By: Noah Schwab
By now, everybody who's anybody has heard about the recent deadly crashes of Boeing 737 Max aircraft and subsequent groundings of all 737 Max 8 and 9 aircraft. What started as the most fuel efficient and powerful alternative for the mid-range aircraft market has now turned into an aviation safety and government oversight nightmare.
The Boeing 737 series is the best selling and most popular plane series in history since its 1967 inception with more than 10,000 planes produced. Some 6,500 of those planes are currently in service. According to aviation analysts Ascend, “the total number of aircraft currently in service is approximately 23,600 - that includes passenger and cargo aircraft... there are 2,500 more in storage.” The closest competitor to the 737 is the Airbus A320 which has some 6,000 planes in service and targets the same mid-range, mid-capacity market. Not only is the 737 the most produced plane in history but also is the most flown plane in the skies, shown right.
What about the Max? The 737 Max aircraft is the best selling model of aircraft in history with currently 4,636 orders. Only 376 aircraft of the 4,636 orders were in service until their grounding due to an issue with the MCAS flight stability system that is suspected of causing the 2 deadly crashes. The Max makes up only 5.8% of all 737 series aircraft in service. Chances are you’ve flown on a 737 series plane and you’ve landed safely.
Despite the relatively small share of flights that were recently operated with the 737 Max aircraft, there is still a cause for concern. The greatest concern is that both of the Max crashes resulted in loss of life for all souls on board. Safety in aviation is the number one priority. Economically, with an average sticker price of $125 million dollars per unit, the 737 Max orders are worth $579,500,000,000 to the US economy, over half a trillion dollars. Having these orders delayed or cancelled by airlines due to safety concerns represents a huge loss to America’s GDP as well as to the global airline industry which is already anemic due to the lack of aircraft to meet the growing demand for flight. Boeing and Airbus which make up the commercial aircraft manufacturing duopoly have a combined backlog (orders to be delivered) of 13,528 airplanes. Airlines such as Southwest which only operate 737s will feel the greatest pinch having ordered 249 737 Max aircraft, the most of any airline. Southwest lost 7% of their total fleet because of the Max groundings. This has greatly reduced Southwest's capacity in a time where a significant portion of their fleet was already out for scheduled maintenance. The impact of these groundings are predicted to only increase through the Summer travel season if a solution is not reached. If the planes are grounded 3 months, Boeing may have to pay airlines between $1-5 Billion dollars in compensation for losses.
Boeing’s stock has been volatile since October. This has negatively impacted the Dow Jones Industrial Average, in which Boeing has the heaviest weight out of the 30 member companies landing at 9.8% because of Boeing’s high stock price. This means that a change in Boeing impacts the Dow Jones more than a stock change in any other member company. Boeing has lost 13% of its stock value since February 28 which came off of a 36% increase in value between January 1 through February 28 of 2019. In a 3 day span between March 8 and March 12, Boeing lost 11% of its stock value which it made back in the subsequent days. This volatility can best be explained by Boeing’s long term sustainable outlook. Investors snatch at the opportunity to buy stock at these significant losses because in the long run, Boeing will grow in value. Evidence of this is since 2016 (long before the 737 Max crashes), Boeing’s value has increased 163.8% or $236.83 per share up to its 52-wk high of $446.01 per share. Boeing’s current market value is $215,300,000,000.00
Works Cited:
International, Forecast. “Airbus and Boeing Report December and Full-Year 2018 Commercial Aircraft Orders and Deliveries.” Defense Security Monitor, Forecast International, 18 Jan. 2019, dsm.forecastinternational.com/wordpress/2019/01/15/airbus-and-boeing-report-december-and-full-year-2018-commercial-aircraft-orders-and-deliveries/.
Morris, Hugh. “How Many Planes Are There in the World Right Now?” The Telegraph, Telegraph Media Group, 16 Feb. 2017, www.telegraph.co.uk/travel/travel-truths/how-many-planes-are-there-in-the-world/.
Porter, Gerald. “With Boeing 737 Max Grounding, Airlines Expect a Short-Term Hit on Flying Capacity, Costs.” Fortune, Fortune Media, 18 Mar. 2019, fortune.com/2019/03/18/boeing-737-max-grounded-airlines-southwest/.
Russell, Karl, and Ashwin Seshagiri. “Why the 737 That Crashed Is Boeing's Best-Selling Plane Ever.” The New York Times, The New York Times, 15 Mar. 2019, www.nytimes.com/interactive/2019/03/15/business/boeing-737-max-popularity.html.
Sakelaris, Nicholas. “Boeing Could Lose Billions over 737 Max 8; Airlines Shuffle Flights.” UPI, United Press International Inc., 14 Mar. 2019, www.upi.com/Top_News/US/2019/03/14/Boeing-could-lose-billions-over-737-Max-8-airlines-shuffle-flights/8231552561038/.
Smith, Oliver. “10,000 And Counting: the Most Successful Jet Aircraft of All Time.” The Telegraph, Telegraph Media Group, 19 Mar. 2018, www.telegraph.co.uk/travel/comment/the-most-popular-plane-ever-made/.
Looking at a specific airline like Southwest on a microeconomic scale, the grounding of the 737 Max could have a significant impact on the price of flights. Since the supply of planes was reduced by 7%, supply is relatively inelastic, and demand continues to grow, Southwest should theoretically have a higher equilibrium price for flights. It will be interesting to see if Southwest raises prices or tries to keep their prices low to compete in the monopolistically competitive flight industry.
ReplyDeleteOn the other hand, to what extent CAN they raise their prices before people switch where they're booking their flights? Airlines already use some Price Discrimination so there isn't that much of a difference if the first price is a tad higher than it would've started at before the reduction of their fleet. Furthermore, last-second flight bookings can significantly change the demand for those flights since they may be the only flights left and could actually prove to be a source of profit for the airlines.
DeleteGreat read! I have indeed flown on a 737 and agree with your take that it would be economically disastrous to Boeing and Southwest Airlines for this plane to be grounded. The 737 is one of the oldest designs for commercial airlines in current use which is why it has been updated. In the years since its inception it has been reliable which is why it has sold so well. It may be time for Boeing to invest in a total replacement for the 737 to fill the 2 engine regional transportation niche. Doing so would counteract the bad PR of the 737 MAX disastrous while allowing modern engineers to update designs. Hopefully since you're going into aerospace engineering you will be one of those designing it!
ReplyDeleteI agree with the idea of updating designs! Part of the reason MCAS was put on these planes was to counteract tendency for the aircraft to pitch upward because of its larger and more powerful engines that were placed on its slightly (clearly not slightly enough) modified 737 air frame. This makes for impressive steep attack angle take offs at airshows but stability concerns for commercial uses. Why don't they do a complete redesign of the 757?
DeleteEven after this disaster for Boeing, I believe the stock will still shoot up long term. Major controversies rarely cause companies high on the fortune 500 list to plummet to irrelevance. I do think confidence will be restored in Boeing eventually but in the short term the spending market for Boeing 737s will decrease. However you have to consider the fact that they are apart of an oligarchy. So they are very important to the airline business and trust will eventually be restored considering airlines need planes. In the end like every major disaster, the memory will fade and Boeing will go back to being the giant it is.
ReplyDeleteWhile Boeing's reputation has been hurt before, Boeing has, as you mentioned, remained ever appealing for investors as a mainstay in the American corporate sphere. While disastrous, the reality is with the 737 MAX is that this issue is merely a blip on a graph for Boeing and the company will probably go on without a hitch. I'm not an expert in the aeronautics engineering industry but I agree that Boeing should be focusing on developing new planes rather than retrofitting old designs, for its sake and that of the US economy.
ReplyDelete