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FAA Finds New Flaw in 737 Max: Will Airline Stocks Suffer?

Aparajita Dutta

Airlines in the United States and Europe have been bearing the brunt of the grounding of Boeing’s best-selling jets for the past few months. Those who were expecting Boeing’s BA 737 Max to return to service any time soon were in for a disappointment as the Federal Aviation Administration (FAA) discovered another potential safety issue with the jet.

Per a CNN report, the problem involves a microprocessor. The failure of the microprocessor during a flight can push the airplane's nose down. This comes as a major disappointment, with Boeing working on software upgrades for months, following the crash of 737 Max 8 jets in Ethiopia and Indonesia, which resulted in the grounding of this model in March.

Economic Impact on the Airline Industry

Airlines are incurring loss of hundreds of millions of dollars due to the grounding.

Southwest Airlines LUV, which operates the world's largest fleet of 737 Max planes, said it has already lost $200 million in the first quarter as it had to cancel flights, primarily due to the grounding of the plane.

Per a BBC report, American Airlines AAL estimates the grounding to cost it $350 million, as it has cancelled more than 15,000 flights till August.

Though United Continental Holdings UAL has not revealed the extent of the damage that the grounding of 737 MAX will cause, FlightGlobal estimates the total number of flights impacted to be around 3,440.

In fact, share price of these airlines have been witnessing a downside. In the week following 737’s grounding on Mar 14, the stocks declined as we can see below:

What Next?

In May, FAA representatives had said that approval of the 737 MAX jets may take place as early as late June. However, it is quite evident now that the plane will stay grounded until the FAA and regulators in other countries thoroughly examine the aircraft and give final approval for flight. A few analysts believe that the latest setback may delay the plane’s return to service by one to three months, which implies further increase in costs for the aforementioned airline stocks.

As a result of the 737 grounding, services in North America were disrupted the most initially. This is because Southwest Airlines, Air Canada and American Airlines are the three largest operators of the 737 Max aircraft in the world. However, these airlines accommodated passengers by putting them on other flights, using alternative aircraft and bringing old jets back into action.

The recently provided optimistic projections for the second-quarter reporting cycle by major airline stocks came as a ray of hope. For the soon-to-be- reported quarter, Southwest Airlines anticipates revenue per available seat miles (RASM: a key measure of unit revenue) to increase 6.5-7.5% year over year compared with 5.5-7.5% expected earlier.  Air Canada, last month, reported a surprise quarterly profit that sent shares up more than 5% per a Reuters report.

These projections imply better prospects for airline stocks, at least for now. However, as uncertainty still looms over 737’s return to service, the ultimate impact of grounding of the best-selling jet on the airline industry remains to be seen.

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