|Boeing Is Compensating Airlines for the 737 MAX. Here's What It Means for Its Stock and the Industry. -- Barrons.com|
DOW JONES & COMPANY, INC. 6:44 AM ET 7/19/2019
Symbol Last Price Change
|BA ||361.11 ||0 (0%)|
|LUV ||52.44 ||0 (0%)|
|DAL ||62.66 ||0 (0%)|
|SPR ||73.34 ||0 (0%)|
|QUOTES AS OF 04:00:05 PM ET 07/18/2019 |
Boeing (BA) announced a $5 billion after-tax charge to compensate its airline customers for delays associated with the 737 MAX grounding. That's a small positive for airlines who fly the MAX, and it may signal Boeing's(BA) growing confidence its troubled jet will return to service sooner than later.
"For purposes of the second-quarter financial results, the company has assumed that regulatory approval of 737 MAX return to service in the U.S. and other jurisdictions begins early in the fourth quarter 2019," reads the company's news release.
There are 387 MAX planes grounded and more that haven't been delivered. Boeing's(BA) charge -- very, very roughly -- equates to a benefit for airlines of $12 million per delivered plane. Taking into account delays for planes that could be in service but haven't been delivered, the benefit works out to about $7 million per plane.
These are only estimates, and they don't mean Boeing(BA) will write a check to be deposited in airlines' bank accounts. The amount will be spread over years and could be in the form of discounts or other benefits.
The back story. The 737 MAX, Boeing's(BA) newest single-aisle plane, has been grounded world-wide since mid-March, following two tragic crashes of the jet that killed all on board. Boeing(BA) has been working with regulators to fix flight- control software implicated in both crashes. It's still unclear what other changes regulators may require, such as additional pilot training or added sensors, to clear the MAX to fly again.
What's new. Southwest Airlines(LUV) , for instance, flies an all-737 fleet. It has 34 MAX jets grounded and about 41 MAX jets on order that haven't been delivered. That works out to a benefit of roughly $525 million to Southwest(LUV), or about 2% of the stock's current market capitalization, or about 3% of 2018 operating costs. It's possible Southwest(LUV) stock could get a bump from Boeing's(BA) news -- albeit a small one. Southwest(LUV) declined to comment on Boeing's(BA)$5 billion charge, referring us instead to previous statements about the MAX.
Delta Air Lines (DAL) shares, on the other hand, shouldn't see any benefit from the news. It doesn't operate the MAX jet. What's more, its stock has outperformed other airlines since the MAX grounding, in part, because it received the benefit of lower industry capacity without the pain of having less capacity of its own to offer the flying public.
Looking ahead. Of course, valuing one-time cash payments for any stock is difficult. Still, it's helpful to quantify the value of the compensation relative to the value of a company, or relative to the value of the MAX jet itself. New MAX jets are worth about $47 million each, according to aircraft appraiser Cirium.
Boeing (BA) stock actually rose 2% in after-hours trading in response to this news. That reaction might signal that any news is good news at this point for the MAX.
Details are thin about Boeing's(BA) continuing conversations with customers, regulators, and pilots. Perhaps putting a dollar value on the delays signals to investors that the timing for a return to service is known -- or know with a greater degree of certainty. If that wasn't the case, predicting the compensation costs would be impossible. Still, Boeing(BA) shares will likely remain rangebound for the foreseeable future, until the ultimate fate of the 737 MAX jet is known.
Spirit AeroSystems (SPR) is another stock that could benefit from the Boeing(BA) news. Its stock has been hit harder than even Boeing(BA) shares , falling 24% since the fatal crash of an Ethiopian Airlines flight on March 10. Boeing(BA) stock, by comparison, has fallen 14.5% over the same span, far worse than the 7% gain of the Dow Jones Industrial Average. Spirit derives about 80% of its sales from Boeing(BA) -- the reason Spirit Aero Systems' shares are so sensitive to Boeing(BA) news.
Write to Al Root at email@example.com