MAX grounding could end up costing Boeing more than USD55 million a day as regulators and federal agencies probe 737 accident circumstances

20 March, 2019

It remains early days in the investigation into the recent crash of the Ethiopian Airlines, but with the loss of a Lion Air aircraft last year it is at a much more mature stage and “clear similarities’ between the incidents mean that many airlines across the world are developing operational contingency plans as the global fleet of the modern generation airliner sit at airports around the world after last week’s grounding order.

France's Bureau d'Enquêtes et d'Analyses pour la Sécurité de l'Aviation Civile (BEA) has now extracted data from the flight data recorder (FDR) and cockpit voice recorder of the Ethiopian Airlines aircraft which crashed on 10-Mar-2019 and confirmed the FDR data showed “clear similarities” between Ethiopian Airlines Flight 302 and Lion Air Flight 610 and which “will be the subject of further study during the investigation". A preliminary report is expected to be released by mid-April.

This could relate to the Manoeuvring Characteristics Augmentation System (MCAS) flight control system, which will be at the centre of a new software update for the aircraft that Boeing CEO Dennis Muilenburg says will be released soon.

The manufacturer has been working with the US Federal Aviation Administration (FAA), the Department of Transportation and the National Transportation Safety Board (NTSB) on issues relating to both incidents and Mr Muilenburg says “soon we’ll release a software update and related pilot training for the 737 MAX that will address concerns discovered in the aftermath of the Lion Air Flight 610 accident.” The update is expected to include changes to MCAS, pilot displays, operation manuals and crew training.

Until the preliminary report on the African accident is released, we will not know just how linked the two crashes are, but what is certain is the longer the 737MAX is grounded the more people will speculate and the bigger the problem may get for the manufacturer.

There are already reports that at least two federal agencies – the Department of Justice and Department of Transportation - are probing Boeing for information with MCAS again believed to be at the centre of requests and in particular if its development was big enough for the type to require a separate type certification, rather than that which covers the previous generation versions of the 737.

What is clear is the operators of the aircraft are not happy with the circumstances. While they obviously will adhere to any safety related requirements, some are already confirming they will seek compensation and expenses incurred during the grounding period.

The CAPA – Centre for Aviation Fleet Database shows a total global fleet of 371 MAX aircraft, including -8 and -9 variants. Southwest Airlines, Air Canada, American Airlines, China Southern Airlines, Norwegian, Air China, TUI Group, United Airlines, flydubai, SpiceJet and WestJet are the largest operators of the type. All operators will have a different level of exposure to the grounding, based around their wider fleet and network, and many schedules have been modified and short-term leases signed to maintain their network integrity.

Aircraft purchase agreements can be legally complex and Boeing will certainly have liability obligations to some, if not all customers. A study by independent aviation consultancy IBA suggests that the direct cost of grounding the 737 MAX will be in the region of USD150,000 per day per aircraft. For Boeing that is a liability of up to USD55.6 million a day and a bill that could already amount to over USD350 million.

The IBA calculation is based around leasing and finance costs that airlines have to pay those lease rentals/finance costs irrespective of whether the aircraft flies or not, staff costs, parking fees, passenger re-routing/compensation from schedule changes and cancellations and other costs to get aircraft back into operation.

There is also the cost of the loss of revenue, a much more complex calculation, but which could certainly add up for the airlines mentioned above that all have more than a dozen MAX aircraft now sat on the ground. For some, IBA warns, that ‘thin’ Northern Hemisphere winters and potential ‘low cash’ situations could mean lost revenue in Mar-2019 “could tip them into the red (and beyond)”.

For Boeing the focus must be on generating a solution that allows the MAX to return to the air and fly safely. It is currently continuing production of the aircraft and has more than 5,000 aircraft on order, valued at more than USD600 billion. But just as its liability bill rises every day the MAX is grounded, its bumper orderbook could shrink with many airlines already threatening to cancel their commitments.