Boeing’s stock would seem to be under significant downward pressure under current circumstances.
As is now well known, two major crashes occurred with Boeing’s new pride and joy, the 737 Max8. Both crashes occurred soon after take-off in clear weather. Although it’s too soon to draw definitive conclusions, both crashes at this stage seemed to be similar. Both were incurred by so-called third world country airlines, i.e. Indonesia’s Lion Air and Ethiopia’s Ethiopian Airlines.
A total of 347 people died in these two crashes. In various circles, Boeing has been accused of negligence, greed and taking shortcuts. The Federal Aviation Authority (FAA) has been accused of being understaffed and being essentially in Boeing’s pocket. The 737 Max8 and Max9 have been grounded.
Boeing’s stock has held up—so far—rather well through all these, because the market thinks Boeing would benefit from a US/China trade pact. In my opinion, the market is celebrating what would happen anyway, trade pact or not. China is desperate for planes. It’s not going to boycott Boeing for trade reasons. The homegrown Chinese airliner will take years to get off the ground (pun intended). The Europeans—Airbus—are booked up. This probably is the bullish case for Boeing. Its planes are needed, if not irreplaceable.
But 347 people have died. Because of what, in some minds, are Boeing’s negligence, greed and shortcuts. Maybe this judgement is unfair, but in my opinion, this will be a tremendous weight on Boeing’s stock. Boeing is guilty until proven innocent. It may take a lot longer than investors would like for the Max to get back off the ground. And Boeing’s legal bills could be staggering before this is over.
347 people have died.
A Brief Technical Overview
I pretend no special engineering expertise but what has happened can be described in plain English. For those readers who want more information, I recommend articles by George Leopold and Junko Yoshida in EE Times.
Boeing and Airbus are duopolists in the market for the building of large commercial airliners. Boeing’s 737 was historically an incredible success but Boeing was under competitive pressure to build a replacement for the 737. It decided not to do that but instead to make certain “minor” modifications to the 737. One of those modifications was to add more powerful engines. But those engines had to be mounted forward of the wings. This, in turn, caused the plane’s nose to pitch up on climb out.
To counteract this tendency, Boeing created a software fix called MCAS. This fix, without the pilot even knowing it, automatically offset the pitch up tendency. MCAS received its data inputs from just one sensor (unless the purchasing airline specifically ordered an additional sensor).
Boeing concluded that the 737 Max wasn’t that different from the earlier 737s and the pilots did not require retraining. This saved a lot of money and helped keep Boeing competitive with Airbus. Boeing apparently sent out an update on the subject which most pilots never read. Boeing essentially followed an RTFM policy (old computer expression meaning Read The F__cking Manual).
The Current Situation
Boeing is now hard at work coming up with fixes for MCAS, which will involve having two sensors. Presumably, pilots will need to be trained to deal with situations where the sensors don’t agree. RTFM cannot prevail.
But so many questions can be asked. The first being why didn’t Boeing do this in the first place. Was Boeing saving money on pilot training? Anyone taking Engineering 101 would ask how one of the technologically smartest companies in the world could place the safety of an entire plane on the proper functioning of just one sensor.
And going beyond that, there is the question of the Max’s pitch up tendency. Is that really the best design for a plane whereby it automatically tends to pitch up and possibly stall? Engineers are “can do” people and when given a problem they will figure out how to solve it. So the Boeing engineers fixed the pitch up with MCAS and the Max kept its bigger engines. But did Boeing make the right decision in “tweaking” the 737? Or should it have built an entirely new plane?
Boeing Arrogance and Realities
There has been some bad feeling between the Ethiopian Airline authorities and Boeing. Boeing, rightly or wrongly, has given the impression that Ethiopian Airlines didn’t follow instructions. Boeing has given the impression of arrogance.
The fact is that the two crashes occurred on airlines from countries which are less advanced technologically. The pilots reported problems with the plane’s sensor in three prior flights in the case of the Indonesian Lion Air crash. The sensor didn’t get fixed. The co-pilot in the Ethiopian Air crash reportedly only had 200 hours of experience. Welcome to the third world. One of the things that investors may note when reading about these incidents is that not every 737 Max8 is the same. Richer first world airlines buy extra features, which are in fact safety features.
I believe Boeing is responsible for the competence and experience of the airlines it sells to. There is an explosion of demand for planes in the so-called third world where experience and expertise are lacking. This is Boeing’s problem. It is Boeing’s responsibility to compensate for this. Boeing can’t blame its third world customers. If it takes their money, it is responsible for the safety of their planes.
Bayer (Monsanto) Being Destroyed by a Judicial Lynch Mob
In July 2018, German life sciences giant Bayer (BAYRY) acquired US agricultural company, Monsanto. At the time, Bayer thought it was acquiring a scientific gem and that it would be building a global agricultural company. And indeed Monsanto was a scientific gem.
So much for the best-laid plans of mice and men. Unfortunately for Bayer, it had underestimated the power of the coalition of corrupt American lawyers and anti-science fanatics for whom Monsanto was the devil incarnate. With the ink barely dry on its acquisition by Bayer, in August 2018, a California jury ordered Monsanto to pay $289 million to one individual who claimed he got cancer from Monsanto’s Roundup herbicide. This award totally defies any sense of equity or common sense. It was lowered later but to a still staggering sum of $78 million. Now the trials are coming one after the other. The plaintiffs number in the thousands. You can’t turn on the TV without seeing lawyers advertising for would-be Roundup victims. Bayer is becoming a giant ATM machine for the plaintiffs.
Monsanto’s genetically modified seeds for corn and soybeans and other crops are resistant to its glyphosate-based herbicides. That’s how Monsanto designed them. Monsanto seeds and herbicides are used in the US and South America in particular and have become an essential part of the global agricultural supply. If every field worker can sue Bayer for imagined glyphosate-caused ailments, the global food chain will be disrupted. Glyphosate? Nobody will make the stuff.
I quote below a passage from the Genetic Literacy Project which is a report on another more recent Monsanto trial with another absurd astronomical verdict, this time $80 million. This verdict is not based on science.
“On March 20, a jury of six people in California delivered a decision on the science of glyphosate, the active ingredient in Bayer’s Roundup, concludingit contributed to a person’s cancer. There were no toxicologists, chemists or oncologists on this jury. No studies were read or cited. This farce is a result of a group of outspoken scientists working with predatory law firms who have decided this adversarial litigious approach is more efficient than the regulatory risk management process the democratic institutions had developed (and they write openly about it). These true believers, these scientific zealots, have proven they are willing to work with anyone to get their way—wither public trust in science and our elected risk managers.”
In other words, we have an FDA in the US. Monsanto complied with their edicts. But then the lawyers and anti-science fanatics go to court and invent their own standards. Juries and science don’t always mix. We can argue whether jury trials are the right approach for complicated scientific cases.
There was always the Scopes monkey trial where high school teacher John Scopes was convicted of teaching evolution. Or comedian Charlie Chaplin’s infamous paternity trial where he was forced to pay child support despite blood tests proving he was not the father. Blood tests were new at the time. Too much for the just plain folks on the jury. But that’s history.