737 MAX Grounding Will Cost Boeing $4.9 Billion

The financial costs associated with the ongoing Boeing 737 MAX grounding are starting to be revealed. Boeing has just announced that it is recording an after-tax charge of USD$4.9 billion in the second quarter of 2019 to account for costs associated with the grounding. That USD$4.9 billion translates to USD$8.74 per share.

The Boeing 737 MAX was grounded in March 2019 following the crash of an Ethiopian Airlines 737 MAX after take off from Addis Ababa. That crash followed a crash Lion Air crash in October 2018 in Indonesia. 

Boeing’s 737-8 MAX rotating. Photo: Wikimedia Commons.

Despite some flurries of optimism in late May 2019 that the problems surrounding the 737 MAX would be solved, the 737 MAX remains firmly on the ground.

The grounding has been a logistical and financial headache for airlines around the world. For Boeing, it has been a financial and public relations disaster.

Now, the 737 MAX’s grounding is really starting to bite into Boeing’s balance sheet.

What Boeing said

In a statement provided to Simple Flying, Boeing noted that the USD$4.9 billion charge will lead to a USD$5.6 billion reduction of pre-tax earnings and revenue in the second quarter of 2019. 

The aircraft manufacturer also expects to be paying “consideration and concessions” for years to come as a result of the 737 MAX grounding.

Previous financial guidance put out by Boeing has not reflected the impact of the grounding. This announcement, released by Boeing yesterday, highlights the impact the 737 MAX grounding is having on Boeing. 

And it is only for one quarter.

Boeing 737-9 MAX. Photo: Wikimedia Commons.

Publically, Boeing is putting the best perspective it can on the situation.

In the statement provided to Simple Flying, Boeing Chairman, President and CEO Dennis Muilenburg said the grounding and how it was managed was a “defining moment” for Boeing;

“We remain focused on safely returning the 737 MAX to service. Nothing is more important to us than the safety of the flight crews and passengers who fly on our airplanes. The MAX grounding presents significant headwinds and the financial impact recognized this quarter reflects the current challenges and helps to address future financial risks.”

Boeing is cautiously optimistic going forward

Boeing is cautiously optimistic that the 737 MAX aircraft will return to service in the fourth quarter of 2019. The current accounting and financial guidance are reflecting that.

The grounding has also meant that the production of the 737 MAX has slowed. This is also impacting on Boeing’s balance sheet. The impact of the slow down in production will be felt for some quarters to come.

But Boeing does expect production to pick up in 2020, assuming the 737 MAX is returned to service by then. Boeing is currently producing 42 of the aircraft per month. In their statement, Boeing said they expected this to increase to 57 per month in 2020.

Production of the 737 MAX has slowed but is expected to pick up in 2020. Photo: Airbus 777 via Flickr.

That any manufacturer could survive the prolonged grounding of a key product, survive the negative publicity, and survive the financial impact, is a testament to Boeing’s financial position and reputation. But both are taking a hit as the airlines continue to adjust timetables to account for their grounded planes.

Public confidence in the 737 MAX is being seriously undermined. While some people are happy to step foot in the MAX once it is cleared to fly, many others say they will avoid flying on the aircraft altogether.

Boeing’s financial advice yesterday reflects the new reality for the manufacturer. 

Further costs can be expected when it releases third-quarter 2019 financial advice in a few months time.