BoA Estimates Boeing 737 MAX Crisis Could Hit $20bln.

BoA Estimates Boeing 737 MAX Crisis Could Hit $20bln.
January 22, 2020


The shares Boeing (NYSE: BA) came under selling pressure after Ron Epstein, aerospace analyst at Bank of America Merrill Lynch, estimated that the cost of grounding the 737 MAX, its best-selling aircraft, could reach $20 billion. The stock closed at $313.37, down $10.78 or 3.33% from the prior close.

Epstein’s forecast excludes lawsuit settlements that may be reached with families of crash victims, in case the planed take to the air again in June or July. The analyst estimates that Boeing derived roughly 40% of its profits last year from 737 MAX.

The company’s best-selling aircraft was grounded across the globe after the loss of 346 lives from two deadly crashes. Currently, American, United, and Southwest airlines, which have 737 MAXs in their fleet, have removed the aircraft from their schedules until early June of this year.

The disaster forced ex-CEO Dennis Muilenburg to step down, hastened Boeing to terminate production of 737 MAX aircraft, caused the inflow of orders to drop to the lowest level in decades, affected its supply chain, and flared up expenses that are now estimated to be $10 billion. The bad news is not yet over. Even the temporary suspension of production has not entirely stopped the cash drain. According to JP Morgan estimates, Boeing will lose up to $1 billion per month despite the production cut.

737 MAX issues have eclipsed the KC-46 refueling tanker issues faced by Boeing. The company is unable to start working on its plan to build a middle-market aircraft because of these issues. Airbus continues to capitalize on Boeing’s problem by raking up orders from United and American for its upcoming long-range, single-aisle aircraft. Considering the problems facing the 737 MAX, Boeing’s 777X could come under more time-consuming scrutiny from regulators.

And as if all this was not enough, a collection of startling internal messages released by the company depicted employees making offensive statements against regulators and airline companies, while bragging about making them accept less time-intensive training process.

Earlier this month, Boeing release yet more bad news to its customers. It now advocates additional simulator training for 737 MAX pilots, a U-turn from its earlier position, and a step that could cause an additional delay in the return of 737 MAX aircraft to service.

Dave Calhoun, who took the helm recently, has been given the task of reforming Boeing’s culture, boost employee morale, and fix the torn relationships between customers and regulators.

While speaking to employees, Calhoun acknowledged that investors are right in being disappointed with the company. Calhoun said, “Many of our stakeholders are rightly disappointed in us, and it’s our job to repair these vital relationships. We’ll do so through a recommitment to transparency and by meeting and exceeding their expectations. We will listen, seek feedback, and respond — appropriately, urgently and respectfully.”

Forecasts made by Wall Street analysts vary considerably, from a loss of $0.23 per share to a profit of $2.52 per share, as per the survey carried out by Refinitiv. On average, analysts anticipate the company to post a profit of $1.53 per share, down 72% from the prior year. The Street analysts estimate a 26% y-o-y decline in revenue to $20.80 billion.

Many Wall Street analysts now anticipate Boeing, which is scheduled to report its fourth-quarter and full-year earnings on January 29th, to incur additional charges associated with 737 MAX. Boeing already took a pretax charge of $5.60 billion in July to pay damages to airline companies and other clients for the grounding of the aircraft.

Moody’s Investors Service could possibly downgrade Boeing’s debt, a month after slashing its credit rating by a notch as the issue continues to drag than anticipated. A lower credit rating implies that Boeing will have to shell out more as interest for the sum borrowed as the risk premium will increase.

Sheila Kahyaoglu, aerospace and defense analyst at Jefferies, has estimated that compensation to aircraft customers could probably increase to $11 billion. She expects a portion of that to be reported later this month. The estimate is based on the assumption that the grounded aircraft will resume service in April.

Analysts are also looking for news on how Boeing will manage its supply chain.

Commenting on layoffs and supply chain issues, Epstein said: “It doesn’t give you the warm and fuzzies when Spirit lays off 2,800 people.”

The analyst pointed out that suppliers are facing a tough situation as they cannot afford to lose workers in a tight job market. He said, “It’s a tight job market and I’m sure there are a lot to companies that would like to hire them.”

Until Boeing brings back 737 MAX to service, the stock is expected to remain bearish.

Technically, the stock is declining after facing resistance at 350. The next major support is only at 280-300 levels. Additionally, the RSI indicator is also in the negative region. Therefore, we are anticipating the downtrend in the stock to continue.

boe - technical analysis - 22nd Jan 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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