The tragic loss of life due to the crashing of the Lion Air flight 610 in October 2018 and the Ethiopian Airlines flight 302 resulted in the global grounding of the Boeing 737 Max until the cause of the crash could be reliably identified. Globally, 371 of these aircraft have been grounded. The potential risk for Boeing could be the complete or partial cancellation of orders placed by global airlines, litigation for victims of the crashes, and compensation claims by airlines for lost revenue, presenting opportunities for rivals.
MarketsandMarkets™ View Point:
Pooja Rana, Senior Analyst, Research: Aerospace and Defense at MarketsandMarkets™, shares her views on the development:
IMPACT ON THE MARKET
The impact on the market is complicated as some airlines stand to gain and other airlines stand to lose. Countries affected include China, India, Norway, Indonesia, Germany, UK, France, the Netherlands, Singapore, Australia, New Zealand, Canada, and the US. Disruption is bound to occur; however, airlines have safeguards in place to minimize the effects. These safeguards include changing or swapping an aircraft type, combining 2 or 3 flights into a single operation, arranging alternative flights for travelers, and moving travelers to other airlines if tickets have been issued.
The number of Boeing 737 Max in circulation is small in comparison to the previous model which has more than 6,000 aircraft. Subject to fleet size and number of flights required to be rescheduled, major airlines are capable of managing this disruption.
Low-cost carriers will face more challenges in rescheduling flights as they have limited fleet capacities. For instance, SilkAir and Fiji Airways have 6 and 2 Boeing 737 max aircraft in their respective operating aircraft fleets. The Boeing 737 Max aircraft accounted for approximately 16% of low-cost carrier fleets. Considering the small percentage of grounded Boeing 737 Max aircraft were scheduled to conduct more frequent flights a week, this leaves the airlines at a loss of passenger seats. Moreover, this will also lead in flight cancellation, hike in airfare, route management, apron parking cost.
Nearly half of the existing commercial aircraft fleets are leased and contracts do not normally allow airlines to claim damages for grounding of flights due to technical issues with aircraft. Even so, there may be some payouts due to multi-plane purchases made by airlines. For instance, Norwegian Air has sought reimbursement from Boeing for the costs of grounding the B737Max.
SpiceJet, and Indian Airlines are seeking compensation from Boeing due to their contracts with Boeing, which state that if the airlines suffer revenue loss in terms of maintenance or technical overhaul or in case aircraft are grounded, Boeing is required to pay the airline as a part of compensation.
Safety concerns will not only affect the manufacturers of aircraft but also the entire supply chain, from component suppliers of engines, electrical systems, valves, flight control systems, sensors, landing gear, airframers, flight management systems, brakes, and integrators, to end users such as airlines.
Due to congestion, airports usually do not have space to park grounded aircraft. Parked aircraft is to replace more than 350 grounded Max jets, and airlines are likely to press Boeing for compensation. Airlines most affected are American Airlines, Air Canada, WestJet Airlines Ltd. United Continental, Norwegian Air’s, Ryanair, air china, China Southern, Spicejet, Jet Airways, and VietJet, among others
IMPACT ON COMPETITORS
The only major competitor to Boeing is Airbus. These companies together are said to dominate 99% of the global orders for large aircraft.
Till March 2019, Boeing has a 4,636 backlog worldwide for the 737 Max. After the 2 fatal crashes, the Indonesian flag carrier Garuda cancelled 49 orders for the 737 Max aircraft, citing “concerns about the safety of passengers”. After cancellation by Garuda, Lion Air also plans to cancel its USD 22 billion order with Boeing. In addition, VietJet is reconsidering the future of a USD 25 billion order for 200 aircraft, while Kenya Air is also reconsidering tentative plans to place an order with Boeing. This has placed aircraft orders valued at USD 600 Billion at risk. This is expected to offer opportunities for the airbus 320 and other aircraft manufacturers, such as Embraer (E-190-E2 jets).
FIGURE 1 WHO’S WINNING BATTLE OF SINGLE AISLE AIRCRAFT: B737 MAX V/S A320
Source: Airbus & Boeing Outlook
Security concerns raised by aviation authorities of various countries have affected the orders for the Boeing 737 Max, leading Boeing to suffer significant financial losses.
In addition to financial losses, it will provide opportunities to its rivals, such as Embraer, Airbus, and China’s state-owned aircraft manufacturer, COMAC to promote their aircraft.
In the current scenario, the manufacture of aircraft and components rely heavily on automation. Excessive automation in the manufacture of aircraft has resulted in several errors in software and components. As per the 2016 FAA inspector general’s report, due to the increasing automation in aircraft, pilots are getting less opportunities to use their manual flying skills.
Under such critical circumstances, Boeing requires to provide reliable solutions fast to avoid losses in the entire aircraft supply chain. If it will show quick solution, it may incur huge opportunity cost to its competitor.