Recent scrutiny over Boeing's quality management systems and an ongoing investigation raise significant concerns for the company's future and financial impact. Senator Maria Cantwell directs attention towards FAA's oversight of Boeing manufacturing....
The recent emergency door plug blowout on Alaska Air Group flight 1282 has generated an overwhelming amount of news, theories, and data points surrounding Boeing, its production, and its quality-management systems.
Amidst this influx of information, it is important for investors to discern fact from fiction and seek contextual understanding.
One notable development occurred on Thursday when Senator Maria Cantwell (D., Wash.), chair of the Senate Committee on Commerce, Science, and Transportation, directed her attention towards the Federal Aviation Administration (FAA) and its oversight of Boeing manufacturing. Specifically, she expressed concerns about Boeing's revised quality process, which resulted in the layoff of 900 quality inspectors in recent years, according to Vertical Research analyst Rob Stallard.
It is important to dispel any confusion about those 900 individuals. They did not leave the company. The combination of the MAX grounding and the pandemic drastically altered the situation. Layoffs were indeed experienced by Boeing, largely due to the impact of Covid-19. Before the pandemic, Boeing successfully shipped approximately 800 jets. Despite the challenges faced, the company managed to deliver 528 planes in 2023, surpassing the 480 delivered in 2022.
Requests for comment regarding inspection practices and the number of inspectors per plane were left unanswered by Boeing. Correspondingly, Cantwell's office did not provide an immediate response regarding the 900 quality inspectors.
In parallel with these developments, the FAA made an announcement on Thursday regarding an ongoing investigation into whether the 737 MAX 9 plane involved in the recent accident adhered to Boeing's design specifications. The full letter containing details about the investigation can be accessed here.
The recent investigation into Boeing's MAX 9 jets has raised significant concerns for the company's future. According to a report by Jefferies analyst Shelia Kahyaoglu, the investigation has complicated the timeline for the jet's return to service. Initially, Kahyaoglu projected a two-week grounding for the MAX 9 jets, but now believes the grounding could potentially be longer.
Currently, there are approximately 200 MAX 9 jets in service out of a total of 1,400 MAX jets worldwide. This limits the financial damage to Boeing, as compensation paid to airlines unable to use their planes is estimated to be around $2 million to $3 million per day, according to Wall Street estimates.
Investors can use this information as a rule of thumb to estimate the impact on Boeing stock. It is projected that Boeing will generate about $6 billion in free cash flow in 2026, while delivering 700 planes. If the grounding ends quickly, MAX 9 jet deliveries in 2024 would amount to roughly 30 units.
In terms of manufacturing and design concerns, BofA Securities analyst Ronald Epstein suggests that the blowout was likely an assembly issue. However, conclusive findings are still pending from ongoing investigations. Nevertheless, this observation can be useful for investors when considering factors such as cockpit warning lights, Wi-Fi installations, quality inspectors, and loose bolts - all of which have been discussed since the blowout incident.
Boeing's stock has experienced a decrease of 1.4% in early trading on Friday, while the S&P 500 and Nasdaq Composite have seen slight gains of around 0.5%. Year to date, Boeing shares have fallen by approximately 16%.
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