Why Wednesday’s Double-Whammy Hurt Boeing Stock

A public acknowledgment of system defects and a Congressional hearing puts the screws on BA stock

Typically, “hump” day represents an optimistic moment for corporate warriors as they sense the weekend looming. But for Boeing (NYSE:BA), Wednesday took on an ominous tone as management faced both concerned airliners and an angry government. Ultimately, the disclosures and added scrutiny are enough to impact your perspective on Boeing stock.

Wednesday’s Double-Whammy Hurts Boeing Stock
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At its Renton, Washington factory, BA’s leadership team presented software updates and other improvements to the 737 Max 8. This is the airplane that was involved in both the Lion Air Flight 610 and Ethiopian Airlines Flight 302 crashes that killed all onboard. More than 200 pilots and airline executives attended the public presentation.

The proposals are significant because they facilitate more control to the aircrew. In addition, should the anti-stalling system known as Maneuvering Characteristics Augmentation System (MCAS) encounter faulty data, the new improvements will prevent MCAS from reacting to it.

Such a mechanism, had it been originally installed in the 737 Max, could have saved Lion Air Flight 610. On a less-important note, it would have also saved much turmoil in Boeing stock. This logic fueled the company’s other high-profile event on Wednesday.

Circus of Incompetence Threatens to Ground BA Stock

Before an airplane receives the green light for commercial use, it undergoes a battery of safety tests. In charge of these assessments is the Federal Aviation Administration, which assigns regulators to analyze individual aircraft. Senators in two separate congressional hearings, grilled Boeing’s regulators.

What the senators ultimately unveiled unnerved anyone with functional ears. Also, anyone with significant exposure to BA stock is probably angling for the “sell” button.

According to the FAA officials overseeing the 737 Max, regulators initially tested the controversial MCAS software. But facing substantial competitive pressure from Airbus (OTCMKTS:EADSY) and other manufacturers, Boeing wanted the Max approved for operation quickly. Inexplicably, the FAA allowed BA to have the final word in the oversight process.

More troubling for the airplane manufacturer and Boeing stock, the FAA does not believe that BA comprehensively tested MCAS. Specifically, Boeing may not have tested a hypothetical situation involving a faulty sensor.

Unsurprisingly, Senator Richard Blumenthal remained unimpressed with the FAA regulators’ explanation. Essentially speaking for everyone, Blumenthal blasted the federal agency, accusing them of doing “safety on the cheap, which is neither cheap nor safe.” Moreover, he bluntly stated that the FAA “put the fox in charge of the henhouse.”

Plus, the FAA is already on the defensive. Earlier this month, the agency grounded all 737 Max jets. By itself and without any other context, this was a smart move. However, it followed the lead of other countries and the European Union. According to The New York Times, the FAA was the last major regulatory force to ground the embattled airplanes.

Boeing Stock Likely to Suffer Turbulence

In the aftermath of the Lion Air tragedy, Boeing initially “benefitted” from the seed of doubt. The company asserted that Lion Air’s ground crew inappropriately tampered with the doomed flight’s sensors. Management insisted that this action caused the plane to crash, not an inherent defect with MCAS.

But with Ethiopian Airlines also suffering a very similar accident, BA’s credibility crumbled. What little they had remaining evaporated on Wednesday. By focusing all the attention on MCAS, both Boeing and the U.S. government acknowledged that profits came before human lives. This time, instead of pointing fingers, management kept their hands in their pockets.

And that really hurts Boeing stock. Today, all doubts have been removed. Execs lied and deflected following the first tragedy, hoping that it wouldn’t repeat. Rather than take responsibility, they waited until 157 people unnecessarily lost their lives.

I’m not surprised that BA stock initially started the day in the black, but is now in the red. They’re going to be seeing a lot of this color over the coming months, and perhaps years.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/wednesday-double-whammy-hurts-boeing-stock/.

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