Airlines are typically expected to be robustly profitable during the summer season, a period when heavy demand keeps fares higher and planes fuller than during other parts of the year. But this year, all bets are off. Although the U.S. carriers’ trade group, Airlines for America, estimates that a record 257.4 million people will fly from June 1 through the end of August, cancellations from the grounding of Boeing’s 737 MAX jetliner continue to squeeze airlines. Timing could not be much worse, considering the International Air Transport Association just cut the global air traffic industry’s 2019 profit expectations by more than 21%.
In April, MRP highlighted early downstream discomfort being felt by airlines who were forced to cancel thousands of flights through early June. Now, those cancellations have extended all the way through August for United, American, and Southwest Airlines, all heavily dependent on their 737 MAX jets.
Last week, Boeing said it had finished the development of a software fix for the 737 MAX, but that update has not yet been certified by the Federal Aviation Administration (FAA), which must happen before the agency allows the plane to fly in the US again. Chief Executive Dennis Muilenburg said at Boeing’s annual meeting on April 29 that he expected a test flight required for FAA certification by mid-May. Such a flight hasn’t yet been scheduled.
Over the weekend, complicating the situation further, the FAA said almost 150 parts inside the wings of 312 Boeing 737 jets may be defective and need to be replaced. "The affected parts may be susceptible to premature failure or cracks resulting from the improper manufacturing process," the FAA said in a statement. "Although a complete failure of a leading edge slat track would not result in the loss of the aircraft, a risk remains that a failed part could lead to aircraft damage in flight."
Currently, the consensus from the FAA and its regulatory counterparts from 31 nations was that it’s too early to set any time frame on when the plane may return to commercial service. While Boeing is painting an optimistic picture, others are bracing for the worst. Emirates airline president Tim Clark said the Boeing 737 MAX would probably remain grounded until December because of a lack of co-ordinated action between global aviation regulators. Emirates does not operate the Max but is in a partnership with Flydubai, which has 14 grounded jets and dozens more on order.
Worse for Boeing, a number of players in the airline industry, as well as families of 737 MAX crash victims, could bring them to court for compensation. Oscar Munoz, United’s CEO, said he expects compensation “of some sort over time” once Boeing’s 737 MAX is back in service. Munoz added that there’s no assumption all passengers will feel comfortable flying on a Boeing 737 MAX plane anytime soon. In anticipation, United, along with Southwest Airlines, said last month that they would not be charging passengers for switching flights in order to avoid the 737 MAX.
When the cases do end up in court, some plaintiffs already plan to argue that the company knowingly deployed their 737 MAX models with faulty components. A lawsuit filed by Mary Schiavo, the former inspector general of the Department of Transportation, argues 2 previous Boeing 737 crashes in 1991 and 1994 saw Boeing withhold information, reject or resist calls to ground the aircraft and emphasized pilots' faults over design issues.
Schiavo, in the lawsuit, said the FAA has continuously allowed Boeing to build new 737 models — including the MAX version — under the same certificate that was used for the original 737 in 1967. That has allowed Boeing to “race the new models through design, engineering, development and production by ‘cutting and pasting’ prior models and prior documentation, knowing Boeing would be permitted by the FAA to self-certify,” the lawsuit states. The New York Times has reported that self-certification allowed Mark Forkner, the MAX's chief technical pilot, to unilaterally remove MCAS, the faulty software which caused the 737 MAX jetliners to malfunction, from the pilot’s manual – avoiding the costs that would have been accrued to train pilots operating the plane. Boeing has agreed to mediate dozens of lawsuits brought over last year’s Lion Air crash, but many more are likely to surface.
Back in April, Garuda Indonesia became the first airline to withdraw purchases of the 737 MAX, cancelling 49 orders. Now, Azerbaijan airline AZAL has canceled a $1 billion contract to buy 10 Boeing 737 MAX planes. These compound a cessation of all new 737 MAX orders that began in March, following a first quarter that saw total 737 deliveries decline by a third, to 89 from 132 a year ago. Even worse for the company, Boeing cut production by almost 20% in April and received no new orders for any of their planes for the month. In mid-May, Boeing said it has lost at least $1 billion since the deadly crashes and that it couldn't predict how much worse the future financial effect of the incidents would be. It also said its core profits fell 21% in the first three months of 2019 compared with the same period last year.
The heavily concentrated aviation industry could face more headwinds later this year if a 15-year spat between the US and EU over mutual claims of illegal aid to plane giants Boeing and Airbus, respectively, finally escalates as part of broader international trade tensions. The Trump administration threatened last month to impose tariffs on $11 billion of European goods including planes and their parts, claiming the subsidies provided by the European Union to Airbus have adversely affected the United States.