50 Business The EconomistAugust 24th 2019
21ing seven fewer older, thirstier 737s from
its fleet this year than it originally planned.
United Airlines is pressing into service
wide-bodied jets, which are costlier to run
than single-aisle jets like the 737 and so
generally reserved for long-haul routes.
Affected airlines can expect compensa-
tion in kind from Boeing, in the form of
bigger discounts and better deals on other
services. The same cannot be said of Boe-
ing’s suppliers. It has relentlessly squeezed
their profit margins in recent years in
search of efficiency. Many have invested in
extra capacity to supply parts for 57 max
planes a month, Boeing’s original produc-
tion target for this year. Instead, Boeing cut
monthly output back from 52 to 42.Low spirits
Spirit AeroSystems, which gets around half
its revenues from supplying fuselages for
the 737 max, saw margins slip and is cut-
ting overtime and putting workers on un-
paid leave to cut costs after “disruption in a
complex production system”, says its boss,
Tom Gentile. It has lost 28% of its market
capitalisation, or around $3bn, since
March. Allegheny Technologies, which
makes composite materials used in the air-
craft, has been similarly clobbered. Gen-
eral Electric, America’s troubled engineer-
ing giant which supplies max engines in a
joint venture with Safran, a French aero-
space company, faces a bigger bill. It is paid
only when planes are delivered. It esti-
mates that its cashflow could be reduced by
as much $1.4bn in 2019, adding to its woes
(see next story). Safran’s results for the first
half of 2019, due on September 5th, will be
pored over for signs of trouble.
Most aerospace firms do not live by Boe-ing alone. That, and Boeing’s decision to
maintain production, has insulated them
from a bigger fallout. utc, an American
conglomerate which makes electronics,
seats, wheels and brakes for the max, reck-
ons the delays will have only a small im-
pact on profits. The situation for suppliers
is summed up neatly by David Squires, boss
of Senior, a British firm that makes high-
tech components not only for Boeing but
also for geand Spirit. The grounding has
not been devastating, he insists. That said,
his firm will now be where it hoped to be in
April 2019 only by the start of 2021.
Then there is Boeing itself. The 737, the
first of which took to the air half a century
ago, has been a huge seller for the com-
pany—the 10,000th rolled off the produc-
tion line in 2018. In March Goldman Sachs,
a bank, estimated that the max may ac-
count for a third of Boeing’s overall rev-
enues (including its defence business) in
the next five years. Although no max orders
have been cancelled so far, Boeing has not
booked any new ones either. Further de-
lays, Boeing has admitted, may force it to
cut production further—or even shut it
down altogether.
The fiasco has already led the plane-
maker to postpone plans to develop a new
twin-aisle plane to replace the ageing 757.
Its share price has dropped by 25% in the
past five months, wiping $62bn from its
stockmarket value. It reported a record
quarterly loss of $2.9bn in the three
months to June, after it set aside $4.9bn for
compensation for angry airlines. It may
need to allocate more towards other con-
tingencies. Southwest’s pilots have already
sued Boeing for lost wages resulting from
cancelled flights. Crash victims’ familiesare also preparing lawsuits.
Boeing can endure the financial pain for
a while longer. Its duopoly with Airbus
means that, in the short run, airlines and
suppliers have little choice but to bear the
costs stoically. Boeing’s chief executive,
Dennis Muilenburg, appears confident
that the max will be flying again before its
commercial partners and investors run out
of patience.
Many in the industry seem to share this
conviction—regulators will not, the think-
ing goes, jeopardise Boeing’s future be-
cause the company is too big to fail. Per-
haps. But the faa, roundly criticised for
being slower than other regulators to
ground the plane, and earlier granting Boe-
ing wide-ranging powers of self-certifica-
tion, is in no mood to prove them right. 7The MAX factorSources:Companyreports;BloombergBoeing737 MAXorders
Topbuyers,July 2019CommercialaircraftdeliveredFreecashflow,$bn Inventories,changeonpreviousquarter,$bn0 100 200 300
SouthwestAirlines
Flydubai
LionAir
VietJetAir
GECAS
AirLeaseCorporation
UnitedAirlines
SpiceJet
GOLLinhasAéreas
RyanairDelivered Unfilled2017 18 19050100150200250737 MAX737 (other)747
767777
7872017 18 19-20242018 2019-2024O
n august20th credit-raters at Fitch
warned of insufficient financial re-
serves against the costs of long-term care
for buyers of insurance products at General
Electric. Days earlier Harry Markopolos, an
accounting investigator, alleged inade-
quate provisioning of reserves in ge’s in-
surance division and improper accounting
of its Baker Hughes petroleum holdings.
This, claimed the corporate sleuth, who
shot to fame by uncovering Bernard Ma-
doff’s Ponzi scheme, may dig a $38bn hole
in the industrial conglomerate’s books. Its
share price fell by 11% in response.
So far, so familiar. Management mis-
steps and other stumbles have erased 70%,
or $200bn, of ge’s market capitalisation
since 2016. Nor did the full-throated de-
fence of ge by its executives come as a sur-
prise, though it took a particularly macho
form when Larry Culp, its third boss in as
many years, bought $3m in ge shares to
show his confidence in the company. What
was really surprising was the chorus of
support for the struggling giant from ex-
perts, investors and analysts.
Harvey Pitt, a former chairman of Amer-
ica’s Securities and Exchange Commission
(sec), criticised Mr Markopolos for going
public without giving his target the chance
to respond to his concerns. Stanley Druck-
enmiller, a respected billionaire investor,
praised Mr Culp’s efforts to turn around the
firm and added to his ge holdings. Gold-
man Sachs, which does not rate ge’s shares,
sent clients a private analysis which con-
cluded that its long-term-care reserve lev-NEW YORK
A troubled industrial giant gets a boost
from an unexpected quarterGeneral ElectricBack on the Street