Boeing investors have rushed into derivatives markets to protect themselves from further steep falls in the company’s share price, as the grounding of its fast-selling 737 Max aircraft looks set to last for several weeks at least, with costs that could ultimately be well over $1bn.
Investors and analysts are struggling to assess the financial fallout from two deadly crashes of the new jet in five months, which could force Boeing to make compensation payments to airlines with grounded planes. Legal settlements with the families of victims and the costs of repairing existing aircraft could add to the final bill, along with delays to future deliveries.
Boeing said on Thursday that it would halt deliveries of new 737 Max aircraft because of the grounding, but that it was not currently changing its production schedule.
The company had said it would increase the 737 production rate from 52 a month now to 57 around mid-2019, but that increase could now be delayed, says Chris Higgins, aerospace analyst at Morningstar. “If a rate increase is pushed into late 2019 or early 2020, such a move would also dent Boeing’s full-year 2019 results,” he said.
Aviation authorities around the world banned flights of the aircraft following the crash of an Ethiopian Airlines plane on Sunday, which showed similarities to a Lion Air crash in Indonesia in October.
The company’s shares have fallen more than 10 per cent this week, but derivatives trading suggests that investors fear further declines. The sale of puts, which give investors the right to sell stock at a pre-agreed price and which are used to hedge against share price declines, soared to 237,000 contracts on Tuesday — 20 times the average daily volume — and has remained elevated since.
At the same time, the cost of hedging against a further 10 per cent fall in Boeing shares has close to doubled.
Black box recorders from the Ethiopian Airlines plane arrived in France on Thursday to help crash investigators. The probe into the Lion Air flight in October focused on a new automated stall-prevention feature on the 737 Max, which pilots have complained can erroneously force the nose downwards.
The US Federal Aviation Administration has said the planes will remain grounded at least until Boeing completes a software fix. In meetings with members of Congress on Thursday, the FAA signalled the installations will take weeks.
“There’s a high probability that the stock is close to its bottom,” said one of Boeing’s top-10 shareholders. “If the black box says there is another issue aside from the software or pilot training, then we have another problem.”
Safety fears grounded the 787 Dreamliner in 2013. That involved 50 aircraft and is believed to have cost the company about $500m, though Boeing never disclosed an exact figure. The 737 Max grounding involves 350 planes currently in service at more than 50 operators, so it could easily cost more, Mr Higgins said.
“Boeing negotiates with each airline to determine the amount of compensation. Often a significant portion of the compensation is done via future discounts on aircraft [as opposed to cash compensation] but some airlines will hold out for cash,” he said.
JPMorgan analyst Seth Seifman calculated that compensation for grounded aircraft could cost Boeing $115m a month, but carriers will also seek compensation for the cost of bringing in replacement planes, other operating costs and lost profits, so the final number could be a multiple of that.
Bjorn Kjos, chief executive of Norwegian Air, which has 18 Max 8s, said earlier this week that he would “send this bill to those who produce this aircraft”.
An even more significant question could be whether the issue threatens future deliveries of 737 Max aircraft.
Vinay Viswanathan, a derivatives strategist at Macro Risk Advisors, said: “If all these countries are shutting down these planes from being in the air and people start to cancel orders there could be a significant risk to Boeing’s bottom line. If you have a lot of Boeing exposure, you need protection.”
Airlines have so far held off on making decisions about existing orders for the new plane, and analysts predict that the safety concerns mean delays rather than cancellations.
“Delayed receipt of delivery proceeds would be largely a timing issue,” said Cai von Rumohr of Cowen Research, who estimated $1.8bn in revenues could be delayed as a result of a one-month delivery stoppage. Boeing gets about 60 per cent of the price of a plane on delivery.
“In the near-term there is potential for more bad news, because if you had a 737 Max order, why would you take it if you couldn’t fly it?: Mr von Rumohr said. “But in nine to 12 months, the company should be beyond this. It just depends on how they’ll implement a fix, how long that will take and what the airline reaction will be.”