Not so long ago, back when the world was flying, the grounding of the 737-MAX was the biggest issue that Boeing has ever faced. The plane may be back in service soon.
Boeing’s 737-MAX used to be the biggest story in aviation since the 9/11 attacks. Aside from the residual paranoia that was felt among a sector of the flying public after the 9/11 incident, which was significant enough to produce a notable dip in passenger air travel for a while, the 737-MAX issue was one of far more substance once this plane became grounded by order of the FAA due to two separate crashes of the model attributable to a failure of one of the systems on the aircraft.
It turned out that the 737-MAX’s design did not produce an aircraft that was aerodynamically airworthy, and instead of redesigning it, they chose a workaround to keep it from crashing on takeoff and pushed through its FAA approval without a proper examination of the safety of this new craft nor proper training for pilots to manage this system which was even kept from pilots.
The pilots of the first crash first learned about this new system on the way down to the ground, as it failed and left them unprepared for what was to be their final flight. Somehow, this new danger got minimized enough to allow the aircraft to continue flying until a second fatal crash finally had regulators admitting enough is enough, when the planes became quickly grounded world-wide.
Getting these planes back in the air has become a longer project than first envisioned back in March of 2019 when the planes first got taken out of service. A year and four months later, we have finally seen the FAA test the beleaguered plane, a major step in the journey to recertify the aircraft.
No one is sure how much longer the process will be, and the FAA has not released any of its data to the public yet, and will be spending the next while examining and evaluating what it has learned over these three days of testing that they just wrapped up.
It used to be that Boeing shareholders and those who may be interested in playing this stock kept a close eye on the soap opera that played out with this aircraft, which is understandable given the big potential impact of grounding a company’s most popular aircraft.
For a lot of years, bigger was better, and two-story, four engine aircraft were all the rage. The future now is with smaller and more efficient aircraft such as the 737-MAX, the 777, and the 787. Boeing has just announced that they are ceasing production of the iconic 747, with the last one expected to roll off the assembly line in two years, now that competitor Airbus is winding down production of their own massive passenger jet, the A380.
Boeing has spent a huge amount of money upgrading their 737 though, and while it is clear that they should have spent a lot more on an entirely new design for this aircraft rather than the retrofit that they chose, getting this plane up and running is still obviously central to their recovery from the huge mess that they are in now.
We haven’t been all that enthused about Boeing’s stock since this all hit, even though we felt that the sell-off surrounding this was overdone from a long-term perspective. The crisis that ensued with the stock was certainly appropriate for the near term, and as it turned out, was probably not even big enough, but this really was just a transient event, and over the long run, a year or so is plenty transient.
Looking a few years down the road, it isn’t hard at all to appreciate that long after this grounding and the slowdown in sales with this plane has run its course, the 25% haircut that this issue delivered to the company’s stock price just won’t make sense anymore. Given Boeing’s long history of success together with their being one of only two major aircraft manufacturers in the business these days, alongside Airbus, expecting both their business and their stock price to get back to normal seemed a good bet.
The issue though was the trajectory that this recovery will take, and it’s not enough just to look at business projections, as the stock market has to get on board with this as well. With so much up in the air as we watched this longer than expected process of recertification unfold, the market kept a slightly negative view of it and it ended up giving back more per share as the event lingered and the timeline remained very much vague and uncertain.
It’s easy to forget that there was a lot of concern about whether the public will accept this plane in the way that it did prior to these crashes, that the fear of flying in it would not be totally allayed by the FAA, who after all certified this plane prior to these disasters and basically rubber-stamped its approval without anything that we could describe as the proper level of due diligence on their part.
The cat is fully out of the bag here now though and while it is clear that the FAA may have shown undue favor to Boeing back then, they have been put on notice and both Boeing and the FAA now have the eyes of the world upon them and won’t be able to get away with pushing the plane through the process again. The focus now is to win back the confidence of the flying public and this requires that they go a few extra miles with this new certification and retrofitting rather than a few miles short like last time.
Boeing Now Has Two Things to Watch Improve
While some have doubted whether or not this aircraft will ever fly again, there’s just too much money at stake here for Boeing to just walk away from this project. However, the concerns about how well customers will take to this new and improved version of the 737-MAX were much more reasonable.
There are already some who simply refuse to fly due to fear, although they have no qualms with taking ground transportation, in spite of flying being much safer. This even extends to the 737-MAX even before it was grounded, as two deadly crashes among the 42,000 flights this plane took prior to the plug being pulled. That’s a one in 21,000 chance of this happening, where your chance of dying in a car crash in any given year is about 1 in 4,000, to put this in perspective.
One in 21,000 is still way too high if the cause is one that arose from faulty design and lax certification, where they put a device in a plane that pilots were not even aware of, let alone trained on, with this device showing too high of a propensity to malfunction even in the testing phase. Heads turned the other way, people died, and these heads were jerked back toward the issue in horror.
Given that so many stayed away from flying after the 9/11 attacks and took so long to get fully comfortable again, this does give us a very good glimpse of how much a significant segment of the flying public is capable of magnifying risks, as dying in a plane that has been hijacked is simply off the scale in terms of likelihood, and went down significantly more when our screening for these things became so intensive that it also crossed over to the world of paranoia.
Being afraid of flying on a fixed 737 MAX is also way out there, but not so far out there that we want to ignore the threat of this. Fear is by its nature not a critical process but one that derives all of its strength from irrationality, otherwise we would call it prudence. There is no shortage of irrationality in society though and especially when it comes to understanding the comparative risks of flying.
This has been upped significantly by new concerns about contracting COVID-19, and while we did have some restrictions and quarantine requirements that participated in driving down air travel by up to 95% at the worst of it, most of this occurred by virtue of fear alone.
We can only imagine how afraid some people would be to fly in a 737-MAX and having to both worry about the safety of the aircraft and their being infected with this virus, but while the reticence to fly in this plane was only expected to be modest, that’s not a word that could be used to describe the dramatic effects of coronavirus fears upon air travel.
The fate of the stocks of Boeing and the airlines rests in the hands of these travelers. This was not a matter of authorities lifting restrictions that were holding back a big crowd eager to shop again, as people have been free to fly as much as they have chosen to, it’s just that they stopped choosing to.
This has the effect of making the massive slowdown in airline travel being of a nature more organic than a lot of the transitory business losses that resulted from the lockdown. There might have only been half of the normal people in a restaurant than before once allowed to open, but just opening the doors will get you half way back. The doors of the airlines have been wide open all along but with few takers.
As the fear of this virus has declined, people have been slowly coming back, and we got a taste of how big of an impact this can have a month ago, when both Boeing and the airline stocks surged when we were given the good news that things have come a long way from the depths of March.
Boeing went from the depths of $120 in mid-April to $234 on June 8. This was all independent of any real progress to get the 737-MAX back in the air, as this latest news is the first significant development over this time. When air travel shrivels up though, and you make airplanes, it is natural for the market to be scared by this massive decline in air travel enough to want to sell their stocks in the company.
This climb hit some real turbulence shortly after though, when the fear of climbing COVID cases ramped up the fear level overall in the market and put down a lot of stocks, especially ones related to air travel since they are so dependent upon a restoration of public confidence that these developments were seen to diminish.
If People Are Still Flying More, That Has to be Viewed as a Positive
The key to both Boeing and the airline stocks, which can be traded collectively by way of the JETS ETF, being such potentially good trades in the near future lies in the divergence between the short and longer-term outlooks. If you were only planning on holding these stocks for a very short while, your view won’t include the recovery, only turmoil, which will endure for at least a little longer given that people are still using total daily coronavirus cases to influence their trading.
The force that we really leverage with trades like this is the effect of the force of downward momentum, where the selling itself begets more selling, and causes the price of stocks to go down further than what the market would perceive as fair value. Once this goes away, this is what gets corrected, our overselling caused by it being a good idea to get out now regardless of where a stock may be going further down the road.
Just like the market sold off more than it should have during the first wave, this is to be expected during this perceived second wave as well, especially when we consider that air passenger traffic has continued to pick up in spite of the market’s fear rising.
We might think that the stock market wouldn’t be so prone to looking at the coronavirus situation so superficially that they would be so easily fooled. The media at least has a stake in being superficial when it benefits them, shouting these new record daily cases from their rooftops, where all we have to do is look at actual infection rates to get the real story.
While cases have risen to record levels, the infection rate overall is still declining and just went below 8% overall for the first time during the last couple of days. Overall infection rates only can go down when current data puts them down. Statistics can indeed be used to misrepresent the truth, but we would never have expected such obvious errors to scare so many. We’re told the infection rate is going up but no one is bothering to check.
It doesn’t help that the very people who are supposed to know the most about these things are allowing themselves to be deceived as well and are eager to spread the world. Stephen Morse, Professor of Epidemiology at the Mailman School of Public Health, warns us that “there are a lot of worst-case scenarios possible; one is a continuation of the present trajectory.”
He didn’t explain why a declining infection rate would be a trajectory we should be so afraid of, but you have to do a little math to figure this out and this is the part that is being overlooked, the dividing of the number of positives by the number of tests. We would think that you would learn this on day 1 of your education in epidemiology, or at least at some point between day 1 and your becoming a professor of the subject.
Regardless, the market is missing how air travelers are taking this though, with a stiff upper lip perhaps in the face of this misperception. When the market misses something, we do need to well take heed of that because the market drives stock prices and has driven them down over this, and we need to wait for it to wake up more.
If we were being completely objective about this, Boeing’s stock price should have kept going after June 8, because the thing that people were so worried about, the crashing of air travel, bot better since, not worse. If people are worried that higher daily cases is going to scare people away from flying more, and they end up being less scared nevertheless, this is not a negative event that we should be punishing airline stocks for.
While Boeing and the airlines have provided a lot of love so far during this time of recovery, we have already pointed out that there will likely be more in store for the airlines once things continue to pick up and this fear of a second wave wanes, the same thing applies to Boeing stock, which is also tethered to this revival.
When cooler heads prevail, and especially with good news on the 737-MAX comeback now emerging, investors will both see Boeing as a bargain and also find a time where they will be more comfortable getting in. Even though it may only be temporary, temporary market fear needs to be accounted for even by those who invest over the longer term because they still need to get their entries right and resist the temptation to be impatient when a stock is on the way down.
The seas are still pretty rough right now though, and even though Boeing stock has stabilized since its mid-June drop in altitude, we do not want to be impatient either if we’re looking to trade the expected rebound as Boeing’s issues resolve more and more.
It might seem rational to jump on and look to take advantage of this divergence of belief versus reality, the fear that air traffic declining versus it continuing to increase, as long as this is not made transparent enough, we won’t be taking the facts into account enough and this would not be the time to capitalize on an awakening, at a point where it has yet to occur.
As long as coronavirus fears in general are up, like they are now, this will at the very least serve to mute other issues, where people are more prone to engage in hypotheticals such as this wave growing much bigger, and while things may be improving now, it is not difficult for them to imagine a situation where the growth in air travel reverses.
We need to keep a close eye on both though, changes in both air traffic and perceptions of the pandemic in general, and especially to Boeing’s changing stock price. Without a confirmation from the chart, the plane may ready to take off but it has not even moved down the runway yet.
Boeing is very well worth watching closely right now, and just seeing it get back to where it was on June 8 has 27% worth of upside. We want to wait until it is at least in the air again though, and especially see the down currents from virus fears blow away, but that day may not be that far off.