How Boeing Stock May Fare When the Planes Come Back

Boeing

The market always does its best to price in risks with its stocks. Boeing has had quite a bit of risk priced in already, but we may be underestimating the total cost of this fiasco.

The two Boeing 737 MAX aircraft that fell from the sky and killed everyone on board has resulted in the market’s confidence in Boeing being shaken, and along with the billions to try to fix this, there is another significant danger out there that we don’t seem to be accounting for enough.

Deadly plane crashes are not all that unusual really, and Boeing, being one of the two big airplane makers in the world alongside Airbus, has certainly seen its share over the years. This issue with the 737 MAX is different though.

We go to great lengths to learn as much as we can about the reasons why a plane has crashed, because air crashes are so feared in general, and the Air France crash in 2009 is a very good example of this. It was as if money was no object in the quest to find the black boxes from this plane, and this took two years of searching and a huge expenditure to finally find them, 3 miles down on the floor of the Atlantic Ocean.

In spite of flying in a plane being the safest form of transportation out there, major plane crashes create quite a spectacle and can shake people’s confidence quite a bit. Even very minimal risks become magnified, and you don’t have to look any further than our approach to security with flying, where the very thought of a plane going down due to an act of sabotage has created an environment of paranoia where neither cost nor sensibility interfere very much.

While we accept the risks of travelling in cars without any real hesitation, and virtually no one is afraid of driving or riding in a car, our risk tolerance with flying is considerably lower. Causes such as driver error or road conditions don’t really worry us much, but if the threat of mechanical error looms, this really changes things. We have had a few incidents of mechanical failure with cars leading to a few deaths, and the fear of this can really have these rare deaths really stand out from among the 40,000 deaths per year from car accidents in the U.S. alone that don’t even register on the radar.

The threat of an air crash combines our fear of mechanical failure with our fascination with incidents that involve many deaths at once. A couple of hundred people dying in a plane crash at once is seen as a far bigger event than these 40,000 deaths a year in cars, and in spite of the risk being so much lower with flying, all those much smaller tragedies don’t get added up and it really comes down to the amount of deaths per incident and not collectively.

In spite of the fact that plane crashes are such big spectacles, crashes due to weather don’t bother us that much, and we tend to be horrified but chalk these things up to fate, even when there may be pilot error involved, similar to going off the road in bad weather by people driving too fast for conditions. When plane crashes are caused by something faulty with the plane, this not only impacts the victims, it is seen as a real threat to all of us.

When you get two crashes due to the same mechanical failure, as was the case with the 737 MAX, all hell can break loose, and the grounding of all of these aircraft for this long speaks to just how much more serious this is than your typical plane crashes. With the plane being beat down to this unprecedented level, this is far more likely to be sustained than more one-off incidents such as the Air France accident.

With the Air France accident, this was of the more benign sort, and the proximate cause of the crash was discovered to be pilot error, and in particular, the actions of one of the three pilots who had control and made a very bad decision. By the time the other two pilots figured out what was going on, it was too late, and they all lost their lives very quickly along with all of the other people on board.

Pilot error is the best outcome as far as maintaining people’s confidence in flying, given that these outliers are so infrequent and seeing one of these crashes does not really impact the safety of flying overall very much. Mechanical failure is a considerably bigger deal because this can reveal risks inherent in all the planes of this particular type, although they are generally dealt with swiftly and effectively.

The mechanical issue with this Airbus A330 was notable, but one that a skilled pilot could have overcome. The sensors that relay the air speed of the plane failed, which caused the pilot to believe that it was travelling too fast even though it was travelling far too slow, causing them to want to slow the plane down even more and enough for it to crash.

The plane dropped from the sky in a stall, and the pilot persisted in trying to pull up. Air emergencies are obviously extraordinary stressful, where it can be more difficult to think clearly, but one of the first things pilots learn is that if your airspeed drops too much, the plane will stall, which means no longer supported by the air and falling straight down like you would see with something dropped from a plane that is not aerodynamic.

As it fell, the stall warning sounded over and over, where you need to put the nose down and gain speed to come out of it, or crash. While the sensor failure put them in this spot, fixing this should not have been difficult and if the pilot had been competent this would have scared the passengers plenty but they would have had the opportunity to kiss the ground later instead of being slammed into the ocean to their death.

When it’s the Plane’s Fault, This Really Has Us Worrying

This is the sort of thing that we can still brush off pretty easily, because when people fly, they don’t see what happened to this plane as any sort of notable threat, aside from the fact that there is some risk in flying but none that is really differentiated and this risk just exists in the background like road noise that you don’t really notice.

The incidents with the 737 MAX were different in several important ways though. The first one is the fact that this tragedy started with Boeing improperly retrofitting a normal 737 with bigger engines that caused the plane to have an elevated angle of attack, meaning that it was aerodynamically disposed to climb. There are videos during the testing phase that had the craft in the dangerous position of being almost vertical during take-off, which can stall the plane. With very little room to maneuver, this can easily lead to a crash.

Boeing sought to address this, but their solution caused problems of its own, replacing one deadly threat with another, and replacing a deadly threat which we may be able to overcome with one that we were powerless to stop.

As long as these threats are contained and avoidable, people are fine with them, but if we imagined a car that would go into autopilot from time to time and veer the car into the opposing lane with no way for the driver to prevent it, this would scare people a lot, even though the risk may be very low of this. This is how the 737 MAX threat is viewed and this fear may persist and all the reassurances in the world may not fully extinguish it.

Once Boeing figured out that these engines were too big for the air frame of these aircraft, this was not something that you would ever want to let someone fly without some sort of fix, so Boeing came up with a software solution called Maneuvering Characteristics Augmentation System, or MCAS, to keep things from getting too hairy. It was the failure of the MCAS software that caused both crashes.

Shockingly, Boeing didn’t bother telling anyone about the existence of MCAS upon the release of this new configuration, as it wasn’t found in any of the manuals, nor were either the airlines or the pilots made aware at all of this. It wasn’t even that they could have been thinking that no one would notice either, as serious issues emerged during testing which they kept to themselves.

They were also found to have hid data from the FAA that may have resulted in delays, even though it is felt by some that Boeing had the FAA in its back pocket and essentially were allowed to self-certify it. Regardless, when you hide critical information from regulators, that’s what you end up with.

While MCAS was designed to promote safety, it turned out to be a monster instead, where it would end up going all out to crash a plane in a matter beyond the intervention of even the best pilots.

MCAS was designed to operate for 10 seconds and off for 5 seconds, and in these crashes, it would hurl the plane toward the ground for the 10 seconds, stop for 5 and let the pilots try to bring it up, and then resume its attempt to kill everyone aboard. 10 seconds for MCAS and 5 seconds for the pilots wasn’t a fair fight and the machine won both times.

People are apprehensive enough about flying, and when they hear about such a gruesome event, this is going to scare them more, especially when they try to imagine what the last few minutes of the lives of the passengers would have been like.

After the first crash, Boeing at least saw fit to tell people about this beast, and did try to reassure people that the issue was now fixed. This was in spite of over 200 reported incidents between the crashes involving the malfunction of MCAS. Grounding it was out of the question, as badly as this was needed, provided Boeing was left to decide, as this whole incident emerged from their preferring profit over safety and that continued to rule the day.

With the second crash, knowing about MCAS and being able to do anything to stop it once it has gone haywire turned out to be two very different things. The crew were no match for it and we had our second disaster, with the same plane and for the same reason.

The Aftermath of this May End Up Delivering Much More Pain for Boeing

To say that Boeing’s public reputation has been harmed by this would be putting it mildly. They chose this path to try to stay competitive with a recent upgrade from Airbus, and when they saw U.S. airlines starting to prefer Airbus over them, they went into panic mode.

The 737 MAX was originally designed to be a new build, providing a facelift for the model which had been essentially unchanged for decades, but the company no longer felt that it had time to do that and keep up with the competition. They just stuck some bigger engines on it and when this led to its being unsuitable for flight, they hurriedly put in a software fix to augment this.

The reason why this software was so deadly is that it only relied on one sensor on the plane, where we always use two for anything critical like this. A second sensor would have saved these lives but it was not added.

The reason why it wasn’t was that this would have required special pilot training, as would the admission of MCAS, and they were in too much of a hurry to get this plane up in the air and fill orders. Boeing ended up taking advantage of a loophole that had the addition of a single sensor under the radar because the FAA simply did not contemplate that anyone would ever use a single sensor for a critical system because that would simply be crazy, but they were wrong.

To add to this, they kept this all a secret to everyone, and also failed to fix the problem after the first incident. They are now in the process of fixing it again, but people are now wondering whether the company can be trusted and especially whether this plane is safe now.

To Boeing’s credit, they have gone all in now as they realize that not doing the right thing now will spell the end of this plane, and are doing pretty much everything in their power to save it. When we look at all the improvements that they have made, it’s hard to imagine how this problem would not now be solved. Just a switch to turn this thing off when it goes crazy may have been enough, but they have gone much further and added a lot of redundancy.

Even if the 737 MAX was now the safest plane in the sky, all the media coverage that this has had is going to take its toll, and the toll here may be a big one. There’s also the fact that at best this is a plane that still requires that it be “augmented” by MCAS because it is not flyable otherwise. Many people would prefer a plane that does not need to summon Frankenstein to help keep it in the air, as well behaved as the monster may be now.

Boeing’s reputation has been so tarnished that some have wondered what else they haven’t told us, fearing that another undocumented system may emerge. This is unwarranted but it goes to show just how serious people take the risk of flying, and there is certainly something quite extraordinary about the level of interest we show in this.

It wouldn’t be a stretch to call the actions of Boeing in this affair not only reprehensible but even criminal. Not disclosing the existence of a critical system with the potential to crash a plane, together with their choosing not to make it safe by installing more than one sensor, and doing all this because they did not want to delay the plane’s launch, did not just violate their duty of care to their passengers, it crashed it into the ground.

In a recent survey, only 3% of people are not at all likely to avoid the 737 MAX. 48% are somewhat likely, and 19% are very likely to just say no to the plane. We should find this very disturbing indeed and especially if we own Boeing stock.

It’s hard to measure what impact this will have but we can easily guess that it will be a substantial one. Flyers don’t choose their planes, but the airlines that they fly do, and they choose the airlines. People steering away from the 737 MAX has to affect Boeing’s bottom line, especially the future orders of this model of aircraft, as well as the additional cost to help their customers bear the burden of the loss of business that this may continue to cause.

This has already become a monster to Boeing’s bottom line, but like the blob, this one might keep growing for a while. The 737 MAX returning to the skies may not be a positive at all and may easily spill more blood than it stops for Boeing, and maybe a lot more.

The company itself may be avoided as well, to the extent that they are seen as the devils behind these disasters, which is not unreasonable given that all this blood is clearly on their hands and their hands alone. A lot of people only have sketchy knowledge about what went on with MCAS, and as more learn the gory details, this will only deepen their distrust.

Boeing’s earnings projections over the next few years looks fabulous, although the ultimate impact of the 737 MAX fiasco may be understated. By looking at this we could easily see its stock being a bargain here, but as more and more details have emerged about their role in these deadly crashes, the optimism gets harder and harder to reasonably maintain.

Boeing’s flagship plane may not be so dangerous anymore, at least in terms of presenting physical danger, but its stock still is. While people may worry about flying in the plane, a bigger worry may be what happens to its stock price, which this crazy software may end up bringing down even more as time passes.

Boeing looks more exciting on the short side than on the long right now, as we may see it move down toward its recent bottoms as Boeing’s rush to get the plane back in the air meets more and more delays from the FAA, who not surprisingly, does not share Boeing’s impatience. Once it eventually does, the pushback from the public will be really interesting to watch.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.