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B737MAX Values Hold Firm – For Now

April 15, 2019

Grounding Could Create Long Term Perception Problems But Not Yet

The values of the B737MAX are not currently being changed despite the tragic loss of two aircraft and subsequent grounding of the type.

Boeing cites 376 deliveries of the MAX. With 29,000 jet aircraft in service these 376 aircraft represent just over one percent of the worlds fleet. Most airlines will be able to accommodate the loss of capacity by bringing back other aircraft into service, by acquiring short term lift, by using larger aircraft, by increasing load factors, or by even cutting frequency. The need for interim capacity may see a slight uplift in short term lease rentals for the A320 and B737NG with lessors requesting a premium for lease extensions. Those operators specializing in ACMI leasing may see increased demand whereby older aircraft are employed to fill gaps in the schedule. However, there is no expectation that values of the A320 and B737NG should increase.

The grounding of the B737MAX is not a unique event and has occurred a number of times before although it remains an extremely rare event for an entire fleet to be grounded. The airworthiness authorities such as the FAA and EASA usually issue emergency Airworthiness Directives (ADs) that require operators to undertake inspections and modifications within a specified time, perhaps even before the next flight. In the case of an emergency AD, the cause of the defect is known along with the means to rectify it even if it includes withdrawing the specific aircraft from service until relevant work is undertaken.

There have perhaps only been some eight previous occasions since 1930 when an aircraft Type Certificate (a Type Certificate applies to the entire aircraft model whereas a Certificate of Airworthiness applies to a specific serial number). In 1930 the Fokker F-10A was grounded due to defective wing design but the cost of inspections caused some operators to stop flying the aircraft thereafter. The Lockheed Constellation was grounded in 1946 for a month due to a generator issue that caused the loss of an aircraft but the type continue to be a success thereafter. The crash of a DC6 in 1947 caused the type to be grounded and lasted for four months. The most notable grounding was of the de Havilland Comet in 1954 after a number of crashes were traced to fatigue. The aircraft was grounded for four years during which time the airframe was significantly modified to withstand pressurization. In 1972 and 1974 two crashes of the DC10 caused by a cargo door design issue did not result in its grounding with the issue being addressed by ADs. However, in 1979 the DC10 was grounded as a result of an American Airlines crash which was traced to an engine maintenance issue whereby engines were replaced using a forklift thereby creating cracks in the pylon. The grounding was in effect for five weeks. The accidents surrounding the DC10 caused some longer term perception issues and may have contributed to the loss of some sale campaigns immediately thereafter but the type continued to be a mainstay of the fleet for years thereafter with the last passenger flight taking in 2014. The Yak-42 was grounded for two year in 1982 due to a design issue with the horizontal stabilizer. The crash of the Concorde in 2001 caused by the penetration of the fuel tank by debris saw its grounding for 15 months. However, even in 2013 the B787 was grounded for three months following fire issues with lithium ion batteries. The values of the B787 were not affected even though the batter issue followed a long series of delays to service entry.

The length of time that the B737MAX will be grounded will be an important consideration as will be the manner in which the type returns to service. While Boeing will be likely be paying many millions to the families of those tragically lost in the two accidents as well as compensation to operators, the return to service will likely be measured. The FAA, previously seen as the “gold standard” in terms of aviation safety and oversight, will wish to ensure that the rectification of any issues satisfies all interested parties and that the return to service addresses the concerns of other authorities and operators. American Airlines has indicated that services will not feature the B737MAX until early June. There is an expectation that the aircraft could be back in worldwide service by the end of June although there will be pressures to bring this forward and for others to delay such a return. There will likely be a need to modify all delivered aircraft and ensure that pilots are able to manage the systems safely before service is resumed. Should the grounding of the aircraft extend beyond the end of August there may be a need to assess the effect on values again. The appetite for 24 hour news and the importance of social media will ensure that the B737MAX remains under scrutiny with any related and unrelated event making headline news just as the diversion of a Southwest B737MAX on its flight to a storage facility due to an engine problem became a major news item despite many other aircraft and types suffering the same fate on the same day which went unreported.

The desire of airlines and countries directly associated with the B737MAX crashes to distance themselves from the type is understandable. The service entry of the B777-9 is not too far away but it may be the case that the past relationship between the FAA and Boeing may warrant a review of the way in which the design features of the B777 were validated which could cause a delay.

Values of the B737MAX will not likely be impacted by a few cancellations although orders from Garuda and Lionair represent a not unsubstantial five percent of the MAX orderbook. Should orders from other customers be cancelled representing more than ten percent of the orderbook then there may be a need to consider the short term values of the B737MAX but at present there is no justification for value degradation due to the grounding.

 

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