Boeing’s (NYSE:BA) troubled 737 Max jetliner is the gift that keeps on giving, to the chagrin of shareholders. By now everyone has heard the tales that negatively impacted Boeing stock: the two fatal crashes, the grounding of the Max jetliner, the subsequent investigations, and management’s admission of communication oversights.
Things are so bad at the iconic airplane manufacturer that the grounded jetliners are spilling over into the parking lot. Social media has gone wild with aerial pictures of Boeing employees’ cars parked right next to massive jetliners. Until the 737 Max receives the green light to fly again, they really have nowhere else to go. It’s emblematic of the dark cloud hanging over BA stock.
And it may get even worse for the Boeing stock price. Just this week the BBC reported that the Federal Aviation Administration (FAA) identified a “potential risk” when testing the Max during a simulated flight. The watchdog agency failed to clarify, further casting doubt on a potential comeback.
To quickly recap, the company’s crisis centers are on an onboard software called Maneuvering Characteristics Augmentation System, or MCAS. Originally designed to help prevent stalling, it instead worked against the flight crew’s wishes, dropping the nose down multiple times. That critical malfunction led to the losses of Lion Air Flight 610 and Ethiopian Airlines Flight 302.
As a precaution, aviation agencies throughout the world grounded the 737 Max, with the U.S. being the last to comply. For BA stock and for the company’s reputation, it is vital that the Max resume normal operations: multiple airliners depend on it.
The latest news about the Max’s poor testing with the FAA is a real kick to the teeth. But should you avoid Boeing stock in response?
Unique Airline Industry Benefits Boeing Stock by Default
If you’re basing your move on how the markets are absorbing recent developments, you may want to dump BA stock.
On Wednesday’s regular session, the Boeing stock price closed just under $375, or 1.5% above the prior day. During extended hours, however, shares dipped noticeably, taking a 1.1% loss. The airplane manufacturer might incur some choppiness over the coming days.
I think this is a normal reaction. As I said earlier, several domestic and international airliners are hurting right now. With the busy travel season upon us, this development could not have come at a worse time.
Politics also stymie BA stock. The FAA suffered harsh criticisms from all corners for lax safety-certification standards. Given the context, the federal agency is in no hurry to rush the Max’s reintroduction.
But here’s the problem with avoiding Boeing stock: the competition has no real way of benefiting from this malaise.
Sure, Airbus (OTCMKTS:EADSY) can steal market share. The most recent Paris Air Show demonstrates this case as Airbus cleaned house with airplane orders. On the other hand, Boeing was left fighting for scraps.
But sell BA stock? Not so fast! Airbus orders have outpaced Boeing orders for the third straight year, so this angle isn’t surprising. More critically, Boeing did receive orders. IAG stepped up to the plate and ordered 200 Max jetliners at a substantial discount.
The reality is that the Max is a brilliant airplane: it’s fuel-efficient, has great range, and has attributes that are valuable to the current air-travel ecosystem.
The bottom line is that it’s not easy for airliners to switch allegiances.
Airbus Stuck in a Holding Pattern
Even if competitors like Airbus wanted to advantage this situation, no viable pathway exists.
Of course, airliners can scrap their relationship with Boeing and shift to Airbus. The problem here is that these airliners would go to the back of the production line. Although not ideal, it’s better to wait for Boeing to get its act together.
Airbus also doesn’t want to risk ramping up production for orders they may or may not fulfill. Once this crisis fades — and it will inevitably fade — Boeing will resume normal operations. At that point Airbus may have a lot of expensive inventory on their hands.
It’s certainly not an ideal situation for Boeing stock. Management has a tough road ahead. Eventually they will navigate through it. Understanding how this crisis cycle works, taking a speculative bet on BA stock makes fundamental sense.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
