How Administrative Errors at Boeing (BA) Could Cost Investors

The shocking incident earlier this year involving the Boeing 737 Max has placed The Boeing Company (BA) in the spotlight for all the wrong reasons. On January 5, the door plug of a commercial Boeing 737 Max 9 for Alaska Airlines blew off mid-air, revealing serious lapses in Boeing’s quality control and safety protocols.

This incident, traced back to a simple yet critical paperwork error, highlighted the potential dangers of administrative oversights in aviation manufacturing. Moreover, it interrupted Boeing’s progress in recovering from two deadly crashes of Max jets in 2018 and 2019. These crashes in Indonesia and Ethiopia, which claimed about 346 lives, are now back in the spotlight as well.

Detailed Analysis of the January 5th Accident

An Alaska Airlines flight operating a Boeing 737 Max 9 experienced a significant safety breach when a door plug came off 10 minutes after the flight took off from Portland, Oregon, on its way to Ontario, California. The root cause of this alarming event was a lack of paperwork. Evidence shows four bolts that hold the door plug in place were not installed before the plane left the factory in October, as the workers did not receive the necessary work order.

This administrative error, though seemingly minor, had the potential to endanger the lives of all passengers and crew on board, but luckily, the incident wasn’t fatal.

The door plug incident highlights significant issues with the quality of work along the Boeing assembly lines. These problems have drawn the attention of multiple federal investigations and whistleblower revelations, and have contributed to delays in jet deliveries, causing widespread disruptions for airlines and passengers worldwide.

Elizabeth Lund, BA’s Senior Vice President of Quality, addressed this issue at a press conference and admitted that the absence of paperwork led to administrative oversight. “The fact that one employee could not fill out one piece of paperwork in this condition and could result in an accident was shocking to all of us,” Lund stated.

The lack of paperwork was not new information, as it had been previously disclosed in testimony before the US Senate Commerce Committee by the head of the National Transportation Safety Board (NTSB). After the aircraft company “blatantly violated NTSB investigative regulations,” the agency issued a series of sanctions against Boeing.

So, Boeing’s disclosure of the information led to further complications with the NTSB, resulting in a reprimand and potential criminal probe referral to the Department of Justice.

The PR Team’s Struggle in Managing Continuous Crises

Boeing’s PR team has faced immense challenges in managing the fallout from continuous crises. The January 5th incident required immediate crisis management to mitigate further damage. However, their efforts were complicated by a subsequent reprimand from the NTSB for allegedly violating investigative protocols by sharing information prematurely.

BA acknowledged Lund’s recent remarks were a mistake. “We deeply regret that some of our comments, intended to make clear our responsibility in the accident and explain the actions we are taking, overstepped the NTSB’s role as the source of investigative information,” Boeing’s Kowal stated.

The strained relationship with regulatory bodies exacerbates the difficulty for Boeing’s PR team, which must now balance transparency with compliance while managing public perception and investor confidence.

Potential Financial and Reputational Damage

Administrative errors like the one seen on January 5 involving the Boeing 737 Max 9 can lead to significant financial and reputational damage. For BA, the immediate financial impact includes potential fines, legal fees, and the cost of corrective measures.

However, the long-term consequences can be even more damaging. Repeated safety issues erode trust in the brand, leading to a loss of customer confidence and potentially impacting future sales. Airlines may reconsider placing orders with Boeing and opt for competitors that are perceived as more reliable.

Investors are particularly sensitive to such risks. Boeing’s stock price is closely tied to its reputation for safety and reliability. Continued administrative errors and poor crisis management can enhance stock price volatility, affecting investor returns. The market tends to react negatively to news of safety breaches and regulatory reprimands, as seen in the aftermath of the door plug incident.

BA’s stock has plunged more than 24% over the past six months and nearly 29% year-to-date.

Bleak First-Quarter 2024 Results

BA faces increased scrutiny over the safety of its planes. As it deals with quality crises from the January 5th flight, Boeing reported a massive $355 million net loss for the first quarter that ended March 31, 2024. The company brought in revenue of $16.57 billion, a 7.5% year-over-year decline.

During the quarter, Boeing posted a 36% year-over-year decrease in commercial plane deliveries. This resulted in cash flow from operations dropping to negative $3.36 billion and non-GAAP free cash flow falling to negative $3.90 billion.

“Our first quarter results reflect the immediate actions we've taken to slow down 737 production to drive improvements in quality,” commented Dave Calhoun, Boeing’s President and CEO. “We will take the time necessary to strengthen our quality and safety management systems and this work will position us for a stronger and more stable future.”

“Near term, yes, we are in a tough moment,” Calhoun told its employees. “Lower deliveries can be difficult for our customers and for our financials. But safety and quality must and will come above all else.”

Wall Street also appears bearish about the aviation giant’s growth prospects. Analysts expect BA’s revenue for the second quarter (ended June 2024) to decrease 10.4% year-over-year to $17.71 billion. The company is projected to post a loss per share of $1.14 for the same period.

Bottom Line

The January 5th incident involving the Boeing 737 Max 9 has renewed scrutiny of air travel and Boeing’s planes. This incident highlighted a long series of safety and manufacturing issues accumulated for Boeing over the years, including two deadly crashes involving Max jets. These lapses pose serious safety risks and jeopardize the company’s reputation and financial stability.

Boeing’s repeated safety failures could have significant implications for Boeing’s future orders and stock performance. If the aviation giant cannot address these systemic issues and improve its crisis management strategies, it risks losing market share to competitors like Airbus SE (EADSY).

Investors must closely monitor BA’s response to these ongoing challenges. Effective and transparent communication, coupled with improvements in operational processes, will be crucial in restoring investor confidence. Boeing must also work to repair its relationship with regulatory bodies, ensuring compliance with all investigative protocols to avoid future reprimands and potential criminal investigations.

In conclusion, administrative errors at Boeing, exemplified by the January 5th incident, highlight the critical need for robust quality control and effective crisis management. The financial and reputational damage from such errors can considerably impact investor confidence. As Boeing navigates this problematic landscape, its ability to restore trust and demonstrate operational excellence will be vital to securing its future in the competitive aerospace industry.

AAL’s Ambitious Change: What Investors Need to Know

With rapid technological advancements and travelers' evolving demands, the aviation sector is experiencing unprecedented growth and expansion. American Airlines Group, Inc. (AAL), a frontrunner, has unveiled plans to expand its fleet, underscoring its dedication to staying ahead in this dynamic landscape.

Comprehensive Fleet Expansion Breakdown

AAL, earlier this month, announced orders for about 260 new aircraft, including 85 Airbus A321neo, 85 Boeing 737 MAX 10 and 90 Embraer E175. Also, the orders encompass options and purchase rights for an additional 193 aircraft. Under the Boeing order, American Airlines has chosen to convert 30 of its existing 737 MAX 8 orders into 737 MAX 10 aircraft.

These orders from Airbus SE (EADSY), Boeing Company (BA), and Embraer S.A. (ERJ) form a vital component of American Airlines’ ongoing commitment to enhance premium seating options across its narrowbody and regional fleets. They also serve to bolster the airline’s domestic and short-haul international network, contributing to its long-term sustainability and competitiveness.

“Over the past decade, we have invested heavily to modernize and simplify our fleet, which is the largest and youngest among U.S. network carriers,” stated American Airlines’ CEO Robert Isom. “These orders will continue to fuel our fleet with newer, more efficient aircraft so we can continue to deliver the best network and record-setting operational reliability for our customers.”

Since 2014, AAL has received more than 60 mainline and regional aircraft. With the recent announcement, American Airlines now has around 440 aircraft on order, ensuring its aircraft order book extends into the next decade.

“As we look into the next decade, American will have a steady stream of new aircraft alongside a balanced level of capital investment, which will allow us to expand our network and deliver for our shareholders,” said American’s Chief Financial Officer Devon May.

Boosting Regional Fleet Capacity

AAL is prioritizing the integration of larger, dual-class regional aircraft into its fleet, a move aimed at enhancing connectivity from smaller markets to the airline’s global network. The airline has set a goal to retire all its 50-seat single-class regional jets by the decade’s end while ensuring continued service to small and medium-sized markets with larger regional jets.

Upon the completion of deliveries of Embraer E175 aircraft, American Airlines foresees its entire regional fleet being comprised of dual-class regional jets featuring premium seating, high-speed satellite Wi-Fi, and in-seat power amenities. American’s wholly-owned regional carriers will operate the new E175 aircraft, further solidifying the airline’s commitment to modernizing its regional operations.

Arjan Meijer, CEO of Embraer Commercial Aviation, said, “The E175 is truly the backbone of the U.S. aviation network, connecting all corners of the country.”

“One of the world’s most successful aircraft programs, the E175 was upgraded with a series of modifications that improved fuel burn by 6.5%. This modern, comfortable, reliable and efficient aircraft continues to deliver the connectivity the U.S. depends on day after day. This represents American’s largest-ever single order of E175s, and we thank American for its continued trust in our products and people,” Meijer added.

Improvements to Existing Aircraft for a Premium Travel Experience

In addition to the new fleet, AAL has announced plans to initiate retrofitting of its A319 and A320 aircraft, commencing in 2025, in response to heightened customer demand for premium travel experiences. The retrofit program aims to revamp the interiors, featuring power outlets at each seat, expanded overhead bins, and refreshed seats with updated trim and finishes.

Under this initiative, American’s A319 fleet will undergo modifications to accommodate additional premium seating, raising the count to 12 domestic first-class seats. Similarly, the A320 fleet retrofits will see an increase in domestic first-class seating to 16.

Through the combination of retrofitting existing aircraft and the anticipated arrival of new aircraft, American Airlines projects a growth of over 20% in premium seating across its fleet by 2026.

Strategy for Long-Term Growth and Value Creation

On March 4, 2024, AAL’s CEO Robert Isom and other senior leaders provided an update at 2024 Investor Day in New York on the airline’s performance and its path forward for long-term growth and value creation.

“I’m incredibly proud of the work we have done over the past two years to build an American that is stronger, more focused and well-positioned to realize our full potential,” said Robert Isom. “Today, with our key initiatives in place, American is positioned to deliver a reliable operation for customers while generating durable earnings over the long term. We’re excited for the path ahead and confident in our ability to drive value for our shareholders through our commercial initiatives and continued execution.”

Also, American Airlines provided insights into the financial targets it had set for 2024 through 2026 and beyond. For 2024, the airline expects adjusted EBITDAR margin growth of nearly 14% year over year, free cash flow of about $2 billion, and total debt of $41 billion.

American Airlines targets adjusted EBITDAR growth of approximately 14%-16% for the year 2025, free cash flow of greater than $2 billion, and total debt of nearly $39 billion. For 2026 and beyond, the airline projects adjusted EBITDAR growth of around 15%-18%, free cash flow of greater than $3 billion, and total debt of less than $35 billion.

AAL’s members of the senior leadership team also discussed the drivers of its value-creation opportunities, such as operating a transformed fleet that is simplified and optimized for efficiency, capitalizing on competitive advantages of its network poised to adapt to evolving consumer trends, attracting and retaining customers with travel rewards program AAdavantage®, and generating durable financial results.

Bottom Line

AAL’s recent orders for Airbus, Boeing, and Embraer aircraft will allow the airline to expand premium seats across its narrowbody and regional fleets and bolster its domestic and short-haul international network for sustained long-term growth. Further, American is expected to retrofit its A319 and A320 fleets starting in 2025, increasing the number of domestic first-class seats on each aircraft.

These strategic investments in fleet modernization, operational efficiency, and customer experience enhancement demonstrate American Airlines’ commitment to meeting evolving industry demands. This, in turn, could lead to enhanced revenue streams and passenger satisfaction, contributing positively to the company’s growth trajectory.

By upgrading its fleet, AAL can further enhance its competitive position in the market, especially by offering a superior travel experience compared to its rivals. This could help the airline capture a larger market share and strengthen its position as a leading player in the aviation industry.

Is Singapore Airlines (SINGY) an Attractive Buy Despite Denying Air India Stake Increase?

On June 15, news broke that Singapore Airlines Limited (SINGY) had expressed interest in increasing its 25.1% stake in the Tata Group-operated Air India, secured as part of its merger with Vistara that was announced in November 2022 and due to be completed by March 2024. The report claimed that SINGY could gradually increase its stake to 40% to have more skin in the game.

However, the report was soon followed by a denial by SINGY, with its spokesperson confirming that there is no change in SIA’s position from the November 2022 announcement.

However, Goh Choon Phong, the CEO of SINGY, reaffirmed his support by stating, “With this merger, we have an opportunity to deepen our relationship with Tata and participate directly in an exciting new growth phase in India’s aviation market.”

The salt-to-steel conglomerate Tata Group operates three airlines in India: Air India (with Air India Express as its low-cost subsidiary), Air Asia India, and Vistara (a 51:49 joint venture between Tata Sons and SINGY).

The merger of Vistara and Air India into a single entity (Air India), with SIA investing INR 20.59 billion, is under review by the Competition Commission of India (CCI).

With SIA’s expertise in operating a successful airline, particularly when dealing with powerful players such as IndiGo as well as international competition like Emirates and Qatar Airways, it is understandable why Air India might have reportedly been keen on a potential stake increase.
Pinch of Salt

“If something cannot go on forever, it will stop.” The obviousness of this observation made by Herb Stein was what made it famous.
In our June 13 article, we discussed how, despite air carriers turning to bigger airplanes, even on shorter routes and jumbo-jets, such as the Boeing 747 and the Airbus A380, being brought back to help ease airport congestion and work around pilot shortages, Delta Air Lines, Inc. (DAL) wishful extrapolation of the narrative of “revenge travel” could rapidly unravel.

While there remain valid reasons to doubt whether business travel is ever going back to normal and that the pent-up demand might not be enough to sustain the momentum, the battle for Indian skies comes with its own set of challenges.

When the facts, such as 90% of wage earners in India earn INR 25000 or below, the seemingly unending exodus of millionaires from India, and Indigo ordered 500 Airbus aircraft soon after Air India’s combined order of 470 aircraft from both Boeing and Airbus, are taken into consideration, it only takes willful suspension of disbelief to equate low penetration with growth potential.

Hence the possibility that civil aviation in India could be a bubble waiting to burst or at least a profitability sink for air carriers can only be ignored by investors, including SINGY, at their own peril.

Safer Alternative

With The Boeing Company (BA)still on the back foot and playing catch up to its European rival, Airbus SE (EADSY), the latter, with ROCE and ROTC better than the industry average, could be a common denominator that could give investors (relatively) safe exposure to the heated battle for a greater share of the pie of the Indian sky.