Boeing’s Political Power Is About to Be Tested

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In a statement issued Tuesday, Boeing Co. (NYSE: BA) CEO Dennis Muilenburg reiterated the company’s commitment to safety as the “core of who we are at Boeing.” That may not be enough to staunch the costs the company may incur as the result of two crashes in less than five months that killed 346 people from what looks like the same flaw in the 737 MAX’s anti-stall system.

The U.S. Federal Aviation Administration (FAA) also is likely to be scrutinized for its role in certifying the new planes and their safety systems. In nearly unprecedented decisions announced Tuesday, Canada’s civil aviation agency and the European Union’s ESEA have said they will subject Boeing’s proposed fix to the anti-stall to their own testing rather than accept the results of FAA certification of the software change that is due to be installed beginning next month.

The increased scrutiny threatens to keep the 737 MAX grounded for an additional two to three months and raises Boeing’s exposure to additional costs resulting from airlines that will be forced to keep the planes on the ground. Boeing also will be unable to deliver new planes to customers in Canada or Europe until the agencies certify the planes’ safety. With 52 planes a month rolling off Boeing’s 737 assembly line, this becomes a more serious cash flow problem for the company.

Adding to Boeing’s woes is an investigation by federal prosecutors into possible criminal charges against the company for lying to regulators about the safety of the 737 MAX. According to a report from Bloomberg, U.S. investigators likely are looking for evidence of “misrepresenting to pilots how the aircraft operated and whether there were internal documents backing that up.” In other words, did Boeing know about a problem with the aircraft’s safety systems and try to cover it up? That would amount to fraud with criminal intent.

Bloomberg compares the possible outcome of such an investigation to a finding that General Motors failed to disclose an ignition switch problem to federal regulators and paid a $900 million fine in September 2017 for that failure. Toyota paid a $1.2 billion fine in 2014 in a case involving sticking accelerator pedals. And then there’s the Takata airbag fiasco that bankrupted the Japanese firm.

The investigation may or may not result in criminal charges, but if charges are leveled against Boeing, the company’s financial exposure in civil actions shoots way up.

Even if that turns out to be the case, Boeing’s massive cash flow (around $15 billion last year) and position as one of just two makers of fuel-efficient, single-aisle aircraft that seat roughly 100 to 200 passengers (Airbus is the other with its A320neo) has a “secure” market position, according to Teal Group analyst Richard Aboulafia. The market for these planes currently sits on a backlog of more than 11,000 orders, about 4,600 of which are orders for Boeing 737s. And even if some airlines want to cancel 737 orders, they will be reluctant to do so because they would then stand at the end of a five-year-long line for delivery of an A320neo, losing out on a 15% fuel-economy benefit until the Airbus planes arrive.

For Boeing, fixing the problem and getting certified to fly again is way more important than any fines or civil judgments it has to pay. The company will do all it can to close any federal investigation quickly so that it can begin delivering 737s again. Will the $15 million Boeing spent on lobbying in 2018 and the $4.5 million the company and its employees spent on the 2018 midterm elections be much help in ending the investigations and getting the 737 off the ground? We’re about to find out.

Boeing stock traded up about 1.1% in early trading Wednesday, at $378.00 in a 52-week range of $292.47 to $446.01. The consensus 12-month price target on the stock is $436.95.

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