Boeing Struggles to Contain Crisis From Second 737 Max Crash

(Bloomberg) -- Boeing Co. and U.S. regulators grappled with a crisis of confidence in the 737 Max that moved with the speed of an Internet rumor after the second deadly crash of the model in five months.

Breaking precedent, regulators in China grounded the revamped narrow-body plane before an international team of investigators had a chance to review flight data and cockpit voice recorders recovered after a brand-new Ethiopian Airlines 737 Max 8 plunged into a hillside minutes after takeoff Sunday. The U.S. Federal Aviation Administration said Monday that the jet model remains airworthy.

Boeing tumbled the most on the S&P 500 Index as questions swirled around the newest version of its 737 family, a cash cow that generates almost a third of the company’s operating profit. The Ethiopian disaster that claimed 157 lives this weekend followed the crash of a Lion Air 737 Max off the coast of Indonesia in October. That delivered a one-two punch for an aircraft type that has ranked among the world’s safest since it started flying in the 1960s.

“Boeing has lost control of the timetable to provide the safe, reliable solution,” said Neil Hansford, chairman of the Australian consultant Strategic Aviation Solutions. “The longer it goes, the more chance Boeing has of losing orders.”

Boeing sank 5.6 percent to $399.03 at 3:39 p.m. in New York after paring losses earlier in the trading session of as much as 13 percent. That was the biggest intraday decline since Sept. 17, 2001, the first day of trading after the 9/11 attacks.

The grounding in China, followed by the Indonesian air safety regulator’s order to halt 737 Max flights starting Tuesday, raised the question of whether other countries would follow suit. Some carriers, including Ethiopian, parked their Max jets. South Korea began a special inspection of the aircraft.

In Europe and Canada, regulators said it’s too soon to take action as they scrutinize the next steps in contact with their U.S. counterparts. The FAA will issue a “continued airworthiness notification” for operators of the 737 Max.

“The FAA continuously assesses and oversees the safety performance of U.S. commercial aircraft,” the agency said in a statement. “If we identify an issue that affects safety, the FAA will take immediate and appropriate action. ”

While the groundings in China and elsewhere are important, most nations typically wait to act until the U.S. and Europe issue findings on aviation matters. The FAA and the European Union Aviation Safety Agency oversee the world’s largest aircraft manufacturers and take the lead in ensuring the safety of their planes.

U.S. carriers such as Southwest Airlines Co., American Airlines Group Inc. and United Continental Holdings Inc. are still flying the 737 Max. But some labor unions expressed misgivings.

“We do have a few flight attendants who are indicating they are afraid to fly the 737 Max,” said Lori Bassani, president of the Association of Professional Flight Attendants, which represents employees at American. No attendants have refused to fly on the plane so far.

Industry Reactions

The U.S. has only grounded an entire model of aircraft twice in the last 40 years. The most recent time was in January 2013 after two lithium-ion battery fires on Boeing’s 787 Dreamliner model. The agency only acted after the second such incident occurred.

Boeing has dispatched a technical team to assist the investigation into the Ethiopian Airlines plane, which was delivered new in November to Africa’s biggest carrier. The FAA, which originally certified the 737 Max, and the U.S. National Transportation Safety Board have also joined the probe. The crash occurred shortly after takeoff from Addis Ababa, Ethiopia.

CEO’s Challenge

The cloud around the Max is emerging as the biggest crisis for Boeing Chief Executive Officer Dennis Muilenburg, 55, who was running company’s defense business during the Dreamliner’s grounding.

Since he took the reins as CEO in July 2015, Boeing has dramatically expanded cash flow, repurchased shares and built a $490 billion backlog of unfilled orders. The shares have tripled, boosting the company’s market value by $140 billion and making Boeing the most valuable U.S. industrial company. Sales surpassed $100 billion last year for the first time.

Since the Lion Air crash, however, Boeing has been hit by concerns about the 737 Max even though its share have rallied.

The company and the FAA have been finalizing a software fix for an obscure anti-stall measure created for the plane that came to light with the Indonesia tragedy. The Maneuvering Characteristics Augmentation System, triggered by an erroneous sensor reading, had baffled pilots by pushing the Lion Air plane downward dozens of times before it crashed.

The flight-control software is activated without pilot input when a sensor measuring the angle a plane’s nose is flying relative to the wind indicates the aircraft may be approaching a mid-flight stall.

But the software only operates when a plane is being flown manually with its flaps retracted, according to a Nov. 10 memo provided to Southwest Airlines pilots following the Lion Air crash. Flaps are typically extended to provide lift as airplanes climb after takeoff.

Boeing responded to the earlier crash by advising pilots that the Max’s so-called angle-of-attack sensor can provide false readings, causing the plane’s computers to erroneously detect a stall.

That in turn can prompt the aircraft to dive for as long as 10 seconds to regain the speed the computer thinks is needed to keep flying. Pilots could counteract the sudden downward tilt by flipping two switches and manually holding the aircraft stable, the planemaker said.

What Bloomberg Intelligence Says

“The crash may show insufficient training for the new stall prevention systems on the 737 Max. It’s unlikely due to design flaws, and the plane is likely to stay in service.”
-- George Ferguson, global aviation analyst
Click here to view the research.

The single-aisle 737 forms the backbone of many global airline fleets, which use the model and Airbus SE’s competing A320 line on shorter routes. The 737 Max, which debuted in May 2017, is poised to generate about $30 billion in annual revenue as factory output rises to a 57-jet monthly pace this year, according to Bloomberg Intelligence. Airbus is also studying a major production boost of its upgraded A320neo.

While groundings of the Max probably wouldn’t spur mass order cancellations, “this nevertheless spurs worries that the Max is flawed and could lose share to the Neo if customers, pilots and/or passengers sour on the aircraft,” said Jonathan Raviv, an analyst at Citigroup Inc.

“But at the end of the day, these sorts of issues are usually resolved with the fact that they’re still flying in the U.S. suggesting this will be the ultimate outcome,” Raviv said in a note to clients.

--With assistance from Mary Schlangenstein.

To contact the reporters on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net;Alan Levin in Washington at alevin24@bloomberg.net;Ryan Beene in Washington at rbeene@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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