes

Most experts believe the software upgrade will end up fixing any problems to the satisfaction of various authorities.

“The technology is a headache, but not insurmountable. The damage to the reputation is the biggest challenge of all,” said Richard Aboulafia, vice president of analysis at the Teal Group.

How long the planes stay on the ground is still uncertain, “but our guess is weeks and not months,” said Cowen aerospace analyst Cai Von Rumohr in a note to investors.

Past crises for Boeing

Aboulafia said that Boeing has weathered worse crises before.

The plunge in air travel that rocked the airline industry after the September 11, 2001 attack was a bigger threat because it wasn’t clear if or when demand for air travel would return. US airlines all needed bailouts to survive that downturn.

Workers are pictured next to a Boeing 737 MAX 9 airplane on the tarmac at the Boeing Renton Factory in Renton, Washington on March 12, 2019. - US President Donald Trump on March 13, 2019, announced a plan to ground all Boeing 737 MAX aircraft amid intense international and political pressure following the second deadly crash in less than five months. "We're going to be issuing an emergency order of prohibition regarding all flights of the 737 MAX 8 and 737 MAX 9," Trump told reporters the White House. (Photo by Jason Redmond / AFP) (Photo credit should read JASON REDMOND/AFP/Getty Images)

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A lithium battery problem that led to the grounding of the 787 Dreamliner for three months in 2013 was a bigger problem, too.

“Here you have the headline tragedy, the horror of 300 deaths,” said Aboulafia. “But for Boeing, the Dreamliner seemed scarier because we did not know how to fix it, and the consequences of not being able to fix it would have been devastating.”

Public reaction

News of this week’s crash led some passengers to try and avoid flying on a 737 Max. Kayak, a travel booking site, even added a feature for customers to screen by airplane type. But it’s not clear those fears will linger once the planes are given approval to fly once again.

Von Rumohr said another Boeing plane, the 727, had four fatal crashes in seven months between 1965 and 1966, soon after its introduction.

The problem was a training issue, and not mechanical. Pilots were unfamiliar the three-engine configuration.

“It seemed like it would never recover from that. Travel agents were telling customers to fly anything but a 727. It came back from that to be one of its most successful aircraft,” Von Rumohr told CNN Business.

Boeing’s financial health

Boeing is also in the strongest financial position in its history to weather the storm.

The company had record revenue of $101 billion last year, and $10.6 billion in profit.

It will have to compensate the airlines that own the 737 Max jets and the CEO of Norwegian Air has already said he’ll be sending Boeing the bill for any lost revenue. But Aboulafia thinks that will come to hundreds of millions of dollars, not billions.

A Boeing 737 MAX 8 operated by Southwest Airlines arrives for a landing at Hobby Airport, Wednesday, March 13, 2019, in Houston. President Donald Trump issued an emergency order Wednesday grounding all Boeing 737 Max 8 aircraft in the wake of a crash of an Ethiopian airliner, a reversal for the U.S. after federal aviation regulators had maintained it had no data to show the jets are unsafe. (Yi-Chin Lee/Houston Chronicle via AP)

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The best news for Boeing as it tries to recover is its strong position in a strong market.

There are only two major players - Boeing and Airbus - able to supply airlines with the jets of this size. And demand for air travel continues to grow, especially in China, which is poised to become the first $1 trillion market for aircraft.

Airlines with 737 Max orders have little opportunity to cancel and replace it with an Airbus plane. Airbus has a significant backlog, and the airline also would encounter costs for spare parts and training pilots on a new aircraft type in its fleet.

“Even if you’re ticked off at Boeing, you have to get over it, because you have to do business with them,” said airline consultant Mike Boyd.