Looming DoJ Decision on Boeing Prosecution Piles Onto Debt Concerns and Rampant Cash Burn

A final decision on whether Boeing will be prosecuted for pending charges related to two 737 MAX crashes in 2018-2019 is expected by July 7. The initial prosecution of these charges was deferred in 2021 as part of a settlement with the Department of Justice (DoJ), but continued malfunctions affecting Boeing’s planes have allegedly constituted a violation of provisions in the arrangement. A felony conviction could imperil Boeing’s defense business and potentially open them up to further demands from the families of 737 MAX crash victims. 

These parties were not consulted by the Department of Justice as part of Boeing’s deferred prosecution agreement (DPA) in 2021, but have been able to secure favorable decisions in federal court that may entitle them to certain rights as “crime victims”. The DoJ disputes this classification, but it has apologized for leaving them out of their construction of the DPA. The position of the families regarding a DoJ prosecution of Boeing includes a request that the maximum possible fine, a sum which surpasses $24.7 billion, be levied. Further monetary damages pursued against Boeing, whether by the Justice Department or families of crash victims, will put the company in an even more precarious financial situation as their credit rating spirals toward “junk” levels.

Related Stocks: The Boeing Company (BA), Airbus SE (EADSY)

In May, the US Department of Justice (DoJ) accused Boeing of violating a 2021 deferred prosecution agreement (DPA) related to fraud conspiracy charges. The violation stemmed from a mid-air blowout of a panel aboard Alaska Airlines Flight 1282 – 737 MAX 9 jet – in January. Though the door plug, which served as the ultimate source of the blowout, was manufactured by supplier Spirit Aerosystems, the extra door assembly is only “semi-rigged”, meaning Boeing completes the installation of most door plugs on its planes and is supposed to conduct testing under pressurization to ensure all pieces of the craft are properly fastened. The National Transportation Safety Board (NTSB) found that Boeing was, in fact, behind the mis-installation of the door plug. According to the DoJ, the Alaska Airlines incident was evidence that Boeing had failed to meet the terms of its DPA, which required the company to set up and maintain a program to detect and prevent violations of US anti-fraud laws.

Boeing’s ongoing woes, which have shattered the reputation and financial health of the American aviation giant over the past five years, began with its withholding of information during the certification process for its Maneuvering Characteristics Augmentation System (MCAS). This software system, which proved to be faulty, was the root cause of two separate 737 MAX 8 crashes within a five-month span in 2018-2019 and lead to the death 346 passengers and crew aboard the doomed jets. At the outset of a subsequent global grounding of all 737 MAX planes in March 2019, Boeing led investors and airlines to believe that a fix for the MCAS software, along with re-certification, would come as soon as mid-May of that year. When no progress on re-certification was present by that June, MRP expressed skepticism about the simplicity of the repairs that would be needed, noting that, in addition to software problems, almost 150 parts inside the wings of 312 Boeing 737 jets were potentially defective and had to be replaced. On June 4, 2019, we initiated SHORT Aviation and Airlines themes (closed on January 8, 2020 and March 30, 2020, respectively), largely focused on Boeing and the fallout that would be felt by suppliers and commercial airline operators.

It would ultimately take 20 months before the 737 MAX could be re-certified in the US in November 2020. As part of its DoJ settlement, Boeing submitted to a fine of $243.6 million, as well as payment of $1.77 billion in compensation to its airline customers and $500 million to the victims’ beneficiaries. Boeing also paid $200 million to resolve 2022 allegations from the Securities and Exchange Commission (SEC) that the company and its former CEO Dennis Muilenburg made misleading statements but was not required to admit any wrongdoing. Total direct costs to Boeing as a result of the MAX disasters are thus far…