737 MAX grounding
perspective March 2019

A total of 346 people died in two 737 MAX crashes — Lion Air on October 29, 2018 and Ethiopian Airlines on March 10 , crashes with disturbing similarities that have led to a global grounding of the new type.

There appears to be a consensus among technical experts that three inter-related factors — one hardware, one software and one human — contributed to the crashes.

In brief, tentative evidence suggests that in both accidents false readings indicating the danger of a stall from an angle-of-attack (AOA) sensor caused the new Manoeuvring Characteristics Augmentation System (MCAS) to push the aircraft’s nose down to regain speed. Unfortunately, the pilots seem to have failed to recognise that the MCAS was driving the nose-down trim and tried to rectify the problem manually pulling back on the yoke. This resulted in the aircraft pitching up temporarily then pitching down again as the MCAS cut back in — a terrible series of oscillations that culminated in the crashes.

The MCAS was installed in MAXs to smooth out differences in handling characteristics, and hence minimise transition training, between 737NGs and 737MAXs. The 737MAX is powered by more powerful LEAP1 engines than the CFM56s installed on 737NGs, and these engines have a tendency to push the nose of the aircraft up; the MCAS was designed to adjust the horizontal stabiliser to compensate.

Tragically, it appears that the problem could have been resolved by the cockpit crews switching off the MCAS and/or de-powering inputs to the stabiliser, but the crash crews were apparently unaware of the MCAS functionality. And this is where Boeing has faced intense criticism, because the MCAS changes were not directly communicated to airlines and not included in critical checklists. The counter-argument is that the cockpit crews should have been able to resolve the “runaway stabiliser” situation, regardless of the new MCAS.

Following the grounding Boeing has swiftly come up with a solution, which could be rolled out to airlines within one to two months. This involves new alerts on AOA sensor readings; software re-writes to ensure a much more gradual MCAS response to stall situations and prevention of multiple MCAS engagements. Specific MCAS training will be given to crews.

It is then up to the various civil aviation authorities with grounded MAXs to approve the fixes and to recertify the 737MAX for commercial operations. The FAA will take the lead, but that organisation has come under political and legal scrutiny for allegedly outsourcing too much its technical approval and certification process to Boeing. A DoT committee has been set up to investigate.

Costs

The cost of the MAX grounding is impossible to estimate accurately, and claims are confusing, but the following are the main considerations.

Crash costs:

The costs of writing off two new aircraft — $100m or so, plus, more importantly, compensation for the victims, at least $500m, for the brutal reason that many of the dead in the Ethiopian crash were Western professionals. This cost will ultimately be borne by the insurers.

Direct lost profits:

This refers to the cash operating surpluses suffered by the airlines. Profitability will of course vary greatly among the 50-plus operators affected by the grounding, though the claims will logically be towards the top end of the profitability spectrum and should reflect the difference between operating a fuel-efficient new type against a less efficient replacement. This gets complicated as the replacement types may have lower capital costs.

Rescheduling costs:

These are the costs associated with cancelling or consolidating flights, re-allocating other aircraft, parking MAXs and changing planned maintenance to liberate capacity. These can be substantial but, for most of the affected airlines, 737MAXs as yet make up relatively small proportions of their total capacity; for example, for Southwest, the largest operator, MAXs account for only about 4% of total seat capacity. The situation is rather different for airlines like Norwegian which is suffering significant disruption to its schedules; if the MAX grounding is presented as a factor in pushing Norwegian over the edge (see Aviation Strategy, Jan/Feb 2019) might there be a case of a legal action? Who bears this cost depends on Boeing customer contracts but again we suspect insurers will pick up a significant portion of the bill.

• TUI (including associate airlines) operates 15 737MAXs, has been explicit in its cost estimate — €200m for the four months between grounding and mid-July when it expects the MAX to be able to re-enter service. Working this number through, we estimate that that TUI is claiming losses of around $9,000/flight hour on its MAX fleet, which compares to operating costs per hour somewhere in the $5,000 region.

Delivery delays:

For the airlines this is again a rescheduling cost while for Boeing it is probably a cash-flow impact from delays in PDPs and final delivery payments.

Reputational damage:

In the short/medium term this cost, for manufacturer and airlines, appears very high, but it tends to dissipate quite quickly. There have always been serious problems associated with the introduction of new types: back in the 60s there was a series of 727 crashes attributed to pilots not being prepared for the slower landing speed of this type through to the grounding of 787 two years ago because of lithium battery and engine problems. (September 11 was the ultimate example of over-reaction to a tragedy — a leading US airport consultancy forecast a permanent 25% reduction of passenger traffic globally, which was so wrong). Once an aircraft issue is fixed, and seen to be fixed, the travelling public’s memory tends to fade quickly. Airlines recognise that the 737MAX situation is serious but temporary, and in a vote of confidence Lufthansa has indicated that it is considering a 100-unit 737MAX order.

• As it stands, the financial cost to Boeing, after insurance, does not seem too substantial, at least in relation to its 2018 operating cashflow of $15.3bn. Cowen Washington Research Group estimate $2bn which seems as good a guess as any. However, one unknown is whether the 737MAX grounding might get embroiled in Sino-US trade disputes, Boeing’s Chinese business (note that many of the 942 “Unidentified” 737MAX orders in the table are probably for Chinese entities) being played against Huawei’s US ambitions and US legal actions against the Chinese conglomerate (whose revenues incidentally have now touched $100bn, exactly the same as Boeing).

Perspective

Finally, for perspective, the following charts, compiled from the Airline Monitor’s 2019 forecast, highlight the inevitable delivery pattern of MAXs and NEOs, both types with long, successful and safe pedigrees. The impact of the 737 MAX grounding will not be perceptible in the long term.