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Regulators Clash Over 737 Max Return: Airline Stocks in Focus

Aparajita Dutta

Constant conflict between Boeing BA and international air-safety authorities has been threatening the return of the jet behemoth’s 737 Max fleet to service. The latest discord between the Federal Aviation Administration (FAA) and European Union Aviation Safety Agency (EASA) regarding the re-certification of this fleet has compounded its woes.

Notably, EASA declared that it will determine whether 737 Max is fit for flying, which reflects its lack of confidence in FAA’s decision. With the holiday season approaching, such discrepancy between the two major global regulators may further delay 737’s return. This also poses a risk for airline stocks, which are already bearing the brunt of the grounding of Boeing’s best-selling airliner since March.

Reason Behind the Conflict

Per media sources, a briefing by Boeing this August was cut short, with regulators from the United States, Europe, Brazil and elsewhere complaining about the jet maker’s failure to provide technical details and answer specific questions about modifications in the operation of MAX flight-control computers. Specifically, these regulators demanded that Boeing resubmitted briefing documents, describing proposed software changes, which will then be vetted by the FAA.

However, per a recent release, EASA, which is conducting its own independent review of the grounded 737 Max, has listed a few requirements, which are much more stringent than those of its U.S. counterpart. Now, if FAA clears 737 Max for flight and EASA delays the same, then the aircraft will be allowed only for domestic flights within the United States. In that case, U.S. airlines operating internationally as well as international airlines that operate 737 Max will continue to suffer.  

In fact, per a Reuters report, other international regulators have also indicated that they will conduct their own analysis of 737 MAX and Boeing's proposed updates, after the FAA’s credibility took a hit following 737 MAX crashes.

What’s the Status of the Airline Industry?

While the grounding of 737 Max has been a notable drag on Boeing’s share price, airlines that have a substantial number of 737 Max jets in their fleet are also incurring significant losses over the past several months. In particular, the commercial damage for airline operators appears to have reached the highest level during the peak summer season.

Per a report by U.K.-based flight data information firm OAG, Boeing 737 Max’s grounding is estimated to hurt global airline industry revenues by $4.1 billion in 2019, including $600 million for three U.S. airlines that fly the aircraft.

Boeing initially expected to get the re-certification for 737 Max by late September. This would have brought the fleet to service by October.  But considering the latest developments, it is highly unlikely. With the holiday season coming up, further delay in the return of 737 Max will prove to be a drag for the airline industry.

Airline Stocks in Focus

Following are the airline stocks that have been suffering the most due to the grounding of 737 Max. As further delay is anticipated in the return of this jetliner to service, we urge investors to keep an eye on these stocks.  

Southwest Airlines LUV, which operates the world's largest fleet of 737 Max planes, has decided to remove Boeing 737 MAX jets from its schedule until Jan 5, 2020. Per Bloomberg, the grounding cut $225 million from this airlines’ 2019 operating income.

American Airlines AAL extended grounding of the 737 Max fleet until Dec 3 as a result of which approximately 140 flights will be cancelled per day. In July, the company reported that the grounding has already resulted in loss of $185 million in revenues, which per OAG might reach $220 million by the end of 2019.

United Continental Holdings UAL has extended grounding of its 737 Max fleet to Dec 19.  According to a CNBC report, this is anticipated to result in 93 flights being cancelled per day in November and 96 a day in the Dec 1-18 period. Though there are no estimates for revenue loss yet, it is obvious that the grounding will have an adverse impact.

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