If the issues surrounding the Boeing Max 8 crisis have shown us anything it’s that safety is the aviation industry’s number one priority — not only in terms of moral and ethical responsibility but also in terms of commercial success.
The tragic loss of life on both the Ethiopian Airlines ET302 and the Lion Air of Indonesia is difficult to put into words. The fact that both planes were almost new Boeing 737 Max 8 has been written about extensively, striking a nerve with many in the industry and the travelling public.
Expensive problems to solve
With two fatal crashes in five months, airlines, leasing companies and manufacturers have been left with a variety of expensive problems to solve.
For Boeing it’s a colossal challenge. The Max 8 is an integral part of its commercial aircraft programme with an order book for more than 5,000 jets with 78 airlines and leasing companies. Costing €88.5m each, the 737 MAX 8 had just replaced the NG (New Generation) version of the 737 last year, with production of the newer model increasing every month.
With the Max planes now grounded, demand for 737NG planes has increased. The lease rate for 10-year old 737NGs may increase by up to 10 per cent should Boeing fail to resolve the issue quickly.
For airlines the commercial impact of these disasters is more difficult to calculate. The grounding of 350 aircraft has caused huge logistical problems around the world with flights planned for the coming weeks needing to find alternative planes to service those routes.
Lessors will also need to take a close look at their longer-term commitments considering the 900 or so 737 Max 8s they currently have on order. Leasing companies work on a time frame of 25 years with respect to the commercial life of an aircraft so any further doubts over the Max 8’s reliability will call these orders into question.
Asset value instability for lessors
The demand for the highest safety standards for lessors is no less pressing than that of the airlines. The market is defined by leasing to multiple airlines while selling in large volumes. If the status of an aircraft as an investible asset is questioned, then long term returns can quickly decline. Therefore, the need for answers is paramount to protecting not only people’s lives but also to protecting leasing companies profit margins. If Boeing cannot resolve this issue satisfactorily it may well lead to leasing operations looking for discounts if aircraft deliveries are delayed due to any redesigns.
The financial impact for lessors for each plane on the ground is difficult to assess. Some say the cost to lease a less-advanced plane that burns more fuel could be up to $35,000 a day. Peter Morris, chief economist at UK-based aviation consultancy Ascend by Cirium, told Points Guy’s Kerry Reals that “It is not possible to quote an accurate cost, since there are so many different markets and strategies adopted by airlines — cancelling or combining flights, delaying retirement of older aircraft, extending leases, etc — all of which have different cost and revenue implications.”
Compensation for airlines?
Boeing is already facing pressure from airlines for compensation due to having to park their 737 MAX 8 fleets. Scandinavian low-cost carrier Norwegian’s chief executive Bjorn Kjos said in a Tweeted video message that “we will not take the cost related to the new aircraft that we have to park temporarily,” and “we will send the bill to those who produce this aircraft.” It’s not the first time Norwegian has faced such issues with its Boeing 787s being temporarily taken out of service in 2018 due to problems with its Rolls-Royce Trent 1000 engines. The Oslo-based airline operates eighteen 737 MAX 8 aircraft and is due to take delivery of a further sixteen this year. The carrier has had to deploy a Boeing 787-9 on flights to the US from Dublin that previously were operated by the MAX 8.
Europe’s largest airline, Ryanair was due to receive its first 737 Max 8 next month with four more due in May. The airline has some 135 737 Max 8s on order in total, with options on 75 more. In the short-term, the crisis is not expected to affect the company, but aviation analysts believe it may need to reassess its medium-term plans. Boeing had created a new high capacity model of the 737 MAX 8 specifically for Ryanair, with the company referring to the model as a “gamechanger” aircraft. Chief marketing officer Kenny Jacobs said the airline’s plans remain unchanged awaiting the outcome of the ongoing investigations into the recent disasters.
Boeing issue fix
This week Boeing has issued a fix for the 737 Max 8, reprogramming software on the anti-stall system – known as MCAS, or Manoeuvring Characteristics Augmentation System which has been pinpointed by investigators as the possible cause in both the Lion Air and Ethiopian ET302 crashes. The company also stated that airlines would not be charged extra for the safety system to be installed. Pilots will also be given extra computer-based training, following criticism that MCAS was not properly highlighted in the aircraft manual.
Aviation’s success lies in its safety
It’s important to remember that commercial aviation is statistically proven as the safest form of mass transportation worldwide. Regulators quick reaction to ground the 737 Max 8 is a testament to aviation’s authorities ‘act first investigate later’ mandate that upholds the trust we have in flying. What’s important now is that Boeing and regulators provide bullet-proof assurances to consumers and airlines that Boeing’s 737 Max 8 is safe to fly. The economic fallout from the crisis has been a stark reminder that safety is intrinsically linked to the success of the industry.
Rodney shares insights from his 20 years’ experience working in the legal and accounting industries with both Irish and international companies. As Managing Director at Cafico International, Rodney regularly works with international companies in the technology, pharma, aviation and insurance industries that are seeking to establish operations in Ireland, assisting them with the management of their projects, and compliance with their fiscal and legal responsibilities.
To learn how Cafico International can help your business expand to Ireland, get in touch with Rodney today.